
FundersClub (YC S12) Wants To Bypass VC And Let You Invest In Startups - kunle
http://techcrunch.com/2012/07/25/fundersclub/
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switz
" _I don't think crowdfunding is good for startups. For startups, having large
numbers of investors is bad, and having inexperienced investors is bad. So
having a very large number of inexperienced investors is the worst scenario
possible. The right way to get money from large numbers of people is to sell
them your product, like Inpulse did, not to sell them your stock._ " -pg

<http://news.ycombinator.com/item?id=3893783>

~~~
drusenko
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.

~~~
JarekS
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.

~~~
argumentum
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?

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ChuckMcM
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.

~~~
nirvana
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.

~~~
ChuckMcM
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.

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therealarmen
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.

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SwellJoe
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).

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immad
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.

~~~
SwellJoe
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.

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danshapiro
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."_

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rdl
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.

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dmarble
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.

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adrianwaj
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.

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alanmeaney
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.

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moondistance
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?

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jot
Interesting comparing this to Seedrs (<http://seedrs.com>), the closest UK
equivalent.

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nodesocket
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?

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smagch
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.

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shalmanese
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.

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netcan
Wow. This is a big idea. I wish them success.

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jaekwon
How do I sign up to get crowdfunded?

