Reposted from Accredited Investor Markets (AIMkts)
FundersClub is a new type of venture capital platform, built around a unique online marketplace that allows accredited investors to become equity holders in FundersClub-managed venture funds – which then fund pre-screened, private companies.
1. Recently, the SEC officially recognized FundersClub as a venture capital adviser and it is the first time in history the SEC has recognized the concept of online venture capital – what predictions can you make about what this will mean for the investment world?
The VC industry’s digital coming of age will take a while to fully play out, but it will have transformative impact on the innovation economy. Similar to how the Internet has transformed other industries, we will in time see the Internet facilitating a greater level of transparency, efficiency, and scalability in the funding and supporting of innovative businesses. This will benefit individual and institutional investors, entrepreneurs, and today’s top VCs – all while increasing societal value and wealth creation.
2. Why is FundersClub the first ever to do this? Why hasn’t anyone else done it?
It wasn’t for lack of trying. As with most big ideas, we were not the first to attempt to bring startup investing online, and plenty of earlier, failed attempts precede us (and more will no doubt follow us). FundersClub’s progress is attributable to a combination of factors. Our team is comprised of a syndicate of serially successful entrepreneurs, angel investors, and VCs. The insights gained from our combined experiences allowed us to build software that today helps us tap into a vast network for receiving dealflow, conducting due diligence, investing, and adding value to our investments. Certain market trends also facilitated our launch. For example, there is a growing shift of value creation out of the public markets, which is sideling millions of investors and causing them to seek alternative ways to invest in innovative companies. We also structured our business model to fully align our incentives with those of the investors and entrepreneurs we serve, which impacts every decision we make. We don’t pocket any money from investors’ invested capital, for example, and instead are compensated solely via a percentage of investment profits. We are therefore not incentivized by selling investments to investors or fundraising for entrepreneurs, but rather by attaining successful outcomes for both investors and entrepreneurs.
3. What implications do you predict that a never-done-before online VC platform could have for accredited investors?
VC has a long and storied history. Although the industry has faced its share of issues, at its best, VC has yielded iconic and innovative companies we now take for granted that have enriched the investors who supported them (e.g. Google, Apple, Amazon, eBay). By bringing transparency and efficiency to VC, we aspire to maximize success for our investors and entrepreneurs. We also seek to make the startup asset category accessible to accredited investors who currently do not have access to investment opportunities normally reserved for institutional VCs and their limited partners (who typically include pension, hedge, and endowment funds, and large family offices rather than individual accredited investors). We also seek to make investments available in such a way that allows for portfolio diversification with much lower levels of capital than conventionally possible. Finally, it’s important to point out that startup investing is still a high-risk, high-reward asset category, and it’s unlikely that that will change.
4. What about for other types of capital-raising platforms?
It’s difficult to speculate about other platforms. We’re more a VC platform, incentivized by successful outcomes for investors and entrepreneurs, than a fundraising platform incentivized around raising money.
5. What FundersClub does is sometimes mistaken for crowdfunding, but you have been clear it is VC-only – for accredited investor. Can you elaborate?
We have little to do with either equity crowdfunding or the JOBS Act. During our founding, the public dialogue around online startup and private company investing was dominated by equity crowdfunding and the JOBS Act, but we created our own path based on the experiences and best practices of our team. Specifically, we invented our model for online investing in private companies—online VC—to bring the power of the Internet to VC. In so doing, we’ve avoided some of the problems that equity crowdfunding brings in its present form.
6. Such as?
For starters, the SEC has yet to finish writing rules to protect investors who plan to engage in equity crowdfunding. But beyond this fundamental point, there are also substantial gaps in the legislation itself, such as how to prevent fraud, how to minimize investors’ exposure to low-promise opportunities, how to avoid the potential adverse selection problem where only startups who can’t attract value-added capital pursue crowdfunding, and how to avoid overwhelming startups with the overhead of hundreds or even thousands of shareholders while still protecting investors appropriately. In contrast to this ambiguity, FundersClub is taking what works from a tried and true investment model—venture capital—and improving it with the power of the Internet as well as the recommendations of thought leaders in the VC industry who have weathered both success and failure over multiple decades.
7. FundersClub is the first and only online platform to be granted membership in the NVCA so far, which is a great way to attract wary investors – how has that changed things for FundersClub?
The NVCA, the National Venture Capital Association, is the trade organization of the venture capital industry. Its members include all major VC funds. FundersClub’s membership in the NVCA was not intended to attract investors, but rather to give our investors and our entrepreneurs a seat and a voice at the table of the VC industry. We are now an active member of the NVCA and we are both impacting and learning from best practices of the VC industry.
8. You have solid, personal experience in raising capital for startups, so what set of circumstances/experiences led you to start FundersClub and what led you to believe this type of platform would be successful?
It’s true that our personal experiences raising capital, creating startups, successfully exiting, and investing in startups caused us to approach FundersClub with a first-hand viewpoint that has helped us along the way. However, more than our personal experience, it is our focus on soliciting and being responsive to feedback that I credit for our success to date. Before launching, we spoke with and incorporated the feedback of hundreds of individuals across the startup ecosystem, including entrepreneurs, VCs, angel investors, lawyers, accredited investors, and others. We continue to collect feedback every day that informs our ongoing decisions. We ultimately did not build FundersClub for ourselves, but for the entrepreneurial community and our goal is to build something that people love.
9. You and co-founder Boris Silver were featured in Forbes’ “30 under 30: Technology” and it was noted that you used FundersClub’s platform to fund FundersClub – comments.
We raised a $6.5M seed round for FundersClub. Of this, $0.5M was invested by FundersClub, and $6M was invested by other top VC and angel investors. FundersClub was FundersClub’s first investment. Since then, we have seen most of our subsequent investments follow this pattern, with the startups augmenting capital raised from top VCs and angels offline with capital from FundersClub. This is not surprising since it is quite common for top startups to raise capital from a syndicate of investors rather than a single investor, and often preferred by both the founders and the investors since it gives the company a more diverse investor team.
10. Does FundersClub attract a certain demographic or type of investor? What draws them to you, over another type of investor?
Yes, because of the high net worth and income requirements, FundersClub members tend to be highly accomplished and connected in their professional careers and industries. They also tend to be highly engaged in the world around them since FundersClub enables individuals to have a direct impact on innovative, disruptive ideas.
11. What are some of the beneficial differences between investing through FundersClub versus investing into a company directly as an angel investor?
One major benefit is access. Because FundersClub is a VC and institutional investor with a track record of funding top startups, we enable individuals to gain access to investment opportunities normally reserved for only top VC funds and prominent angel investors. A second major benefit is diversification. Typical minimum check sizes in the types of deals the FundersClub is able to access are normally $25,000 to $500,000 or more, whereas FundersClub makes available exposure to these types of opportunities for as little as $1,000, enabling diversification and portfolio development with much lower amounts of capital. A final benefit is due diligence. While we expect investors to conduct their own due diligence on investment opportunities and come to their own conclusions on whether a given opportunity is one they should pursue, we conduct a rigorous vetting process prior to listing a company on FundersClub. Fewer than 5% of referred companies end up being listed as a result of this process.
12. What are some offline networking opportunities FundersClub has for its active members, its startups, and its dealflow partners?
FundersClub hosts offline member events in selected cities to augment our online activities. These include events for our portfolio companies and their founders, events for our investor members, and mixers that include both. Historically these have been networking events, though we will be rolling out educational and workshop events as well.
13. Your background also includes leadership in a non-profit that has provided running water to thousands of people worldwide, does or will FundersClub do anything philanthropic?
We view our current activities as having a large social impact. Our vision with FundersClub is to transform lives and create prosperity through funding innovation. We empower individuals to have an impact on disruptive ideas, and we promote innovative change through sustainable means (startups). As we touch more people through our network with our scalable and growing platform, we also inspire more dialogue around innovation that might not otherwise occur. We are also beginning to fund deserving businesses in geographic regions that are not traditionally recognized as tech hubs and that have often been forgone by the traditional investment community due to information asymmetry.
14. You have an asteroid named after you – why?
Before I became an entrepreneur, I was very active in science research. I generalized the field of DNA nanotechnology by proposing and then creating the first self-assembling nanostructures composed of artificial DNA. The intended application was to use these as scaffolding to create self-assembling nanowires and ultimately self-assembling computers and other devices. My research was published, won numerous awards, and MIT Lincoln Laboratory decided to name an asteroid after me as part of winning an award for young scientists.
Since our launch, incubators, accelerators, angel funds and startups from around the country and around the world have reached out to us. FundersClub launched exclusively with Y Combinator companies, and we are extremely interested in expanding beyond Y Combinator and outside of Silicon Valley in the near future. We are excited about the opportunity and potential for innovation outside of Silicon Valley.
Learning about opportunities from trusted incubators and accelerators is compelling to our organization. We strongly believe in the power of community and the quality of companies that we bring to our community reflects this belief.
We are planning a tour where FundersClub will visit the world’s leading incubators, accelerators, angel funds and startups. We will also host FundersClub Member events exclusively for FundersClub members in different cities (FundersClub is going to become invite only in the near future). We will have a kick-off event in San Francisco. Please stay tuned for events in your city. The cities we are currently planning to visit are below, email us at firstname.lastname@example.org and let us know if you’d like to be involved with the FundersClub event in your city, or if you’d like us to expand our tour to your city. We look forward to meeting many of our Members in the coming months.
Cities on “FundersClub International Incubator and Angel tour” - more coming soon: San Francisco, New York City, Boston, Philadelphia, Chicago, Los Angeles, Washington DC, Vancouver, London, Paris, Madrid, Milan, Berlin, Sao Palo, Santiago, Shanghai, Mumbai, Tokyo
The FundersClub Team
Just another example of why our dinner tradition needs to continue. Richard (former Sequoia-backed tech entrepreneur-turned co-founder of Rocket Fizz, a soda pop franchise chain) brought 4 eclectic flavors for a tasting alongside dinner. Peaches and Cream was the bomb, though Toxic Slime was the crowd favorite. Can’t wait until they open their shop on University Ave in Palo Alto. Alana (co-founder of Agent of Presence, a wearable technology/fashion company) dazzled us when explaining how the dress she designed lights up to the beat of your own heart. As seems to be happening these days at FundersClub dinners, a mutual connection was made…Rich offered to put Alana in touch with his friend who ran and sold a large fashion brand to help as Agent of Presence gears up for its first mainstream product release.
Rich is one of our early users. Alana and Felicia met at a muni stop in San Francisco a while back and have been good friends ever since (true story!).
Another night with good friends at the house. Felicia’s friend Jeff is helping to launch a political campaign for an aspiring President of a foreign country. Marya is co-founder of Emerge America, which has over 600 women who’ve graduated its program and are now in political office. Eric is a good friend who is at Harvard Business School and in the bay area completing an internship at a start up for the summer.
We stretched the limit of our small dining room table and augmented it with boxes of beer leftover from our launch party with Jude (co-founder of Heyzap), Paul and Akshay (co-founders of Picplum).
Alex, Brian (ex-Apple), and David M (Khosla Ventures) geeked out over touch screen nanotechnology. Alex’s last startup was a touch screen nanotechnology company. Brian was one of Apple’s lead engineers working with Steve Hotelling, Jony Ive, and others to bring the world’s first projected capacitive touch screen enabled smartphone to market (the much beloved iPhone). David M works at Khosla Ventures and was a Stanford PhD in nanotech and as a result has reviewed a lot of commercial nanotech for Khosla. In a hardware-centric dinner, David Murray (head of product at Raptr, user experience lead at Atari, and product manager at Google), represented for software and marveled at his experiences starring in an upcoming Bravo reality TV show about entrepreneurs in Silicon Valley.
2 early FundersClub Members and supporters. Thanks for all of the helpful feedback!
Ayush, a Google product manager, was one of the first FundersClub investors. Ayush and Colin (below), a Stanford Business School Student and entrepreneur, have been extremely helpful in giving product feedback during FundersClub’s early days.
Tonight we were honored to host Jing, Charles, and Rishi. Jing and Charles run what might possibly be the largest gaming company you’ve never heard of. Rishi is an early FundersClub supporter and just left Google (today!) to launch his own start up.
Dinner at the FundersClub House with Tuff, Chairman of the Seraph Group. Awesome feedback on newly launched site, awesome dinner.