FundersClub Reports Unrealized Net IRR of 41.2% | Hacker News Reader

FundersClub Reports Unrealized Net IRR of 41.2%

mattermark.com

47 pointsdmor31 comments

A whole lot can happen between 'unrealized' and 'realized'

Especially if one of the two startups driving all the growth is probably a Bitcoin startup.

If I'm reading the graph correct, the other spin that could be put on it is "majority of FundersClub investments receiving follow-on equity funding get it at lower valuations than FundersClub seed funding"

Maybe you could plot that against the increase in valuation between YC seed funding and the next round for YC12...

In this case, "illiquid" vs "liquid" is probably apt.

Its also a little disingenuous that they touted the funds "performance" 10 days after one of their two success stories had a huge bump in valuation. Had they decided to celebrate their unrealized IRR on Jan 10th (i.e without the huge valuation bump for Teespring) it would have probably been in the mid teens.

I would like to have seen some mention of risk in the Mattermark or the Funder's Club post. It's great that so many of their portfolio companies have gone on to do follow on rounds, but what percentage of companies that do a follow on round have a liquidity event at or above that level? What percentage end up at zero? Risk is something we have a pretty good idea about for public equity indexes (S&P 500, Russel 2K, etc), but not necessarily for VC funded startups where most of the data is private. It seems like the kind of analysis that should be right in Mattermark's wheelhouse.

pure comedy. how many investments did they mark down do zero?

amazing, a seed fund with no zeros! these guys are good!!

also, where most seed investors die is in the inability to "protect" their ownership in follow-on rounds.

sounds like they'll figure that out in the next 5 years.

My application for membership just got rejected for not making enough money.

Rich get richer, I guess. If I was in a different mood I would write a blog post in outrage.

Are you an accredited investor? Legally, FundersClub can't accept you if you're not. This isn't a "rich get richer" kind of thing; it's a federal regulation. It's not FundersClub being snooty; it's FundersClub complying with the SEC.

The JOBS Act intends to break down some of these barriers, though its most important provisions are still pending.

"Rich get richer" is literally institutionalized in the United States through the SEC and tax law. Certain people are fighting to raise the limit to $2 million cash liquidity because there are too many millionaires now.

People who aren't rich partake in all kind of risky investments, from gambling to personal lines of credit. But when it comes to the ability to investment in new companies before they are sold to the public, the investment is deemed "too risky" for those with under a million dollars in cash liquidity. That is, the only investment opportunities that are deemed too risky for those who aren't rich are the investment opportunities that have a high expected value.

This isn't a "rich get richer" kind of thing; it's a federal regulation.

Well, it may be a "rich get richer" kind of thing, but it isn't something for FundersClub to decide, it's something the government has decided.

Edit: Your edits mooted my point

Sounds like a rich-get-richer thing to me.

Well the accredited investor rules really are there to protect people from getting scammed. That rule just accepts that a material number of the people asking for investment are going to be unscrupulous bastards who are just out to take their "investors" money. This way they take it away from people who can afford to lose it, rather than people who cannot. There are avenues for non-accredited investors to invest in the market in which the SEC has put a lot of constraints on the people trying to you pitch you such that if they are really crooks you can sue them and try to get your money back. Sometimes even that fails, as in the Madoff case, but they try.

> Well the accredited investor rules really are there to protect people from getting scammed.

This is a line of bullshit. If the law allowed it, you could easily set up a site like LendingClub.com which distributed the risk over many many things, mitigating it quite a bit, and allowing "smaller" players to take advantage of it.

One could do the same thing with real estate... If the law allowed it.

The laws against capital investment by anyone who is not a millionaire IS what is making the rich richer.

Perhaps we are talking about different things. There are no "laws against capital investment by anyone", if you want to invest go down to pretty much any bank or financial institution and open an investment account. Go out and buy shares or bonds and have fun. Back in the dot.com days people did this all day long and got the notion of a 'day trader' was born.

The laws that are in place are around liability and more importantly personal liability in the event that the investment goes south. If you are soliciting investment from accredited investors you can put in place some limits on your liability with respect to that investment, I do not believe that is the case if they are not accredited.

We have this already - it's called the stock market and bond market. If you want to distribute the risk of investing in real estate, I suggest taking a look at REITs, real-estate investment trusts. They are companies investing in real estate required to pay out a certain % of profit in dividends.

True, but what if 10 people wanted to co-own a real physical house? I believe there are laws against that

To clarify: I wasn't trying to make a point, one way or the other, about income inequality. The rich are getting richer, and that's a topic for a different discussion. I was simply pointing out that FundersClub accepts rich people because those are the only people they can accept. It's pointless to blame them for a policy they didn't create, but have to abide by.

In all fairness, venture investing is incredibly risky. One should not be doing it unless they are investing no more than 5-10% of their net worth. Someone who is making < 200K a year, would end up investing much more than that and it's probably not a good idea

I don't agree. According to their site[1] they advertise a low minimum 2.5-5K, so you don't need to make 200K a year (or have 1M net worth) to invest 10% or even 5%. You just need to have 100K available for investment and, in your diversification, put 5% on this. I know it's the law in the US, but I don't get it. Yes, it could be incredible risky as you said, but nobody is stopping you (at least here in UE) from buying a leverage certificate that is incredible risky as well (I've seen 7X, 15, even 21X Long and Short on the German or Italian stock market, for example). You just express that "you know what you're doing" and you're good to go. Or you can go to your bank, get 10K in cash and go to the nearest casino...

[1] https://fundersclub.com/how-it-works/

Venture as an asset class has underperformed the S&P over the last 10 years[1], so you probably aren't missing out on much.

It's only the top firms that have been making good money.

[edit] - added source

[1] http://www.nvca.org/index.php?option=com_docman&task=doc_dow...

> Venture as an asset class has underperformed the S&P over the last 10 years[1], so you probably aren't missing out on much.

And that's actually biasing the comparison in VC's favor.

The S&P 500 is a large-cap index. Venture capital is supposed to invest in early-stage companies with high growth prospects. A fairer comparison would be to a small-cap index, or to private equity, or to private equity that only takes on small-caps.

Also note that venture capital is risky and illiquid. It should earn a risk and liquidity premium vs. the public stock market. If it can't earn at least this premium, then it would be producing negative alpha.

Can you provide a link to this data, please?

I recall from my venture class in B-school that most venture funds basically match inflation. Sorry, I don't have a link to cite, but our prof had been a venture capitalist for 15 years. For every $100M return KPCB sees off of a Facebook or similar, they pump $90M into companies that either fail outright or exit in a break-even acquihire. $10M over the average 10 year life of a venture fund isn't a great return.

Most good VCs aren't in it for the money; they want to see people succeed. The money is obviously important, but they generally have enough of it before they start investing.

This is the SEC trying to protect the "little guy". This is why they can only let "accredited" investors invest that have over a certain amount of money/income. If you're outraged, make sure to point your outrage at the government.

Outrage pointed at the government:

I don't agree with the supposed intentions of the government. If the government really was trying to 'protect the little guy', it wouldn't allow all those short-term credit schemes that charge exorbitantly high interest rates.

Those things are toxic, screwing up peoples' lives all the time, but the government lets it keep on going.

What kind of person who can barely put food on the table invest in a startup? It's stupid.

Even if you can put food on the table, you should be able to do whatever the hell you want with your money.

False advertising and misrepresentation is the issue that needs attention here, not "protecting the little guy."

Um, it's already all about "false advertising and misrepresentation"! It's all about disclosure. Any company can choose to comply with the reporting requirements and thus "go public", whereupon anyone who wants to buy shares in the company is free to do so at any time, even with their last penny.

Even without complying with those requirements, companies can still, to a limited degree, receive investment from a certain number of non-accredited investors.

What is it, exactly, that you think the SEC regs say?

Well, the idea is that there are tons of incredibly risky investments out there where you really do need to be a professional investor to properly understand the risk (or at least wealthy enough to absorb a large loss). The idea is to prevent predatory bankers from selling these really risky investments to individuals as if they weren't as risky.

Taking on a lot of risk as part of a portfolio strategy is fine, but you need to understand what you're getting into when you're buying leveraged securities, complex debt-equity instruments, etc. I'm glad the average investor can't buy into hedge funds, because you only hear about the successful ones. You don't hear about all the ones that lost 50% of their value in the first year and closed down (and there are plenty of them.)

I agree that you have to understand what you're getting into, but I argue it's not limited to products of high finance.

What about payday loans, borrowing on credit cards, etc.?

Let's not forget about buying houses...we all know how that turned out. Student loans?

Like successful hedge funds, you only hear about the flashy side of consumer finance.

Thousands get screwed every day from crooked (and non-crooked) schemes aimed at the non-affluent.

There's no simply no reason to block access to (potentially) the most lucrative instruments known to man in the name of risk. It's already everywhere.

If you were running a business that was solely based off of how well people made money, wouldn't you want to include only those who had proven that they can make lots of money?

Sounds like risk mitigation to me.

It's pretty funny to see this compared to the S&P 500. Liquidity premiums alone could easily account for the difference in returns. I'd take 20% cash gains over 40% utterly illiquid gains any day. Much more interesting statistics would be expected % value realization. Then multiply the 40% gains by that number. For example, if your gains are 40% multiplied by 20% of the startups ever making an exit, your actual returns are 8%.

There's a type on this[0] page. just ctrl-f: fo

[0]http://mattermark.com/fundersclub-irr/

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