FundersClub is an equity crowdfunding website that has helped more than 270 startups get funded to the tune of more than $100 million dollars.
As an entrepreneur, you can use their “online VC” website to get funding for your startup company at the series A or seed stage. As an investor, you can participate in early funding rounds of fast-growing companies.
Equity crowdfunding is emerging as a powerful way to get funding from the crowd by using the power of technology and the internet. In 2017 alone, it grew a lot!
Since this is such a new industry, I want to help demystify some of the major sites, resources, and companies out there. You can learn more about it in my guide Equity Crowdfunding Explained.
With this article, I want to go into the pros and cons of using FundersClub and who it’s best for. You’ll discover more information that will help you make a quick decision going forward.
How FundersClub Works
FundersClub is a San Francisco company that was founded in 2012. They began as a new way for investors to connect with startups through an online marketplace.
Primarily, the platform is interested in early-stage technology companies seeking a seed stage or Series A funding round. You gotta have a strong team, demonstrate traction, and be going after a large market.
Since starting, FundersClub has acquired more than 19,000 members, invested in portfolio companies that have received 26 exits, and raised over $100 million in capital.
Along with providing a market to reach angel investors, FundersClub also pairs founders with more than 600 other founders and entrepreneurs. The company has extensive experience launching, growing, and exiting startups, which they pass on through on-going mentorship.
One big differentiator between FundersClub and some of the other platforms out there is that this platform only accepts angel investors (accredited investors) on their platform.
Fees and Costs
There are costs associated with doing any kind of financial raise and those that are specifically paid to FundersClub in exchange for helping with the transaction.
According to the website, FundersClub charges carried interest for the majority of its funds. As the site says, “carry is a percent of any profits from a fund.”
Single company funds: carry ranges from 1 – 30% based on performance (typically 20%)
Multi company funds: carry ranges from 1 – 30% based on performance. There is also a 0.25 – 3% annual management fee which goes to the fund manager. This management fee averages to be about 0.5 – 2%.
Along with these costs, there are also administrative costs related to each fund which are set aside. This comes out to be 10%. These funds are not used for compensation.
“This fee does not dilute the startup; for example, if $250K is pledged by FundersClub members, $225K is invested in the startup, and $25K is set aside for legal and accounting costs.” – Source.
Who Can Invest on FundersClub?
FundersClub is only open to accredited investors (what does this mean?). Basically, these are people with a high yearly income and large net worth. They can afford to invest in risky startups.
Less than 2% of the companies pass through the vetting and due diligence process. You’re getting access to the cream of the crop.
Of course, there are no guarantees when it comes to the returns that you can expect on their website. In my research, I found that the IRR varied from 8% net IIR to 44%. You can take a look at some of the multiples below.
Remember that past performance is no guarantee of future results. If you wanna check out more about the returns, you can browse this page on their site.
Unlike traditional investments on the public stock market, your investments on FundersClub will be illiquid. This means that your investment horizon is going to be much longer.
You’ll only get a distribution when a liquidation event happens. This simply means that the startup is either acquired or goes public. This can take 4 to 7 years or longer to happen. In some cases, there might not be any kind of distribution.
The minimum to get started investing is $3,000 per fund. The average check size is going to vary depending on the type of investor. The interesting thing about this site is that the average check size is much smaller than with traditional angel investing ($25k – $250k).
Who Can Raise Money on FundersClub?
If you want to do a funding round for your company, then listen up!
Firstly, you gotta fit into what FundersClub is looking for… they want to get a massive return for their investors, so naturally, they can’t accept every company.
In general, you should expect to have:
- A world-class team that can execute on the vision, deal with the day-to-day grind, overcome obstacles, and stay ambitious.
- Product-market fit, which just a fancy way to say traction. People should be buying or using your product in a measurable way. You should be seeing growth.
- Some aspect of scale, meaning technology. Technology is there to increase automation and make it easier to scale. No scale means bad returns in a VC’s eyes.
- The potential to make a lotta cash. You gotta be going after a BIG problem with a solution that addresses a BIG market.
If you got all of that, dope! You’re ready to apply…
To get started, you just need to submit your application, talk with a member of the site’s team, go through an investment committee review, create a profile, and then undergo a panel review.
This is the last step of the process and not many startups make it this far. According to the website, it’s less than 2%!
FundersClub Popularity and Statistics
This site is primarily focused on VC and angel-style investing into emerging technology startups. We can’t really compare it to other equity crowdfunding sites doing Reg CF or Reg A+ raises.
You can correct me if I’m wrong, but I imagine they’re probably doing 506(b) or 506(c) offerings under regulation D, which is the traditional way to raise money from angel investors for startup companies.
In this way, they’d be a bit more similar to platforms like CircleUp or AngelList. At the time of writing, FundersClub has facilitated more than $100 million in investments across more than 270 startups.
Of the companies in their portfolio, they’ve had 20 companies that were acquired and more than $2 billion in funds that went to companies (in later rounds) that started with FundersClub.
I find it interesting that the average check size at the five year mark was $10,857 and the average FundersClub check size was $291,364.
The companies that have made up their portfolio come from industries like:
- IT
- Financial technology
- Health and medicine
- Retail
- Food and agriculture
- Human resources and more…
As you can see, these guys are one of the forerunners at adopting technology and bringing it to the funding game. I think we’re gonna see some great process from them in the future.
Would I recommend FundersClub?
It comes down to your needs as a company and the type of funding that you’re seeking. As I’ve said earlier in the article, you’re basically doing an Angel or VC round with these guys (except it’s online).
In this way, I would evaluate the company and compare it to the other venture capitalists that you’re considering. It’s a different beast from the Reg CF or Reg A+ platforms we’ve discussed in the past.
To get all my thoughts on the various platforms out there, you can grab a copy of Equity Crowdfunding Explained. This guide goes much more in-depth into the different funding types and which is right for you.
Overall, I think FundersClub has been doing some great work and they’re definitely worth looking into. Evaluate how your company fits with the VC model and keep in mind the costs of doing a funding round.
