FundersClub (YC S12) Wants To Bypass VC And Let You Invest In Startups(techcrunch.com)
techcrunch.com
FundersClub (YC S12) Wants To Bypass VC And Let You Invest In Startups
http://techcrunch.com/2012/07/25/fundersclub/
18 comments
From my understanding, FundersClub actually solves this crowdfunding problem by acting as the sole investor on the cap table. As far as you are concerned as a startup, there is only 1 investor, and if there are any shareholder approvals, you only have 1 shareholder to go to.
This is sort of the best of both worlds. The small investor gets the ability to invest in a (risky) company they wouldn't normally be able to, and collect (potentially) disproportionate rewards. The company doesn't have to deal with the hassle of having a ton of shareholders to contend with on the books. They are just along for the ride, and nothing more.
This is sort of the best of both worlds. The small investor gets the ability to invest in a (risky) company they wouldn't normally be able to, and collect (potentially) disproportionate rewards. The company doesn't have to deal with the hassle of having a ton of shareholders to contend with on the books. They are just along for the ride, and nothing more.
So they are much like a "virtual VC"? But you do understand that VCs have value because they bring "unfair advantage" or "connections" or "good advice & experience"?
FundersClub has to think of two sides of the problem - how to shield large number of inexperienced investors from the founders and how to provide network, unfair advantage and smart advice to the founders.
One of the biggest values of YC is the second part. Replicating this is going to be difficult.
One of the biggest values of YC is the second part. Replicating this is going to be difficult.
Who knows, the value of say 100 or even 1000 less powerful, but by no means powerless, investors might be greater than that of 10 VCs?
This might work for the small investors. However, they are only currently admitting people with an annual income of 200k or a net worth of 1m. These "accredited investors" are probably in an economic position to just start investing in companies outright, and given FundersClub's middleman position, I don't see a huge reason to go through them were I an accredited investor.
Come January 1st, the rules for accredited investors change dramatically, as a result of the JOBS act. Basically, anybody can play.
An interesting model would be to sel permanent discounts to your products rather than stock.
Thos discounts could be used by the "investors" to buy and then resell your products.
So, say I invest early, I can buy a perm discount of upto ~30% of a product. Then use that to resell at an overall 10% discount and make a profit - but working to kep the company selling its products....
This could be used by savvy people to setup whole businesses where they make a passive income on the sale of the company's products.
Thos discounts could be used by the "investors" to buy and then resell your products.
So, say I invest early, I can buy a perm discount of upto ~30% of a product. Then use that to resell at an overall 10% discount and make a profit - but working to kep the company selling its products....
This could be used by savvy people to setup whole businesses where they make a passive income on the sale of the company's products.
That is not an attractive option relative to e.g. being an affiliate of the company and getting 10% of the sales price (or much more) for no up-front investment and no sales work. They're not necessarily competitive options vis-a-vis a single company, but if you offered terms like that, I predict no savvy person taking you up on them.
A more viable approach to generating cash early in the life of a company is to pre-sell a particular product which is either time-bounded or feature-bounded in return for a largish sum of cash paid up-front. For example, Joyent used to be a fairly attractive option for Rails hosting, and they had a shared server offering where you could buy a lifetime membership on a particular tier for a few hundred dollars. Selling ~6 of those memberships buys you the physical machine to host many more than 6 of them, meaning they raised enough capital to buy machines (or demonstrate creditworthiness to Dell) to have available inventory for more traditional hosting plans.
Slicehost similarly had a massive cash flow crunch at one point which was preventing them from buying hardware to service new customers for their VPS offering, back when VPSes were quite new and Slicehost was heads-and-tails the best game around. They had an amusing auction-like mechanic: they sorted their waitlist by the dollar value you were willing to pre-pay, so if (for example) you wanted the $20 a month VPS but were willing to pre-pay for the first 6 months, you got in earlier than someone willing to prepay 3 months or desiring month-to-month. This essentially let Slicehost borrow e.g. Bingo Card Creator's credit cards to buy new servers from Dell, without ever needing to offer any sort of equity or do anything very tricky with accounting. (Book $1,000 of cash as assets and $1,000 of unearned revenue as liabilities, spend $1,000 cash from assets and add $1,000 of servers to assets, gradually debit unearned revenue as I consume services every month.)
Another example is Spreedly, which sold a particular plan for their SaaS service (I think they called them "Kickstarters", actually?) where you'd essentially pre-pay for 2 years of service and in return get service for life. It apparently worked out pretty well, though your accountant will hate you if you do that. A more typical example is a SaaS company offering you 10% off the monthly rate if you sign up for yearly billing and 15% off if you sign up for bi-yearly billing, which in both cases will tend to have the SaaS company get a whole bunch of cash upfront. (And the same accounting thing as Slicehost, above.)
A more viable approach to generating cash early in the life of a company is to pre-sell a particular product which is either time-bounded or feature-bounded in return for a largish sum of cash paid up-front. For example, Joyent used to be a fairly attractive option for Rails hosting, and they had a shared server offering where you could buy a lifetime membership on a particular tier for a few hundred dollars. Selling ~6 of those memberships buys you the physical machine to host many more than 6 of them, meaning they raised enough capital to buy machines (or demonstrate creditworthiness to Dell) to have available inventory for more traditional hosting plans.
Slicehost similarly had a massive cash flow crunch at one point which was preventing them from buying hardware to service new customers for their VPS offering, back when VPSes were quite new and Slicehost was heads-and-tails the best game around. They had an amusing auction-like mechanic: they sorted their waitlist by the dollar value you were willing to pre-pay, so if (for example) you wanted the $20 a month VPS but were willing to pre-pay for the first 6 months, you got in earlier than someone willing to prepay 3 months or desiring month-to-month. This essentially let Slicehost borrow e.g. Bingo Card Creator's credit cards to buy new servers from Dell, without ever needing to offer any sort of equity or do anything very tricky with accounting. (Book $1,000 of cash as assets and $1,000 of unearned revenue as liabilities, spend $1,000 cash from assets and add $1,000 of servers to assets, gradually debit unearned revenue as I consume services every month.)
Another example is Spreedly, which sold a particular plan for their SaaS service (I think they called them "Kickstarters", actually?) where you'd essentially pre-pay for 2 years of service and in return get service for life. It apparently worked out pretty well, though your accountant will hate you if you do that. A more typical example is a SaaS company offering you 10% off the monthly rate if you sign up for yearly billing and 15% off if you sign up for bi-yearly billing, which in both cases will tend to have the SaaS company get a whole bunch of cash upfront. (And the same accounting thing as Slicehost, above.)
Permanent discounts can prove to be a bad idea too, like the American Airlines lifetime passes. http://articles.latimes.com/2012/may/05/business/la-fi-0506-...
You could believe that, and still like Funding Club, as a worthwhile experiment/hedge, or because of some faith in the founders. (For example: "this impressive team will figure something out" or "this team has some great insight on how to address my concerns with the model".)
There's a difference between the "crowd" in crowdfunding and accredited investors. pg was probably talking about the former.
Just because crowdfunding is/isn't good for startups doesn't mean that there won't be a huge market for it.
I'd like to see angels kickstart a managed fund type of deal.
This scares me way more than sub prime mortgages. The stories of how granny and gramps put the remains of their retirement savings into "startups" because they have like 1000x returns right? And then want their money back and discover that some large fraction of these companies are kids with no clue, no work experience, and have just burned through their 'seed' round buying a server farm that turns out overloads the circuit breakers in the garage.
Rational folks will say "Gee, that was a poor choice on their part." but the rest of the world will be screaming "Ponzi!" "Tricksters!" "Scams!" and it will be sad sad sad.
I really hope that I am wrong, but I really like the accredited investor rules, it selects from a smaller pool of victims.
Rational folks will say "Gee, that was a poor choice on their part." but the rest of the world will be screaming "Ponzi!" "Tricksters!" "Scams!" and it will be sad sad sad.
I really hope that I am wrong, but I really like the accredited investor rules, it selects from a smaller pool of victims.
Except the JOBS Act would only let granny and gramps invest $2000/year in startups. Folks making over $100k/year can invest 10% of that. [1]
I'm still not sure it's a good deal for the classical web startup, but it seems like it has reasonable protections to keep less sophisticated investors from losing their shirts.
[1] http://www.forbes.com/sites/johnwasik/2012/06/06/what-you-ne...
I'm still not sure it's a good deal for the classical web startup, but it seems like it has reasonable protections to keep less sophisticated investors from losing their shirts.
[1] http://www.forbes.com/sites/johnwasik/2012/06/06/what-you-ne...
I really like the accredited investor rules, it selects from a smaller pool of victims.
And a wealthier pool of beneficiaries.
Wonder why the 99% crowd isn't going after these: laws which explicitly discriminate against non-millionaires, unlocking investment opportunities for the rich not permitted to the other 99%. It's disgusting injustice.
And a wealthier pool of beneficiaries.
Wonder why the 99% crowd isn't going after these: laws which explicitly discriminate against non-millionaires, unlocking investment opportunities for the rich not permitted to the other 99%. It's disgusting injustice.
You need to be an accredited investor to use the site. Your fear is of the Jobs act, not FundersClub.
I think a lot of how crowdfunding plays out will depend on the way it's marketed to people. If the marketing by and large ends up being signs painted "Easy money this way! ->" then it's doomed from the start.
I've had 6 figures in funds (but not 7) that I would have been investing in startups over the past 4 years, but I have not been allowed to because people like you think I should be prevented.
Meanwhile, any weekend I choose, I could have gone to Las Vegas and blown the whole lot in a weekend.
This is just another example of where regulation is used to keep regular people behind and to benefit the well connected and wealthy.
Meanwhile, any weekend I choose, I could have gone to Las Vegas and blown the whole lot in a weekend.
This is just another example of where regulation is used to keep regular people behind and to benefit the well connected and wealthy.
You misconstrue my concern. I am happy to allow anyone who is willing to risk losing everything, give their money to some entrepreneur in the hopes of a big payday. It is exactly like going to Vegas with your funds and throwing it away.
My concern is that the exact argument was used with 'sub prime' mortgages as well, which was that plenty of people who couldn't qualify with the existing rules were perfectly capable of paying a mortgage. And they did. There are thousands, if not tens of thousands, of people who did not qualify under the 'old' rules but could get in under the 'new' looser rules. More money was unlocked for mortgages, more mortgages were written, unscrupulous people exploited than and herded that money into a giant pool of risk and when the balloon went up, blam! We took a big hit which we are collectively paying off through a stagnant economy.
That exact mechanism (to my way of thinking, happy to find someone who can show me why I shouldn't worry) is going to be enabled by the combination of the JOBS Act and stuff like this. Unscrupulous people will convince folks to invest in startups. There will be LOTs of money chasing few startups, valuations will skyrocket as the money tries to find a place to land which will on paper present illusory massive returns (on paper).
This is exactly analogous that the sub-prime rule changes allowed more people to buy houses, but the supply of houses didn't suddenly go up so the price per house when up instead. That raised house valuations which allowed for 'flipping' and some quick gains which people exploited which drove a bubble in real estate.
There aren't that many more startups, and startups that can't get funded today suddenly have access to funds that lets them get funded. So now you, with your 100K$ of 'mad money' to invest get less equity for your investment and your risk is increased because there are more places out there which are bad investments, getting funded anyway and creating noise in the system.
We showed quite clearly in the 90's that when 'retail investors' aka people with money they really can't afford to lose but seeking returns that aren't defensible by economic reasoning, get involved, the sharks come out and fleece them. After the fact a few of the more egregious offenders get prosecuted but the cost is huge.
We should know better. We should find a way to let you invest where you have to make some sort of binding personal responsibility oath which says "I will never ever ask anyone else to cover my losses by this activity even if those losses are the direct result of being swindled by a smooth talking tool of a salesguy."
If you're willing to sign such an affadavit, then more power to you.
My concern is that the exact argument was used with 'sub prime' mortgages as well, which was that plenty of people who couldn't qualify with the existing rules were perfectly capable of paying a mortgage. And they did. There are thousands, if not tens of thousands, of people who did not qualify under the 'old' rules but could get in under the 'new' looser rules. More money was unlocked for mortgages, more mortgages were written, unscrupulous people exploited than and herded that money into a giant pool of risk and when the balloon went up, blam! We took a big hit which we are collectively paying off through a stagnant economy.
That exact mechanism (to my way of thinking, happy to find someone who can show me why I shouldn't worry) is going to be enabled by the combination of the JOBS Act and stuff like this. Unscrupulous people will convince folks to invest in startups. There will be LOTs of money chasing few startups, valuations will skyrocket as the money tries to find a place to land which will on paper present illusory massive returns (on paper).
This is exactly analogous that the sub-prime rule changes allowed more people to buy houses, but the supply of houses didn't suddenly go up so the price per house when up instead. That raised house valuations which allowed for 'flipping' and some quick gains which people exploited which drove a bubble in real estate.
There aren't that many more startups, and startups that can't get funded today suddenly have access to funds that lets them get funded. So now you, with your 100K$ of 'mad money' to invest get less equity for your investment and your risk is increased because there are more places out there which are bad investments, getting funded anyway and creating noise in the system.
We showed quite clearly in the 90's that when 'retail investors' aka people with money they really can't afford to lose but seeking returns that aren't defensible by economic reasoning, get involved, the sharks come out and fleece them. After the fact a few of the more egregious offenders get prosecuted but the cost is huge.
We should know better. We should find a way to let you invest where you have to make some sort of binding personal responsibility oath which says "I will never ever ask anyone else to cover my losses by this activity even if those losses are the direct result of being swindled by a smooth talking tool of a salesguy."
If you're willing to sign such an affadavit, then more power to you.
I think this is great. The comments here are yet another case of unnecessary HN negativity. Kickstarter has strict guidelines around what sort of companies are allowed to raise money (only creative projects) and they have left room for many competitors to fill the gaps.
The concerns about "Granny and Gramps" dumping their retirement savings into startups is overblown. As long as the commitment amounts are capped at a reasonable level ($1000-$5000), I don't see the harm. I've seen much worse decisions being made by "accredited" investors who don't have any limits.
The concerns about "Granny and Gramps" dumping their retirement savings into startups is overblown. As long as the commitment amounts are capped at a reasonable level ($1000-$5000), I don't see the harm. I've seen much worse decisions being made by "accredited" investors who don't have any limits.
There have been at least a half dozen YC companies that I wished I could invest in the moment I met the founders...but, I'm not quite to "high net worth individual" status. I wasn't aware that the JOBS act would allow me to invest in startups. I had vague feelings of unease about the JOBS act (because anything with that kind of Orwellian name coming from government can't possibly be good), but I certainly would like to be able to invest like the rich folk. It's a damned dirty shame that us common folk have been pushed out of early stage investing entirely, even if we have a stomach for the risk and the money and connections to be useful.
So, this sounds cool, but I'm more excited to learn that I might be able to invest directly in startups soon (and sooner than reaching that $200k/year "high net worth" line).
So, this sounds cool, but I'm more excited to learn that I might be able to invest directly in startups soon (and sooner than reaching that $200k/year "high net worth" line).
Joe - I believe you can take your paper value of equity in Virtualmin to count towards being a "high net worth individual".
So you probably do qualify if there is any sort of valuation event for Virtualmin that sets your equity at a high enough value. I know lots of founders that do this.
So you probably do qualify if there is any sort of valuation event for Virtualmin that sets your equity at a high enough value. I know lots of founders that do this.
Good thought, Immad. I hadn't even considered that. However, we haven't raised any additional funding after YC, so our valuation is indeterminate from a legal perspective (or way too low, since the YC money valued us at something like 300k five years ago), I guess? We'd only have revenues to go on, which would comfortably value us in the right sphere, but without a funding round or exit of some sort, I'm not sure how else to make that valuation stick.
I think accreditation requires liquid wealth >$2m. It specifically disqualifies primary residence value.
From the article:
"Investors are only charged the small accounting, state entity, and filing fees FundersClub has to pay and nothing more. Otherwise it’s free."
Apparently, though, they charge 12% of your investment (at least, it was 12% for my test values of 2.5k, 5k, and 10k):
"Investment Amount: $5,000. Administrative fees: $600 ($85/yr x 7 year average fund life). Total to be charged: $5,600."
"Investors are only charged the small accounting, state entity, and filing fees FundersClub has to pay and nothing more. Otherwise it’s free."
Apparently, though, they charge 12% of your investment (at least, it was 12% for my test values of 2.5k, 5k, and 10k):
"Investment Amount: $5,000. Administrative fees: $600 ($85/yr x 7 year average fund life). Total to be charged: $5,600."
This looks like what they intended when they passed the JOBS Act. If it has even 10% the impact on general startups that Kickstarter has had on consumer hardware projects, it will be huge.
I worked in this space for 18 months (09-10) with a few partners. http://www.techcrunch50.com/2009/sprowtt-marketplace/
There's room for money to be made in accredited investor platforms, both in facilitating relationships and facilitating transactions. But I don't think there's a lot of room. Several players over the past few years are making decent cash, though I wouldn't say any are truly disruptive nor are they home runs. And ideas like FundersClub have come and gone, tried by bootstrapped startups all the way up to Goldman Sachs. Like most aspects of the investment banking industry, if you can market your services well, gain a reputation, AND actually facilitate stock deals for good companies, you'll pull in some dough.
The possibility of some dough may be enough for FundersClub to be funded itself. But truly disruptive businesses on the equity offering platform side of things are up against massive hurdles. I don't see anything here that seems revolutionary -- just a play to eventually make something off the crowdfunding revolution.
There's probably going to be a flurry of startup activity trying to capitalize on the securities aspects of the JOBS Act. The SEC rules may simplify some things so much that the technical (legal) barrier to being in the stock offering game will be incredibly low, at least compared with what it is now. But what happens if the barrier does get lowered? Lots of bad deals, lots of public noise, and for successful VCs and angels it's either going to not change their process at all or make it even harder to find quality. It still doesn't change my position that equity investment should be allowed by anyone, with limitations, but a sustainable system for offering stock in early stage companies is going to take a lot more complex work than just finding a way to structure the investments technically.
As a side note, outside these kind of "pie in the sky" offering platform dreams, which I myself threw personal money and time into, there is still obvious room for innovation, albeit unsexy, in automating various aspects of securities compliance. During Q&A Tim O'Reilly rightly encouraged us to pursue that piece of our efforts (definitely trying to bite off more than we could chew). We had NYC bankers telling us the same thing.
BTW, I recommend anyone thinking about or already involved in a securities-related startup to make friends with bankers and M&A folk in NYC. Our clearest, sanest advice came from Wall Street connections we made.
There's room for money to be made in accredited investor platforms, both in facilitating relationships and facilitating transactions. But I don't think there's a lot of room. Several players over the past few years are making decent cash, though I wouldn't say any are truly disruptive nor are they home runs. And ideas like FundersClub have come and gone, tried by bootstrapped startups all the way up to Goldman Sachs. Like most aspects of the investment banking industry, if you can market your services well, gain a reputation, AND actually facilitate stock deals for good companies, you'll pull in some dough.
The possibility of some dough may be enough for FundersClub to be funded itself. But truly disruptive businesses on the equity offering platform side of things are up against massive hurdles. I don't see anything here that seems revolutionary -- just a play to eventually make something off the crowdfunding revolution.
There's probably going to be a flurry of startup activity trying to capitalize on the securities aspects of the JOBS Act. The SEC rules may simplify some things so much that the technical (legal) barrier to being in the stock offering game will be incredibly low, at least compared with what it is now. But what happens if the barrier does get lowered? Lots of bad deals, lots of public noise, and for successful VCs and angels it's either going to not change their process at all or make it even harder to find quality. It still doesn't change my position that equity investment should be allowed by anyone, with limitations, but a sustainable system for offering stock in early stage companies is going to take a lot more complex work than just finding a way to structure the investments technically.
As a side note, outside these kind of "pie in the sky" offering platform dreams, which I myself threw personal money and time into, there is still obvious room for innovation, albeit unsexy, in automating various aspects of securities compliance. During Q&A Tim O'Reilly rightly encouraged us to pursue that piece of our efforts (definitely trying to bite off more than we could chew). We had NYC bankers telling us the same thing.
BTW, I recommend anyone thinking about or already involved in a securities-related startup to make friends with bankers and M&A folk in NYC. Our clearest, sanest advice came from Wall Street connections we made.
I'd use bitcoin myself: lower transaction costs, make micropayments possible, even allow the tracking of coins if they should get usurped. Lastly term the investments as tips rather than investments. Then make everything transparent including the way coins are spent by the startup, revenue received and returns as "thank yous" to tippers. Have a limit to how much a startup can receive.. a certain proportion of tippers need to approve their initial tip to the startup in order for it to raise more funds: build a trust quotient. The startup can game the site by tipping itself to build that trust? Have people send in a copy of their ID and attach it to each user.
other ideas: don't even have the startups register as businesses. Have them only accept bitcoins. Make the site as transparent as possible: who has given to what and when? Have all revenue and expenditure by startups go through the main site for tracking, and the main site can collect a fee for it as it passes through. The main site pays all the taxes.
other ideas: don't even have the startups register as businesses. Have them only accept bitcoins. Make the site as transparent as possible: who has given to what and when? Have all revenue and expenditure by startups go through the main site for tracking, and the main site can collect a fee for it as it passes through. The main site pays all the taxes.
This is a really interesting idea. The JOBS act is going to create new opportunities for start ups like FundersClub.
People often confuse 'accredited investor' with 'educated investor'.
Being an accredited investor does not mean you cannot be scammed, it just means you're less likely to suffer drastic financial consequences as you should be able to absorb total investment losses.
If crowd funding start ups does go mainstream there will be an opportunity for a company to provide advice/guidance to these 'new' investors.
The main risk to the likes of FundersClub is that one sour deal would make all the headlines. I guess it is really important that they apply some sort of filter to the start ups that they allow on their platform and react really well if (prob when) this fails.
People often confuse 'accredited investor' with 'educated investor'.
Being an accredited investor does not mean you cannot be scammed, it just means you're less likely to suffer drastic financial consequences as you should be able to absorb total investment losses.
If crowd funding start ups does go mainstream there will be an opportunity for a company to provide advice/guidance to these 'new' investors.
The main risk to the likes of FundersClub is that one sour deal would make all the headlines. I guess it is really important that they apply some sort of filter to the start ups that they allow on their platform and react really well if (prob when) this fails.
I'm interested in this platform, so I signed up and clicked through to the point where you are prompted to pay.
I didn't see cap tables or information about the round being funded, beyond the amount to be raised.
I assume most people would want to (at least) know more about the current round before investing. For example, how can I determine how much of the company I would (indirectly) own?
I didn't see cap tables or information about the round being funded, beyond the amount to be raised.
I assume most people would want to (at least) know more about the current round before investing. For example, how can I determine how much of the company I would (indirectly) own?
Interesting comparing this to Seedrs (http://seedrs.com), the closest UK equivalent.
[deleted]
Crowd funding/capital is the future, just not sure FundersClub is going to be the KickStarter of this revolution. Their technology and design, honestly is very lacking. What is up with the lion logo?
AngelList is already doing what FunderClub are going to do partially, isn't it?
Sorry, I am a PG and I don't well versed in startups.
Sorry, I am a PG and I don't well versed in startups.
This looks quite similar to CircleUp: https://circleup.com
It's going to be interesting watching the land grab as everyone is waiting for the deadline for the JOBS act to pass.
It's going to be interesting watching the land grab as everyone is waiting for the deadline for the JOBS act to pass.
Wow. This is a big idea. I wish them success.
How do I sign up to get crowdfunded?
http://news.ycombinator.com/item?id=3893783