FundersClub democratized angel investing with its equity crowdfunding marketplace. Two years later, it wants to do the same for launching a fund or being a limited partner by licensing out its backend system for legally doing venture deals and transferring cash. Its new feature, called Partnerships, competes in some ways with AngelList’s Syndicates. Essentially it’s venture-capitalism-as-a-service. Rather than amassing an army of investors that syndicate leaders can call on to fund specific startups, FundersClub Partnerships can function more like traditional VC funds that take on LPs’ cash upfront and then pay them back a percentage of a multi-company portfolio’s profits if they succeed.
Historically, “100 or so seed stage funds decided who got funded,” FundersClub co-founder Alex Mittal tells me. But now anyone with a track record of investment success can crowdfund their own VC firm without having to reinvent the wheel in terms of legal and financial infrastructure, which could help more worthy startups get off the ground.
FundersClub will still curate its own offering of startups and bundles of companies that people with over $1 million in net worth can invest in. It’s just also letting proven angels serve up their own investment opportunities on top of the digitized venture capital backend it built in exchange for a fee and cut of their proceeds. Partnerships is launching with four multi-company funds, including Bobby Yazdani’s Signatures Capital.
How FundersClub Partnerships Work
An accredited investor (someone earning over $200,000 a year or with over $1 million in new worth) who has had at least one profitable exit from their previous investing can apply to start a Partnership. If the FundersClub’s committee thinks they have success potential, the Partnership head must give answers to five ethics questions that will be shown on their profiles. The questions are designed to discourage, or at least make transparent, any conflicts of interest with the fund they’re starting. That could mean taking adviser shares or doing personal investments on the side that don’t align them with getting the best possible cash-for-equity deals for their Partnership. FundersClub also gets a final say in an effort to weed out any scammers.
Once approved, the Partnership leader can set up either a single-company micro fund, or a traditional multi-company VC fund that gets listed on the FundersClub site. Accredited investors can then browse these funds, learn about their partners and investment strategies, and choose to become LPs. Their cash gets them either rights to a chunk of equity in the single-company fund, or a stake in the fund. The LP’s money is wired to the fund, and later doled out to one or several startups, using FundersClub’s backend. This handles banking, deposits and wire transfers, legal documents K-1 and tax preparation, and eventually payouts — all online.
Similar to many SaaS startups, FundersClub had already built out this backend, so it figured it could earn some money and better accomplish its mission of leveling the playing field of investment by licensing it out. In exchange for its service, Partnerships pay FundersClub a 0.25 percent management fee on the money their fund raises from LPs, and 1 percent of their carry (the profits the fund earns if their portfolio returns more than it started with).
To start, FundersClub is featuring four partnerships:
- Signatures Capital – led by Bobby Yazdani, who previously invested in Google, Uber and Dropbox.
- Fabrice Grinda and José Marín – an internationally focused fund whose leaders have backed MilleMercis (IPO’d), Brightroll, DineroMail (acquired), and Sunrise.
- Jared Friedman – A fund from Scribd’s co-founder, who has invested in Parse, CreativeMarket, Swiftype, and Instacart.
- UpWest Labs – An incubator founded in 2012 that’s based in the US but backs Israeli startups.
Syndicates Or Partnerships?
Partnerships are designed to differ from their competitor AngelList Syndicates in a few big ways. First, it’s not an unchecked open platform. Partnership leaders need to have proven they’ve made profitable investments before. Second, it’s meant to give LPs more transparency through the ethics questions, and make sure fund leaders aren’t padding their pockets with lucrative adviser shares in exchange for bringing in their Syndicate or Partnership with a worse deal. And since the multi-company Partnerships get money up front and don’t need LP approval on each deal, stealth startups don’t have to worry about revealing confidential business info to a crowd.
In the blog post announcing Partnerships, Mittal highlights why he thinks Partnerships are better for founders and investors. “Many have critiqued existing deal-by-deal syndicated models for the high logistical overhead for investors and founders and onerous information sharing sometimes endured by participating startups, whether online or offline. The multi-company funds enabled via Partnerships allows VC to come online without requiring startup founders or investors to deal with these issues.”
While tech celebrities like Kevin Rose and Dave Morin might command oversubscribed syndicates on AngelList, Mittal tells me “we don’t care about name brands. We care about performance. And that’s emblematic in the people that we launched with. Nobody knows Bobby, but a lot more people should.”
[Update: After speaking with AngelList co-founder Naval Ravikant, I've learned that AngelList has been quietly allowing for the creation of multi-company funds, similar to what Partnerships just started doing. It also hosts Maiden Lane, and is announcing here The Syndicates Fund and FG Angels Fund, which invest in other syndicates and angels. Ravikant tells me over 50 different Syndicate leads have already successfully run a deal on AngelList.]
Both Partnerships and Syndicates have their place. If a high-profile figure wants to do angel deals with more cash behind them, Syndicates works. If a succesful angel wants to spend more time curating and managing a full-fledged VC fund without the hassle, Partnerships could be a powerful tool. Both wrestle control of the cash spigot away from traditional big VCs, and give founders more grassroots ways to get the capital they need.
“Ultimately, FundersClub is a software company, a technology company, a marketplace,” Mittal says. “We don’t want to be a filter on what gets funded. We want investors to use us to get deals done.”