FundersClub (YC S12) Wants To Bypass VC And Let You Invest In Startups
techcrunch.com
techcrunch.com
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.
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.)
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.
One of the biggest values of YC is the second part. Replicating this is going to be difficult.
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.
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...
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.
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.
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.
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.
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 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.
"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."
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.
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.
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 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?
Sorry, I am a PG and I don't well versed in startups.
It's going to be interesting watching the land grab as everyone is waiting for the deadline for the JOBS act to pass.