We thought it wrong that it was illegal to invest in our friends. So we launched a petition to Congress to change the law. We were invited to DC by Senator Brown, Senator Bennet, Senator Merkeley, and Rep. McHenry, and helped teach them how startups raise money. We were mentioned on the Senate floor and in the Congressional Record several times.
Congress passed Regulation Crowdfunding as part of the JOBS Act in record time, and we were invited to the Rose Garden to watch President Obama sign it into law. The only hitch: the SEC had to write 600+ pages of rules before it could take effect. Little did we know that would take 4 years.
We packed our bags and headed to California to attend Y Combinator, the Harvard of startup accelerators. We drank a lot of red bull and coded all night long. We also became friends with some of the most talented startup founders in the world. It helped us understand how to work with high-quality startups with lots of other financing options.
It became evident the SEC was not going to roll out Regulation Crowdfunding anytime soon. So we decided to use current law to help wealthy accredited investors around the world invest in promising tech startups. On March 25th, we launched our first company: Zenefits. At a $9 million valuation.
The rich person crowdfunding gig was fun, but it's not what we wanted to do long-term. We never took our eye off the SEC and their rule-making on Regulation Crowdfunding. We offered nearly 20 pages of detailed comments on their proposed rules and flew to Washington DC to meet the SEC in person.
Thanks to our new designer, Linlin, we upgraded the entire web site with a more usable and beautiful design. And thanks to Greg and our new software engineer Omar, we became a "full-stack startup". We wrote our own payment transfer, electronic contract signing, accounting, funding portal, income verification, and SEC filing software. We knew we had to drive down costs if crowdfunding was going to work.
The SEC released 685 pages of rules. Wefunder was mentioned 72 times. Overall the rules were good, but there are a couple of flaws that Congress needs to fix to protect investors. Senator Bennet wrote a letter to the SEC with our concerns, and Congressman McHenry introduced the Fix Crowdfunding Act.
After the SEC posted the final rules for Reg Crowdfunding, we pivoted back to our initial vision: creating a new type of public stock market for risky early-stage companies. We began to wind down our "online venture capital for the wealthy" business. All in all, we funded $16 million dollars into 110 startups that increased in value over $2 billion.
For three years, we focused on funding tech startups in Silicon Valley. With Regulation Crowdfunding coming, it was time to expand. Our vision was always to help fund a cross-section of the economy in "real America". So our entire company hopped on a train and met hundreds of business owners across America, 12 cities in 2 weeks, coast to coast.
On May 16th, the law changes: startups can raise up to $1 million per year from their friends and supporters, who can invest as little as $100 each. Companies can be funded as they were 80+ years ago: by their friends, neighbors, and local communities. Not some conglomerate bank headquartered on Wall Street that treats you like a FICO score.
For companies that raise with Regulation Crowdfunding:
For companies that raise with Regulation D, we are not allowed to charge a transaction fee until we decide to 'upgrade' from a funding portal to a broker/dealer. Instead, we charge investors 10 to 20% carried interest.
If Congress passes the Fix Crowdfund Act, for Regulation Crowdfunding offerings, we will reduce the up-front 2% investor fee, and also charge carried interest. This aligns our incentives with those who invest on our platform: we only make money when they do.
The value of our current portfolio should not be a factor in your decision to invest in Wefunder; assume it's $0. We waived our fees in the beginning.
For instance, Zenefits was the first company we listed on Wefunder, and as such, we charged 0% carry. If we had invested $150k at 20% carry, the value of our carried interest would have been $1,260,000 18 months after we funded them.
Our past portfolio speaks for itself on our previous success in Reg D. We must continue to attract high-quality companies for Regulation Crowdfunding.
First, it's important to define "high quality". It does not mean that companies are like Zenefits, offering investors a 4000%+ return in two years. To us, high-quality means deserving businesses with legitimate founders who can grow profitable companies. A donut shop that offers a return to their investors qualifies.
It also typically means businesses who also can raise with Regulation D from professional investors. That is, they have other financing options.
Our biggest strength is that we've spent years immersed in the Y Combinator startup culture, so we intimately understand how founders who have leverage against investors (as their startups are highly sought-after) think. When we take this understanding to the "real world" outside of San Francisco, we expect to blow away the competition.
Customer service: save founders time
An obvious truism is that successful founders with other financing options don't want to waste a lot of time with bullshit. So we try to do nearly all the grunt work for them. We schedule an hour interview, ask for some disclosures and assets, and then hand them a fully-fleshed out fundraising profile and "Form C" SEC filing for their review and approval. Our customer service is key.
Companies with other options won't pay an obscene amount
Another obvious point is that high-quality companies don't need to pay to get funded. Our competitors - typically the ones with a broker/dealer finance background - who charge 7% of the round will not get the best companies.
We currently charge the company 3% of the round, as in our experience companies can justify this cost in return for the marketing value of having their customers be investors. We will continue to drive down company costs as long as possible, and - if Congress passes the Fix Crowdfund Act - take more of our compensation in carried interest, so we're aligned with the investors.
(We also charge $199 for a "Form C" instead of the up to $5000 of some of our competitors).
Companies care about "signaling"
Finally, working with credible companies is a virtuous cycle. High-quality companies want to be funded alongside other high-quality companies.
Think about the difference between Y Combinator and Techstars. Most credible startups apply to Y Combinator first, and only go to Techstars if YC rejects them. It's much more prestigious to be in YC.
We understand follow-on financing
Another great benefit of being immersed in Silicon Valley for years is that we intimately understand the issues around follow-on financing when the venture capitalists come aboard. So we pioneered new crowdfunding securities to ensure that companies don't shoot themselves in the foot if they are successful. Our competitors don't do this to the same extent.
Our costs our lower than our competitors, and we want to pass on the savings so we can fund more higher-quality companies.
We're a "full stack" software and are nearly entirely vertically integrated. We outsource almost nothing. This was an intentional decision as we knew we had to drive down costs to make thousands of investors cost effective, and wanted to control the user experience.
We spent four years writing software to automate nearly everything. For instance, we wrote our own electronic contract signing software, ACH payment transfer software, investor management software, accounting software, SEC filing software, and are now working on tax filing software.
We've partnered with a bank for on-demand escrow accounts at nominal cost and CPA's to offer independent reviews to our clients at nearly 20% of the market rate.
We've also worked with our lawyers at Wilson Sonsini on legal structures that limits some franchise taxes and other unnecessary costs. Finally, we operate as an exempt reporting investment advisor and funding portal, limiting compliance costs that broker/dealers are burdened with.
AngelList and FundersClub have been our two most credible competitors from our founding in 2012 to May 16th, 2016, when Regulation Crowdfunding is implemented. After May 16th, we'll be moving in an opposite direction.
FundersClub is an "Online VC" that crowdfunds it's limited partners from accredited investors. They have no plans to pursue unaccredited investors, expand to small businesses, or be a self-service fundraising platform, like we intend after May 16th. They are our competitor much the same way Union Square Ventures is our competitor.
AngelList is a beautiful web site for accredited investors who know the "inside baseball" game in Silicon Valley. It's perfectly designed for professionals. It's also the "operating system" for startups, with a number of useful services. If AngelList decides to expand to Regulation Crowdfunding, we expect the learning curve on how to best appeal to and educate retail investors - and how to best work with non-tech companies - will slow them down.
We've always knew that we were competing with AngelList and FundersClub in the short-term (although we didn't expect it would take 4 years for the SEC to implement Regulation Crowdfunding!). For the past four years, we've kept true to our vision of a more "Kickstarter" vibe, designed to appeal to and educate non-professionals on how to invest, where anyone can invest as little as $100 in both startups and small businesses. Our competitors - even those who started because of the JOBS Act - iterated more and more towards the accredited market.
On May 16th 2016, we'll have a bunch of new competitors enter the Regulation Crowdfunding market. We just don't know who they all are yet. Given the lack of traction, it's hard to tell who is a serious competitor... but we welcome one!
Our biggest strength is that we know what is takes to work with high-quality companies. We've already proven that we can attract high-growth, high-profile companies to crowdfund from accredited investors (i.e., Zenefits), and now we're planning to do it again for Regulation Crowdfunding.
Another strength is that we've spent four years working on software that drives down costs and is simple and easy to use for both investors and founders. We're not finance people, we're product people. We're also not trained as parasites: our product isn't about just taking a cut, it's about relationships and emotion. Wall Street doesn't do that.
IndieGogo is likely to enter equity crowdfunding. But pre-buying a product in a rewards-based fundraise is completely different emotional and reasoning process than making an investment. The education needs (and legal and compliance skillsets) are dramatically different. We expect that they will enter the market and have an advantage with hardware companies that raised previously on IndieGogo. But our entire focus on an investing experience - and our knowledge of how to work with credible companies - give us advantages in other areas.
It's also likely that SeedInvest and StartEngine will enter on Day 1. An educated investor should carefully look at the portfolio of companies these competitors have funded in the past - taking a look at their follow-on financing and market valuations a year out, and then compare thier results to ours. We're not worried. The highest profile companies that they brag about are ones we rejected.
If you ask this question, you don't understand our ambition. We're talking about turbo-charging the entire economy. We want to accelerate GDP growth by making us a nation of owners in the true engine of our economy: small businesses and startups. We want to explode the number of new businesses.
Our ambition is not to be a VC. We're aim to create a new type of stock market that can allocate more capital to all sorts of worthy businesses, be it a local community-supported coffee shop or the next Uber. We want to create and dominate the emerging private/public hybrid stock market for new businesses, where it's accepted that these are riskier, longer-term investments (i.e., not the NASDAQ). We believe the "wisdom of the crowd" is superior to the judgement of a few gatekeepers like bankers and venture capitalists. Markets beat top-down decision making.
We also want to single-handedly increase the percentage of under 30 year olds that own stakes in private businesses from the current 3.6%, back over 10%, like it was in 1989. Entrepreneurship is dying in this country, outside of tech hubs like SF and NYC. We aim to revitalize capitalism for young people.
Our long-term vision is to create a new type of stock market for risky and early-stage companies, for long-term investments subject to investment limitations. We believe that informed investors can allocate capital more efficiently across our society than a few bankers or venture capitalists. Markets beat gatekeepers.
Unlike the NASDAQ, since it's expected by the public that these investments are far more risky (and as such are subject to investment limits), the burden of regulations are far, far less than that required by a company going public. Companies that refuse to go public until forced to do so (i.e., Uber) as a result of the burden of regulations imposed after Enron may consider a private/public hybrid stock market with a lighter regulatory regime.
The features of this stock market should include:
The benefits to our society include:
Investment clubs are our most important feature to grow.
Investment clubs let groups of experts create their own "Wefunder in a box", hosted on Wefunder, and get an economic incentive to do so. It's a little like a "group syndicate". Only instead of one tech celebrity like on AngelList, it's composed of a group of experts in a particular industry. Some examples could be artificial intelligence, bio-tech, agriculture, or Chicago restaurants.
Investment clubs are responsible for sourcing, vetting, and endorsing companies. Wefunder handles everything else.
The long-term business model on Investment Clubs will be determined by if the Fix Crowdfunding Act is passed in Congress. If it is NOT passed, investment clubs can only earn carried interest from accredited investors. If it is passed, they can earn carry from anyone.
Further, for an ivnestment club that wishes to earn a share of the transaction fee for Regulation CF offerings, they can do so if they get approved by FINRA as a funding portal.
We've made it dead easy to invest in a company - it takes maybe 30 seconds to fully execute an investment and transfer the funds. Consider it a "one click Amazon-style checkout" for investing.
We've also created some beautiful software that lets founders highly customize how they wish to present their company to investors... and helps them generate and file a "Form C" with the SEC at a fraction of the complexity and cost of some of our competitors.
Next, we want to execute better on our long-term vision. The investment is meant to be the start of our product experience. We want to help people "feel behind the curtain", that they are making a difference in the world, that they can find ways to help their portfolio companies, be it by spreading the word about product launches, providing introductions to new hires or partners, or giving detailed product feedback. That's our focus in the last half of 2016.
We've been relentlessly pursuing our vision for four years. We don't let anything stop us, starting before Congress even passed a law. We helped Congress write the sections of the JOBS Act that will enable all Americans to invest, were mentioned by name in the Congressional Letter of Intent, and invited to watch President Obama sign it into law.
When we first started, we did not appreciate what we were getting ourselves into. Now we do. We were already proven product designers and software engineers... with MBA's. But we also needed to learn securities laws inside out, obtain our Series 65 and Series 7 licenses, and learn what it takes for investors to attract high-quality startups.
But, most importantly, we have four years of hands-on, practical experience with raising money from accredited investors outside of SF, for some of the most-sought after startups in the country. We've learned a ton that will be applicable to Regulation Crowdfunding. It'll be very hard for others to catch up to us. We have a vision, practical experience, and a formidable will to make it happen.
Initially, we built this for ourselves. We wanted to make investments in our friends (back before we were accredited).
One of Nick's best friends is angel investor Bill Warner, who founded a public company and sold another for about the same amount. He's inspired all of us: Bill spends practically all of his time helping founders. We wanted to be like him, and help and invest in our startup friends. But we don't have $50k to invest in each company... we had more like $500. Plus, it was effectively illegal for us to do so. We thought that was stupid.
We’ve always wanted to invest in founders we believed in. Not primarily for the financial returns, but to give back, to help, and to live vicariously through their experience. It made no sense to us that only the wealthy had the privilege to act on these emotions prior to the passage of the JOBS act. People are people; the dollar amounts are just smaller.
As we built Wefunder, we also learned that we could help our country by revitalizing entrepreneurship. It became evident to us how many deserving businesses can't get the capital they need to start or grow; the banks got way more risk-adverse after 2008, and venture capitalists pour money into a small sliver of the economy. We believe we can help fix that. The people who care should be allowed to allocate capital to businesses that need it.
We've spoken to thousands of investors on Wefunder. We were surprised to the extent that they were motivated by the same things as us.
We don't want to lose money, but we're not investing in startups primarily for the financial returns. We want to support things we believe in. We consider our startup investing to be socially good lottery tickets. We were surprised that even accredited investors with a finance background feel the same way.
We were also surprised that unaccredited investors (who apply to invest, but can't yet until May 16th) pick the same exact startups on Wefunder as accredited investors. There is no correlation between income and the startups chosen.
We have two businesses that compete for our attention: our current accredited investor "online vc" business, and our long-term interest in Regulation Crowdfunding. Balancing these two demands has always been our greatest challenge.
We needed to fight the battles in the accredited investing space against competitors like AngelList and FundersClub and continue growing without losing the greater war: being prepared for the JOBS Act implementation on May 16, 2016.
We had to focus on growth, but not lose sight of why we were founded: to allow anyone to make investments. This causes us to do superficially non-sensical experiments in the current legal environment, like offer $100 investment minimums for accredited investors, or design our profiles with higher production values needed for professional investors in Silicon Valley (where a simple, "David McClure and SV Angel are investing!" will mostly do.)
In other words, we're taking the hardest approach to growth. Instead of focusing on the low hanging fruit of converting professional investors, we're spending our resources on converting barely accredited investors in the middle of the country. We don't want to learn the lessons that will make us be just like AngelList. We want to learn the lessons that will help us in the future.
While we expect to be able to build a profitable business under present law, our vision will not be fully reached unless Congress and the SEC further improve securities regulations. It might take five years (if at all) for government to fully modernize our regulations.
We've worked with the Deputy Majority Whip - Congressmen McHenry - to help draft the Fix Crowdfunding Act, which would greatly the potential of Regulation Crowdfunding. We've also been in touch with the offices of Senator Bennet, Senator Merkeley, and Senator Daines to support it in the Senate. But it's an open question if and when Congress will act.
The SEC and FINRA can always decide to impose more burdensome regulations in the future. There is a big risk that our growth will be constrained because of ineffective, counter-productive regulations that increase risk to investors, and increase the cost burden on businesses that choose Regulation Crowdfunding.
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