
FundersClub rewarding investors for referrals  - mittal
http://venturebeat.com/2013/07/16/fundersclub-braces-against-general-solitication-by-rewarding-investors-for-referrals/
======
confluence
Ah it's good to see that the colossal mistake of historic proportions
([http://baselinescenario.com/2012/03/19/a-colossal-mistake-
of...](http://baselinescenario.com/2012/03/19/a-colossal-mistake-of-historic-
proportions-the-jobs-bill/)) Just Open Bucket Shops (JOBS -
[http://www.nytimes.com/2012/03/15/opinion/collins-the-
senate...](http://www.nytimes.com/2012/03/15/opinion/collins-the-senate-
overachieves.html?_r=0)) act is in full swing and that the exploiters of it
are already out there having at it with gusto. I'd like to propose a toast to
the forthcoming increase in financial fraud, cost of capital and stupidity.
Can I get a hip-hip-hooray for a reduction in investor protection?

More seriously, this entire situation feels eerily similar to the repeal of
Glass-Steagall protections with GLBA back in 1999
([https://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_Act](https://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_Act)).

The negative effects will take a decade or so to be felt, but felt they will
be. It's probably hard for people to see it now, but this really is dodgy as
hell.

Here's to another bubble.

~~~
7Figures2Commas
The article, and your comment, suggests that this move is strongly connected
to general solicitation, but I think the connection implied does not exist.

In this context, Regulation D applies to the _companies_ raising money through
a private offering. Companies that want to avail themselves of general
solicitation will need to take additional steps to be in compliance with the
law. This includes filing a Form D 15 days prior to the first use of general
solicitation and ensuring that written solicitation contains certain
information and disclaimers.

If you're insinuating that private individuals are going to rush to refer to
companies to FundersClub and then _publicly_ solicit investments in those
companies (i.e. through email blasts, advertisements, blog posts, etc.) in the
hopes that they'll one day get a piece of FundersClub's carried interest (if
there ever is any) _as a result of the JOBS Act_ , you're going too far. That
is _not_ what the revisions to Regulation D are about and anybody who has that
in mind would probably be well-advised to speak with an attorney.

~~~
mittal
Confirmed that FundersClub Refer is not connected to general solicitation or
the JOBS Act. We are simply rewarding members (accredited investors) who are
referring us companies that end up making it past our vetting and due
diligence processes and becoming portfolio companies.

~~~
confluence
> _we are intrigued by the new possibilities enabled by the JOBS Act and look
> forward to potentially expanding our activities down the road._

\-- [https://fundersclub.com/site/faq/](https://fundersclub.com/site/faq/)

Refer looks like the beginning of a kickback scheme a la Morgan Stanley stock
tech analysts circa 1994.

Furthermore, it is true that you are only targeting "accredited investors" for
now. Two things should be noted. Firstly, accredited investors aren't
necessarily smart investors. Earning $200K a year or having a networth of $1
million is a fairly common thing and is unconnected to financial literacy and
startup valuation (see actors/doctors/lawyers/baby boomers investing in
startups).

Secondly, are you honestly telling me that you are just going to stick with
soliciting accredited investors if the legal obligations you are presently
under were to be lifted?

Please.

A side point. A lot of people think that making startups an investment option
for all is a good thing. I'm fairly certain that's a stupid idea, for the
simple fact that if VCs, whose full time job it is to solely invest in
startups, suck at investing in startups, what chance do normal investors with
other jobs have exactly? A lot of people thought that online trading was an
amazingly good idea during the late 90s (it sure was for eTrade), but the
individual returns of sole traders illustrate that this was not the case, and
in fact most investors would've been better off holding a diversified low-fee
index fund.

Not all "disruption" is good disruption.

To the downvoters, may your ignorance go forth and multiply.

------
marcamillion
I am a bit confused as to YC's thinking with encouraging a startup like this.

What are the revenue opportunities - not necessarily short-term, but even
long-term - like?

Do they charge a fee on each investment made? Or do their fees just come from
exits? If so, then their cash flows will look even more ridiculous than a
regular startup - if you assume they only admit 'early stage' startups for
starters to their platform (because I guess that's where the most friction is
from a fundraising point of view, and where the more deals are, etc.) then
they could go 5 years with no cash flows from those deals?

Am I missing something here?

If they charge per deal, does the investor pay or do the startups pay (aside
from a % of equity)?

Edit 1:

So I just did some digging through the FAQ [1] on their site and found this,
that pretty much answers my questions and now I understand why YC invested.
Makes sense.

 _Neither FundersClub Inc. nor any of its employees receive any compensation
from the administrative fees or any other transaction-based fees for its
single company funds. FundersClub will charge a performance based carried
interest for most of its funds, which are expected to provide returns over
time. Our immediate goal is to develop a compelling funding platform that will
benefit both the most promising startups and investors. Over time, FundersClub
has a number of additional ways in which it can make money. FundersClub may
operate liquidity services for private companies, including employee liquidity
program management for private companies, and eventually a trading platform
for private companies that wish to provide ongoing private market liquidity to
their shareholders. We may also participate in the investment funds, which can
achieve returns for us along with other investors. We will continue to assess
the opportunities within regulatory and legal guidelines, and are not
providing any of those services currently._

[1] - [https://fundersclub.com/site/faq/](https://fundersclub.com/site/faq/)

~~~
prostoalex
So an angel investor now has a choice of

1) investing themselves, and keeping the carry

2) investing through FC, paying the carry

For (2) to happen, a few things must resonate:

1) The deal flow is _that_ good. A potential investor cannot fund the
companies that go through FC on AngelList or through other venues.

2) The investor is not an accredited one, but can invest due to JOBS act.

It seems that once again (2) is the real market they're after. I have not yet
seen an entrepreneur limiting their fundraising to FundersClub, and refusing
other venues.

------
bobbygoodlatte
The 20% carry FundersClub charges seems really disproportionate to the value
they add.

A 20% carry for a VC makes some sense — the carry applies across the entire
fund, not just for one specific company. So a VC fund can wind up net
negative, and therefore charge no carry.

It's ridiculous for FundersClub to charge the same carry as a VC, but on each
specific company. They're not taking any risks, or even providing much of a
service. They're basically taking advantage of smaller investors with no other
options, who already have the deck stacked against them.

Now with this referral scheme, angels have an incentive thats at odds with
their fellow (smaller) investors, which is just an irrelevant distraction to
the company being funded.

~~~
hkmurakami
_> They're basically taking advantage of smaller investors with no other
options, who already have the deck stacked against them._

Business is all about getting away with the maximum that your customers (cough
cough) will let you get away with and the minimum your employees will let you
get away with. I agree with your assessment but also see why Fundersclub would
want to try to get away with this gouging their clientele :P

------
wtvanhest
I recognize that this isn't a pyramid scheme, but it does look a lot like a
multi-level marketing structure.

MLMs can be viable, real businesses, but this may open the opportunity for
abuse. I'm very interested to see how the SEC handles this.

I understand the founders want rapid growth, but accredited investors can make
mistakes, and big ones. They are not professional investors, just accredited.

~~~
EScott11
Good points, but the folks at Funders Club _are_ professional investors. The
referrers only get a kickback when FundersClub chooses to invest, and
FundersClub will only do so if they think the company will be sufficiently
successful. A standard which is likely higher than an unprofessional
accredited investor's.

~~~
wtvanhest
ESott,

Thanks, I completely misread the article. I thought it was suggesting that
FoundersClub would pay an investor who brings in another investor. I didn't
understand that FoundersClub would pay an investor who brings in a company.

------
kenko
Has FundersClub _actually_ disrupted venture capital? Is this a claim that
they intend to do so? Do they know what "disruption" actually means?

I find the number of articles/shoddily rewritten press releases that claim
that Startup X "is disrupting" something, when Startup X barely exists,
extremely amusing.

~~~
wavefunction
"disrupting" is some marketing bullshit. When I hear someone mention that
word... I'm far more interested in "remaking" and "reforming" which imply some
sort of constructive outcome rather than just fucking shit up.

~~~
kenko
Well, once upon a time, "disruption" had a real meaning. "Disruptive
innovation" as a contrast with "sustaining innovation" that makes an existing
thing better.

Corollary (quoted from elsewhere):

"If the established players in the industry are trying to smack your new model
down, that's a sign that your innovation isn't disruptive -- it means its
utility is oriented similarly to theirs, so they could in principle adopt
whatever use it has.

The canonical example is steel micro-mills ... They started off being only
good enough for low-margin, cruddy steel like rebar, business which the real
steel mills was delighted not to have to deal with any more. Only the micro-
mills got better and better and kept taking the lowest-margin business away
from the mills until most of them couldn't function any more."

(Related corollary, disruption = innovation through inferiority:
[http://www.mrteacup.org/post/startups-innovation-through-
inf...](http://www.mrteacup.org/post/startups-innovation-through-
inferiority.html))

Of course somewhere along the line someone decided that disruption = the new
hotness, so now no matter what you do, even if it's something that's been done
forever (e.g. renting clothes out short-term), you have to call it
"disruptive".

------
alaskamiller
That line between a scheme and a business is getting blurrier.

By the by, Rebecca Grant, when you add financial incentives to referral
marketing then it turns into something else. That's called affiliate
marketing. And sometimes it creates pretty scummy situations and
circumstances.

------
argumentum
Sad to see the negative comments. The ban on general solicitation was a _very
serious_ violation of free speech.

Yes there are frauds and "exploiters" out there, but they are there no matter
what. FundersClub is one startup that acts to _reduce_ fraud and exploitation
by curating the best startups. Were I an investor, I'd trust that any FC
startup has had serious due diligence, not only because the founders are good
guys, but because it's good for their business.

PS: congrats Alex and Boris .. "refer" is a brilliant idea.

------
wavesounds
"It benefits investors who want to make small angel investments without doing
all the time-consuming due diligence ... The goal is to make venture capital a
more open, democratic, and transparent process."

Im sorry but the investor can't do _less_ due diligence and honestly expect
_more_ transparency. This is either terrible writing or a very fishy scheme
someone is cooking up.

