Wefunder (YC W13): Invest in Startups | Hacker News Reader

Wefunder (YC W13): Invest in Startups

wefunder.com

140 pointsnpt427974 comments

Seed investing is not something for amateurs, in fact frankly I don't think investing in public companies is for amateurs. I would tell ordinary people to invest in index funds and don't invest in startups at all. You should not be investing in startups because you think it is going to change your life. You shouldn't be doing it unless you're rich enough that your life wouldn't be changed by making lots of money. - Paul Graham

Wow, that's funny. As I was reading that, I was thinking "what a thoughtful comment for HN." At least I'm consistent.

Twould be nice if you punctuated it properly though.

Interesting. It looks like one can summon PG by just quoting him. We should try this more often.

You have to say his name 3x.

Sorry transcribing from video is a little harder than from an essay. You try to tow the line between the speaker's rhythm and correct syntax to form the natural voice of the person speaking. Here is the video for the actual quote. http://www.bloomberg.com/video/breaking-down-billion-dollar-... skip to 4:47.

I'm a bit confused by this...why did you fund Wefunder then? "Amateurs" are exactly the people that will be funding startups on Wefunder...

If you imagine investors organized concentrically with the sort who physically show up on Demo Day at the center, I think the sweet spot for this type of thing is the next ring out: people who are not focused on startup investing, but who either understand startups well (like rdl) or are rich enough to learn about them by trial and error.

Ok I see your point and agree with it, but Wefunder is metaphorically opening up to nearly the entire universe by eventually allowing anyone to invest--it doesn't seem to be doing anything to stop 'amateurs' from investing.

I'd like to believe that there are many people have a couple thousands dollars that they'd be willing to invest in a startup that seems promising. In the next year, I will theoretically be able to invest in startups via Wefunder...and I am in college with just one startup under my belt. I like to think I understand startups well but given my age and experience, I bet there are people who understand them far better than I do...and far less as well.

> but given my age and experience

Given your age and experience you have NOHTING to loose. Experiment. Fail. Learn. Succeed.

One of my all-time favorite sayings is by Mark Twain: "A man holding a cat by the tail learns something he can learn no other way".

If you think you understand startups enough to risk $1,000, by all means, do it! You will learn something regardless of the outcome. And, frankly, at your age, if you are intelligent about it there are virtually no negatives.

Yes sir, I plan on doing so!

I was only responding to the seemingly-odd assumption that only the "next ring" of investors is what Wefunder is going for--at least that's what I got from pg's response to why he/YC funded Wefunder. To me, there is no way to keep it to only this "next ring" and it doesn't seem that Wefunder is trying to do this. They are trying to appeal to those who are even several "rings" away.

Good! Be absolutely fearless. Intelligent, but fearless.

Regarding funding for your venture/s. Forget it. Don't do it. At least not at first. Save money and bootstrap one or a couple of ideas yourself. You will earn you honorary MBA that way. You have to be smart about business before venturing out into a larger domain (unless you have good mentors who can guide you).

Companies like Facebook --where the founders had absolutely zero business experience and zero idea of where the thing was going or how it was going to make money-- are exceptions to the rule. Most businesses require a reasonable grip of business management and the identification of a good business model from the very start. And even with that failure is far more likely than success. So, have fun with it and don't risk too much on each experiment. Once you find something that gains traction take a huge leap and go for it.

This begs an interesting question: perhaps the way for the public to become seed investors is through diversification (i.e. index-style investing applied to small companies as well). Already, something analogous is possible through micro-cap index funds. That said, I agree that ultra-small companies are not a place to put all of your capital for the long haul, but they could provide correlation advantages with respect to the broader market in small doses.

I agree that ordinary people shouldn't bet their life savings on startups. But this allows an average well-informed SF employee to invest $1,000-2,000/month of his/her salary into any startup they like - hardly a life changing amount. See it as a Kickstarter on steroids. At least this gives us a chance too to invest in the next Dropbox and Airbnb.

Worth noting: $1,000-2,000/month stashed in a less risky asset class (e.g. index funds) over 30 years is likely to be enough for most people to retire comfortably. That's potentially life changing over the long term.

Indeed. Nobody should limit their investments to just these. For every $1,000 you put into a crowdfunded company, you should be investing at least $4,000 in more traditional and safe investments. And 20% is even a lot. That assumes a young person who has high future earnings potential and a high risk tolerance. 5-10% would be more reasonable for most people.

That said - this is certainly an asset class one could beat the S&P500 with, as long as you aren't just throwing darts and are actually investing in companies you know a lot about and understand.

> traditional and safe investments

This made me chuckle.

The "traditional" investment vehicles of US stocks, real estate and bonds are anything but "safe" these days.

The last few years are not representative of the long term. Over the long term stocks, bonds and real estate - in aggregate - rise in value.

If you don't want to risk short or medium term fluctuations and black swans, the ultimate traditional and safe investment is a savings account. If you're the type that thinks fiat currency is only worth it's weight in toilet paper, then buy gold.

For any of these investments you'll have more left at retirement than if you put 100% of your capital into startups that ended up going out of business.

But this allows an average well-informed SF employee to invest $1,000-2,000/month of his/her salary into any startup they like - hardly a life changing amount. See it as a Kickstarter on steroids. At least this gives us a chance too to invest in the next Dropbox and Airbnb.

These aren't "ordinary" people? This model's only barrier to entry is the $1k it takes to get in (AFAICT) its not limited to "well-informed SF employees".

> At least this gives us a chance too to invest in the next Dropbox and Airbnb.

And the next Webvan, Pets.com, Kozmo, Flooz, eToys, Boo, etc etc etc, saying nothing of the huge number of failures we don't even know about.

Shouldn't that read "...unless you are rich enough that your life wouldn't be changed by losing lots of money."?

This is a devil's advocate question, but what's the difference between investing one's money, and one's own time & labor at a possibly high opportunity cost in a startup. Or stated another way, if an amateur shouldn't invest their money, what makes it ok for a startup employee to invest their labor?

Employment at a good-ish startup is a good investment in your skill set. Yes, ideally you will make a lot of money on an IPO or acquisition, but even if not you will develop expertise and broaden your network. Just throwing a few thousand at something you can only watch from afar won't get you that.

Investing is not just about returns anymore.

On Kickstarter, millions of people invest in products, not for a return but because they want the product to exist.

I would very willingly toss my money down the blackhole of seed markets, because it is a "fair shot." Other markets are not.

The stock market and index funds are driven by volume (i.e. rich people) fear, our economy, or stupid politicians.

I would gladly fund a product to see it exist, and all the better if I have a shot at making a return on something I believe in. People don't invest in the stock market because they believe in the company, they do it because they have a gut-feeling it might move up that day.

In '96 or '97, I predicted that Valve was going to be very successful, just based on a very early preview I saw of Half-Life - I was just a teenager at that time. I have made many similar calls (honest to god) across many companies including NVidia, Intel, Google -- because I believed in them before any of them went public (for the record, there is not a single public company that I believe in). What I wouldn't give to be able to invest my money where I believed it would do good.

In most circles the definition of investing is the deployment of capital for some expected return on that capital. You can't just take something else that feels like investing and start calling it that.

I agree - what I am trying to say is that there is more to investing than money in, money out, and risk. For example, I would feel a lot better losing money by investing in an innovative product, than losing money because the economy went down. Investing in progress, return or not, is its own reward.

I'm not rich enough that my life wouldn't be changed by lots of money, but I know startups pretty well.

I invest around $10K once a year in a startup, usually with a friend who I believe strongly in. One of them so far was a disaster, and oddly enough he was the highest profile of these investments. One was quite lucrative. Another is looking to be a great return, having recently raised at more than 10x.

I don't think investing 5% of your income and/or capital in startups is a bad idea if you have reason to believe someone will be successful.

The key is to consider the money lost once you invest it. Don't expect anything back.

"All the small investors (often < $25k) invest in the Crowd Fund, which then invests as one entity in the startup."

So your company must create and manage a new investment vehicle for each startup to raise money on Wefunder? I assume so, otherwise the investors in one holding will incur the liability of the fund being sued by the investors/investment of another.

According to your FAQ, you are not charging any fees yet and have raised about $500k to support your operations. On top of operating the parent business, for each entity you will have to prepare and send out K1s, make numerous compliance-related and SEC filings, and correctly disburse funds once liquidity arises. As a fund, you'll also possibly have to prepare annual or quarterly mark-to-market valuation reports for your holdings. All told, this could run into the tens of thousands of dollars per entity per year.

What happens if your company runs out of money to properly steward the funds you raise? Do you have a strategy to mitigate legal / compliance costs?

"What happens if your company runs out of money to properly steward the funds you raise?"

That's a very important question.

They can't even accept money from non-accredited investments until early 2014 (SEC period after JOBS act goes into effect is supposed to end in early 2014). I think they have time to sort that out.

"they have time to sort that out"

Not really... There is a big difference between managing the process for one company and doing it for many. The latter will quickly cause costs to spiral out of control unless the team can get some experience with the regulations now.

In the world of dealing with regulations, one year may sound like a lot of time for one startup but if you have to handle the paperwork for dozens, it's a whole different ball game.

It takes a team of 2 people 6 months and 25K to set up a broker-dealer, do relevant background checks, pass relevant exams, pass audits, get personnel exemptions, SRO agreements, etc. (https://www.sec.gov/divisions/marketreg/bdguide.htm). That's a one-time process and WeFunder may have done it already.

Once that's done, setting up separate legal investment funds is a 1 month initial process (and its fairly simple to scale this up -- the individual investment funds would be set up in parallel). There's some quarterly paperwork and some yearly paperwork, but it's entirely within the abilities of one person to handle "dozens"

That's right, small investors invest in a separate investment vehicle for each company that will requiere many of the actions that you describe. Second Market and Funders Club work the same way, and the costs do not amount to 10's of thousands of dollars per year. We have set aside enough funds deal with the future costs of each entity.

SecondMarket is a different animal -- they structure liquidity tenders for late-stage private companies and collect portal fees per seller, and, in the past, ordinary secondaries transaction vigs. They also run a large, traditional financial services business that has historically paid for much of their involvement in the startup world.

Funders Club is also a somewhat different animal -- they offer investors access to venture funds where risk is pooled, and also do single-purpose funds that resemble your product.

You are exclusively offering investors access to one investment and one set of risk. Let's say you can get it down to $4k/yr:

* Accountant to prepare and send out K1s to 50 shareholders $1000

* Delaware agent & franchise tax $400

* Legal, regulatory filings, 4 hrs $1000

* Your or your lawyer's time to give legally binding answers to questions from 50 shareholders $?

* Valuation analyst hired by you or firm, 5 hrs $600

* Broker dealer / misc / insurance $1000

These numbers sound pretty low to me but let's say you have economies of scale.

Making money solely when investors make money still seems like a reach. If you make 100 investments per year and have a decent team you will be burning a lot of cash -- the only way to recoup that cash will be to charge a transaction fee or keep raising money until carried interest pays out (which it often doesn't). Either way, it's something you should address in your disclosures.

It's one thing not to have a fleshed-out revenue model if you are a consumer site: nothing will happen if you die except for some upset users, but you can't just suddenly unwind a group of 400 investment funds when the underlying capital is tied up in illiquid private stock.

I really hope uncapped notes are not allowed. If you look at the history, Dropbox turned a $6M investment into a $5 billion dollar company. Google turned a $25M investment into a $250 billion dollar company. I have a feeling, one of these startups is going to turn a $1M uncapped investment into a $1B company, and there are going to be some really hurt feelings. Someone is going to invest $1000 in the next Google/Dropbox/AirBnB and walk away with $1200.

One of my concerns with this whole crowdfunding model is that if one limits the cap, then surely the expected value of the the returns from crowdfunding will be negative. You need the gains from the uncapped hits to compensate for all the failures. If your downside is potentially losing 100% of your investment and that odds of failure are somewhere (arbitrarily picked) between 70-90%, and your upside is only a 20% gain 10-30% of the time, the math doesn't make it seem like the model is sustainable.

Wait, what company went from uncapped note angel funding directly to a billion dollar valuation?

I never said that.

This looks great -- nice to see more options for individuals to invest. I don't think you should ever be convincing someone to invest in startups, but I was actually looking for a way to invest in microryza, and they used your system.

Lots of new people in this space lately: AngelList via SecondMarket, FundersClub, MicroVentures.

I have an investment in a seed fund run by a prominent angel, so I have some insight into recent valuations. I get the feeling that these online investors are getting inferior terms. For example, convertible debt usually comes with a conversion discount and a cap, but the deals I've seen on FundersClub have been missing one or both.

As a founder, more startup-friendly terms sound good to me.

Fundable and RockThePost are also making good noise

Maybe I'm missing something- but I can't see the valuations the companies are raising at anywhere (e.g. I can see that Company X wants to raise $490,000 - but how much of the business this is for)

Surely this is question number 1 when you want to invest in a company?

EDIT- Found it once I clicked the "Apply to invest" button". Maybe it should be a bit more up front though

Thanks - we'll consider that.

I am not impressed.

You are issued stock or a convertible note after your initial investment and you can cannot convert that note till the company is either bought-out or goes public.

What if they don't do either and simply reinvest the "profits" back into the company thereby showing no profits?

What happens if the board of the directors of the company you invested in dilutes your shares by issuing more-and-more stock to themselves and others year-after-after till your percentage of the company is practically non-existent?

I hope this doesn't come across as dismissive - but that's kind of the deal you get when investing tiny amounts (relatively) with early-stage startups. You're basically investing in the team (and their assumed honor) in the hopes of a big exit in the future. Or, more idealistically, in the hopes of being part of the Next Big Thing.

If you're looking for dividends (ie profit return) or management oversight - as an investor - you're going to either invest more and get your own terms or stick to the public markets.

This is interesting. Are the blurred images behind "Mystery YC Company" relevant to the company in any way, or just random backgrounds? The reason I ask is that one of them shows a screenshot for a startup that I know is not a YC company, and I know they aren't raising since they were recently acquired.

Holy crap, this is true visionary...great idea and excellent execution! Hopefully everything goes through on the government-side so that anyone can invest in these startups.

Question, though: Is the plan to allow any company to sign up in 2014 or will there still be some moderation in which companies can sign up?

We'll have a self-service platform which founders can use to fundraise privately. We make it easy to accept investments in about 3 minutes with automated legal docs, e-signature, and ACH payments.

But it'll always be highly curated for featured startups that are public on Wefunder. We are starting out with one per week.

Seems pretty interesting but after I certified for being an investor I got this:

Startups Fundraising Get first access to hot deals. 7 days left.

with no start ups listed. It seemed like there were a few presign up...

How are you guys avoiding having to register as a broker dealer before the JOBS act goes into place? (I'm assuming you're applying for Funding Portal status afterwards)

Great question. There are a few reasons we are able to do this now, mainly that we are not being compensated in any way. That being said we do have a relationship with a broker dealer to give us flexibility moving forward.

Cool! What broker/dealer are you partnered with?

This is what you said on site: How we make money

We earn a 5-8% cut from the total amount raised, depending on the stage of funding.

Isn't Funders Club also YC? What's the difference?

Love the concept, not the name. "Wefunder" comes across as slightly generic with a hint of cheese - the last thing you want as a company specializing in financial investments.

Just my 2 cents; some friendly constructive criticism; something to note perhaps in the near future when you are ready to do another brand evaluation.

When I click "certify as an investor" I automatically get directed to sign up for early access, with Facebook.

I am hesitant to enter my information, because I don't know what the certification process is like. It would be great if you could add this information somewhere? I highly doubt I qualify so it would be for nothing.

Income for 2011-2013, net worth >< 1,000,000 and agreeing that you understand the risk of investing in startups, plus a signature

Looking more into the law change (congrats btw), it would be nice to tell people a) if they qualify, b) if they don't right now, that you will notify when they can also participate

I don't work for Wefunder, I just went through the application process and typed what I remembered filling out.

I haven't tried it yet, but based on your statement:

The requirement is `or`, not `and`: you are still considered an accredited investor if your net worth exceeds 1M and you have 0 income for the past two years. You are also still considered an accredited investor if you have 0 net worth yet have income exceeding 200K/300K

The normal way a form is laid out is that it asks you how you are considered an accredited investor (circle one oval) and give the relevant information.

Their documentation was actually ambiguous until you submitted, too (I used to qualify on income but not assets, now I qualify on assets but not income; I wasn't sure if I'd go through, but did).

IMO, I'd probably err on requiring more as an investment market like this, just to avoid the odds of an early lawsuit or other dispute -- $200k/yr AND HNW AND previous investment experience would be totally reasonable. But that obviously makes it harder to recruit people.

I used >< as, literally, "greater than or less than".

How exactly do accredited investor laws work? If a private company allows a non accredited investor invests to put in $10k in exchange for stock, who broke the law?

If this new law comes in, are foreign investors allowed to take part?

How were unaccredited investors able to invest in Wefunder even though it is not legal yet?

We used state blue sky laws to take a limited number of unaccredited investors legally. We felt it was important to eat our own dog food, and so went through the extra legal hassle. https://wefunder.com/post/16-how-to-legally-crowd-invest-now

thats awesome, its a crowdfunding site that is crowdfunding another crowdfunding site

Damn, I wanted to post that comment :D the other crowdfunding site might launch a research project on how to maximize crowdfunding using machine learning

Not machine learning, but actually social network tuning for the stock market. I think it could be adjusted to towards crowd investing.

I wish I was joking. I should get that project up...

Just applied to put $1k into a YC company that I was very impressed with.

I hope this becomes the default for YC companies. Fuck the VC's - invite the public to demo day and crowd fund the seed rounds!

Quick math: investing $1k into Facebook with the same terms would be worth over $8 million today. For Dropbox, over $600k. For an OMGPOP-sized exit, $25k.

Are there any estimates for if you put $1k into every company from a batch?

Can you show your work on that math, please? I am at work and do not have the ability to go through it myself, but that seems too good to be true...

These are just rough calculations and they ignore things like whether the valuation is pre or post-money and dilution from additional funding etc, but it gives a ballpark idea of potential returns:

$1,000 investment at $8,000,000 valuation = 0.0125%

Facebook valuation today of $63 billion x 0.000125 = $7.87 million (was a little off)

Dropbox valuation currently at least $5 billion (they raised at a $4 billion valuation in 2011) x 0.000125 = $625k

OMGPOP sold for $200 million x 0.000125 = $25k.

Okay, thank you. I was wondering if it was just straight division.

Facebook raised a total of $16B. In each round, you get your share diluted. You'll need the history of the funds raising and the dilution your share is taking, but I guess, you'll hardly reach $1m or even $100K after all dilutions take place.

Peter Thiel invested $500k for 10% and was left with only 2.5% at IPO, so it looks like dilution is indeed stronger than I assumed.

At that dilution rate, $1k in Facebook would be worth "only" about $1.9 million today.

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