As barriers around general solicitation come crashing down, FundersClub is looking at new ways to stay on top.
The startup released a new feature today that rewards members of its community for making referrals. FundersClub will share 10 percent of the total carried interest on a fund with the member who refers the target company. Carried interest is a share of the profits of an investment or fund that is paid to the investment manager (in this case, FundersClub), despite not contributing any initial funds. If FundersClub receives carried interest on a fund, through a liquidity event like an acquisition or IPO, the referrer will receive a little something extra as well. This gives accredited investors an opportunity that it typically only available to general partners at VC firms.
The referral feature is intended to give FundersClub an edge in a competitive market. FundersClub was recognized as the first ever online venture capital firm earlier this year. The startup provides a platform where accredited investors have access to a vetted selection dossier of promising early-stage companies. Members can make small equity investments in companies that appeal to them, and FundersClub pools all the money together into one fund and gives it to the startup under its own name, as one entity on the cap table.
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This approach appeals to certain startups by connecting them to a large community of interested investors and provides them with an additional channel to raise money. It serves investors who want to make small angel investments without doing all the time-consuming due diligence themselves, and/or who live far away from startup hubs.
“We are dedicated to evening the VC playing field which is traditionally insider’s only for certain investors and certain companies,” said cofounder and CEO Alex Mittal in an interview with VentureBeat. “FundersClub is opening access to quality startups to any accredited investor, even those without connections. It is online, more inclusive, and more democratic.”
VC is traditionally a relationship-based, who-you-know industry that is only accessible to an elite groups and where deals happen behind closed doors. The landscape is shifting thanks to the JOBS Act and changes in SEC regulations, as well as the rise of crowdfunding which has made startups and investors more open to alternative forms of financing. This sector has also seen the rise of the “blogger VC” and firms are taking more hands-on, communicative approaches with their portfolio companies. Amidst all this change, “crowd investing” platforms have cropped up including FundersClub, WeFunder, Fundable, and vertically-oriented sites like Healthfundr and CircleUp. All feature a curated array of investment opportunities and the investment world will only get more noisy now that the SEC has lifted the ban on general solicitation.
CEO Alex Mittal said that the refer feature is not connected to the new rules surrounding general solicitation. However FundersClub’s success hedges on the strength of its community — everyone involved stands to gain more from a community of strong startups and fervent investors. The company started out by featuring fellow Y Combinator companies in an effort to ensure quality, but has since branched out. The refer feature aims to keep the pipeline strong and strengthen the network by incentivizing people to bring promising opportunities to FundersClub. To be eligible for this perk, the member must invest at least the minimum investment amount for the fund, the fund must successfully close, and the fund itself must receive carried interest.
FundersClub has invested more than $5 million in 25 companies and has more than 6,000 accredited investor members. FundersClub closed a $6 million seed round last year from an impressive roster of investors. It is based in San Francisco, Calif.