FundersClub is an important early player in the investment crowdfunding ecosystem as a result of receiving what’s known as a “no action letter” from the SEC back in 2013 (AngelList received a similar letter soon after) helping them to pave the way ahead of subsequent updates to SEC rules and regulations following the 2012 JOBS Act.
FundersClub comes out of vaunted startup accelerator YCombinator, and boasts in impressive portfolio including stakes in Slack, Instacart, and Coinbase.
(You can read more about my own investments via FundersClub in A Look Inside My Crowdfunding Porfolio.)
Types of investments FundersClub offers
FundersClub offers investments in single companies as well as multi-company funds, typically targeting a particular market or sector. From the FundersClub website:
Choose between different options: we offer both single-company funds that invest in a specific top startup, as well as multi-company funds that invest in multiple (typically 10-15) top startups that match a specific investing thesis.
What do you get when investing with FundersClub?
The specific security offered by the company can vary by investment. As with many other Reg D investment crowdfunding platforms, investors are actually investing in a special-purpose vehicle (SPV), usually an LLC, which in turn holds the actual underlying securities (and simplifying the raising company’s cap table).
How does FundersClub make money?
FundersClub does not charge investors any direct fees, though does collect carried interest on any returns above the original investment amount (the carried interest amount can vary by fund, but is typically 20%). FundersClub also sets aside a portion (usually 10%) of the capital raised to cover ongoing administrative costs. From their FAQ for founders:
Typically 10%, or up to $25k (exact amount may vary by fund) of the capital pledged by FundersClub members is set aside in a fund. This administration capital does not go to FundersClub. It is used to cover the tax and legal fees associated with setting up a fund, and the ongoing operational costs of running the fund. This capital does not dilute your startup — for example, if FundersClub members pledge $250K, $225K is invested in your startup, and $25K is applied to the 10% administration fee. This is no different from fund expenses incurred by traditional VC funds.
Potential returns and cashflow
Investments via FundersClub are high-risk investments in startups. Most of the investments have no explicit expectation of payments, dividends, or other cash flow. Most startup investments lose some or all of their value. While some investors achieve excellent returns from startup investing, that is a rare outcome and requires substantial diversification over time combined with very careful investment selection.
FundersClub is unique in that they publish detailed return data from their investments, available on their website. For example, across all of their 2012 investments, they report a 21% IRR (though prospective investors should note those returns include unrealized gains).
Breadth of offerings on FundersClub
FundersClub clearly takes a curatorial approach, advertising that they accept fewer than 2% of the startups that apply to raise funds. Unfortunately that also means that there are often no investments available (including at the time of this writing).
Regulatory framework and due diligence expectations
FundersClub itself is what’s known as an “Exempt Reporting Advisor” which is variant of a Registered Investment Advisor. Investments are offered under SEC Reg D, and are only available to accredited investors.
FundersClub curates their offerings, accepting fewer than 2% of applications.