FundersClub rewarding investors for referrals

http://venturebeat.com/2013/07/16/fundersclub-braces-against-general-solitication-by-rewarding-investors-for-referrals/

by mittal • 13 years ago

52 20 13 years ago

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.

marcamillion• 13 years ago

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/

prostoalex• 13 years ago

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.

wtvanhest2• 13 years ago

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• 13 years ago

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.

wtvanhest2• 13 years ago

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.

confluence2• 13 years ago

Ah it's good to see that the colossal mistake of historic proportions (http://baselinescenario.com/2012/03/19/a-colossal-mistake-of...) Just Open Bucket Shops (JOBS - http://www.nytimes.com/2012/03/15/opinion/collins-the-senate...) 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).

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.

rattray• 13 years ago

Care to elaborate? Your comments are quite negative without a lot of backing/substance. Though you may have done a fair amount of research, it doesn't appear here -- I'm not sure this is the kind of critique hn should be about.

7Figures2Commas• 13 years ago

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• 13 years ago

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.

bobbygoodlatte• 13 years ago

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• 13 years ago

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

wavesounds• 13 years ago

"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.

kenko2• 13 years ago

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• 13 years ago

"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.

kenko2• 13 years ago

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...)

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".

cwilson• 13 years ago

Note that the headline of the Venturebeat article itself doesn't use the word disrupt.

alxbrun• 13 years ago

+1 And you aint going to disrupt anything by investing "$5 million in 25 companies".

argumentum• 13 years ago

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.

FundersClub rewarding investors for referrals

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