Between the two of them, Alex Mittal, 28, and Boris Silver, 24, have founded six companies and raised over $25 million in investment capital. Successful exits have also enabled both of them to do a bit of angel investing. “These experiences taught us that the current structure for raising capital and investing in startups is more about who you know, not about what you are building,” Mittal says. That didn’t sit well with them, and so the two, who had met at the Wharton School of the University of Pennsylvania, decided to start FundersClub, an online venture capital platform that gives accredited investors the opportunity to invest in a select group of high-potential startups.
The Right Timing
Mittal and Silver knew one another at Wharton, went their separate ways after graduation, then met up again in San Francisco last year. “We realized we were both thinking about the same type of startup,” Mittal says. Over the past decade, there had been a significant shift in the startup investment environment. Individual investors, who once invested heavily in publicly traded startups, were sidelined by the IPO market’s decline. “Now, the primary investors in startups are institutional venture capitalists whose money comes from hedge funds and endowment funds,” Mittal says.
It seemed to him and Silver that the country’s 5 million to 10 million accredited investors (defined by the SEC as individuals with annual incomes of more than $200,000, or couples with more than $300,000), would be receptive to a platform that would give them the opportunity to invest in the same types of startups that big VC firms were betting on.
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At the same time, the passage of the JOBS Act promised to change the way startups raised capital, partly by eliminating longstanding rules against “general solicitation,” which prevented companies from advertising a capital raise. While that has significant implications for crowdfunding platforms, Mittal stresses that FundersClub is online venture capital rather than crowdfunding. Individuals invest in funds (which sometimes contain just one company), and then FundersClub invests the aggregated amount in the startup.
Lastly, says Mittal, the emergence of technologies that would clearly support what he and Silver had in mind helped tip the scales. Online payment platforms and online document signing, for instance, would allow investors to move thousands of dollars over the Internet without ever leaving home or office.
Value for Both Investors and Startups
Since the platform launched in May of 2012, FundersClub has signed up more than 5000 members (all accredited investors), 500 of whom have invested approximately $2.5 million in nine different funds. Currently, a typical investment is between $2,500 and $5,000. “Lower check sizes enable investors to build a diversified portfolio,” Mittal says. Typically, it’s extremely difficult for individuals to invest such small amounts in high growth potential startups.
Very often, he says, the startups that raise money on FundersClub are already venture backed, or go on to raise a significant venture round. “We get them exposure and that helps them fill out their round faster,” he says. For instance, the online social commerce company, Soldsie, raised $425,000 on FundersClub and recently went on to raise a total of $1 million. And last December, FundersClub raised a total of $500,000 for YCombinator startup Virool, a social video advertising company. “We are not funding second tier companies that can’t get funding any other way,” Mittal says.
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But for startups, the value of the platform goes beyond funding. FundersClub startups also get “an army of investor supporters” who are eager to provide introductions to customers, partners or to help hunt down key job candidates. They do, after all, stand to profit handsomely from a startup’s success.
All of this, however, comes after a strict vetting process. The company’s investment committee reviews approximately 100 startup opportunities every month and screens them for their market potential, quality of the team and growth metrics. Next, a select few are sent on to the FundersClub Angel Panel, comprised of investors who review and score the opportunities. Only 5 percent of companies that apply are selected for the platform. In fact, FundersClub put itself on the platform “to eat our own dogfood,” Mittal explains. The company raised just under half a million, and then went on to raise a total of $6.5 million from a variety of venture capital firms including First Round Capital and Spark Capital.
Pay for Performance
While FundersClub charges investors a maintenance fee, Mittal says that 100 percent of that fee now goes to the company’s banking partner. Unlike traditional venture capital funds, the company doesn’t make money on fees. “We do intend to take carried interest and when there’s an exit or an IPO, we would take 20 percent of the profits,” he says. “Literally, the only way we can survive as a platform is if we have successful outcomes.” He is hoping that the value he provides to startups, and the opportunity he affords investors to “own a piece of the future” will also trigger success for FundersClub.
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Photo courtesy of FundersClub