Think you know about the hottest startups before anyone else? Equity crowdfunding platform and online venture firm FundersClub wants you to be their eyes and ears, so they’re offering to give you 10 percent of their carry (profit) if a startup you refer to them has a big exit. The FundersClub Refer program could win it better deal flow so it can rise above the competitors cropping up in the crowdfunding space.
So here’s how it all works.
FundersClub’s job is to find promising startups, secure space in their next funding round, and then allow FundersClub community members who are accredited investors (over $1 million in net worth to invest) to participate in that round by investing cash in exchange for equity. It offers deal flow to people outside the chummy insiders’ circle of Silicon Valley venture capitalists. To augment the elite introductions and mentorship provided by traditional VCs, crowdfunding offers startups an army of evangelists, testers, customers and connections. FundersClub finds the deals and does the due diligence, the crowdfunders provide cash and whatever else they can help with, and the startup hands out equity.
FundersClub makes money by charging a performance-based carried interest of around 20-30 percent. That means if a startup it funds gets acquired or IPOs at a higher valuation than when it received investment, FundersClub will take 20 percent to 30 percent of the profit and the rest goes to the community crowdfunders. If you refer a startup that gets a positive exit, FundersClub will give you 10 percent of its 20 percent to 30 percent carried interest, or roughly 2 percent to 3 percent of the total carried interest.
So let’s say you refer TechStartup to FundersClub, who helps it raise a $1 million round in exchange for 10 percent of the company at a $10 million valuation. Then Yahooglebook acquires TechStartup for $40 million. The 10 percent of the company becomes worth $4 million. FundersClub takes $600,000 as its 20 percent carried interest of the $3 million return on top of the $1 million invested, and FundersClub’s community members get the other $2.4 million. FundersClub then pays you $60,000, or 10 percent of its carry.
Considering how tough it is to pick a startup that will succeed, let alone hit a home run, you don’t have great odds of striking it rich through FundersClub Refer. But you also don’t really risk much by offering referrals. All you have to do is be the first to refer the startup, have a prior relationship with it, and invest in the company through FundersClub (minimum investment is $1,000 to $5,000). A referral could net you a lot more than your investment. Of course, since you have to be an accredited investor so you’re already sort of rich, $60,000 might not seem like a ton.
But thanks to the JOBS Act, soon anyone (proletariat included) might be able to invest through crowdfunding platforms like FundersClub, Circleup, AngelList, or Wefunder. Last week the SEC pushed through part of the JOBS Act by lifting the ban on general solicitation for fundraising. That lets startups openly advertise that they’re seeking investment, which could bolster FundersClub by piquing the interest of people outside of Silicon Valley who weren’t in earshot of the old word-of-mouth way of fundraising. The next step is to actualize the core of the JOBS Act, which would drop the accredited investor requirement and truly let the whole crowd fund startups.
If (hopefully when) that happens, anyone will be able to participate in FundersClub Refer. Suddenly, average joes could become VC scouts and win a reward down the line. FundersClub might not get that many referrals, it might fund fewer of them, and just a few may exit triggering the bonus, but the program conceptually changes how the public interacts with venture capital.