We earn 10% carried interest on all startups listed on Wefunder. This aligns our incentives with those who invest on our platform: we make money when they do.
For our self-service fundraising platform, we charge the startup $50 per investor, which includes investment contracts, electronic signatures, accredited verification, identity verification, payment transfer, and escrow services.
After the JOBS Act is implemented, we will also charge the investor an up-front 4% fee. Right now, we charge 1.5%-2% administrative fees, but this can only be legally used to cover our direct fund costs, not taken as profit. This limitation on our business model goes away for unaccredited offerings.
First, the value of our current portfolio should not be a factor in your decision to invest in Wefunder, as we discounted our carry when we first started. More important in that decision is if startups of similar quality will continue to list on Wefunder.
For instance, Zenefits was the first company we ever listed on Wefunder, and as such, we charged 0% carry. If we had invested $150k at 10% carry, the value of our carried interest stake would have been $630,000 18 months after we funded them. It would be much higher when they file for an IPO.
There are two factors. First, our administrative fees are lower (<2%, versus up to 8%) because our costs our lower than our competitors. We are very vertically integrated and technically automated. We are writing our own contract signing, payment transfer, investor management, and tax filing software. We've partnered directly with a bank for on demand escrow accounts at nominal cost. We've also worked with our lawyers at K&L Gates on a legal structure that limits some franchise taxes. Finally, we operate as an exempt reporting investment advisor, limiting compliance costs that broker/dealers are burdened with.
Second, our carried interest is lower than our competitors (10%, versus up to 20%) because - long-term - we don't envision ourselves as an "online VC" catering only to accredited investors, such as FundersClub. Our future business model will include a 4% transaction fee on a much greater volume of unaccredited investors, when the JOBS Act is implemented.
AngelList and FundersClub are the two most credible competitors before unaccredited investing is live.
FundersClub is an "Online VC" that crowdfunds it's LP's from accredited investors. They have no plans to pursue unaccredited investors or be a self-service fundraising platform, like we envision. Right now, we compete head to head, but long term, they are our competitor the same way Union Square Ventures is our competitor.
AngelList is by far the most dominant player, doing 10X our volume among accredited investors. They may not pursue unaccredited investors after the JOBS Act is implemented, but we're not complacent: we are planning as if they will.
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.
We're different in two main ways: first our product is designed for normal people, who might live in Kansas, and have limited experience with startups and investing. 80% of our users are outside of SF; 80% of our attempted funding volume are from unaccredited investors. In order to compete with us here, AngelList would need to design an entirely different product experience. Second, we are 100% focused on online fundraising for startups. That's how we competed with them for two years with a team of 3 people, compared to their ~30. It's also a more focused product.
Given the lack of traction, it's hard to tell who is a serious competitor in the unaccredited space. There will be likely be hundreds of "finance guys" that attempt it. Our product will crush them easily. Good product engineers and designers don't work for finance guys. 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.
AlphaWorks is a potential competitor. We're skeptical that BetaWorks' side project will be able to compete against our entire focus, and their execution up until now has been supbar, with at least one incompetent mistake (we knew their plan to hand out free equity was illegal two years earlier), their founder already leaving, and a dramatically inferior investing volume and startup portfolio.
IndieGogo has indicated they might experiment with equity investing. 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. You need two different products - trying both leads to a silly and subpar experience (i.e, Fundable).
Right now, we're focused on making it easy and fast to execute an investment. The goal is 30 seconds or less to sign a contract and transfer funds, on the phone or web. We're about to roll out some upgrades that could be described like "Tinder for investing" or a "one click Amazon-style checkout".
Next, we want to execute 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.
Our portfolio speaks for itself. We've had no problem attracting high-quality startups to our platform.
First, we deliver quick and easy money at good terms, with no bullshit. Most startup investors are fine accepting $100k in 24 hours (or $300k in a little over a month) to help fill out their rounds, if it requires no work on their part. These investment numbers will get faster and greater as we grow.
Second, we deliver value not only through our network as Fund Managers, but also from the army of evangelists we deliver to founders. They can get as many as 99 investors who are passionate about what they are doing, and want to help, such as with marketing, evangelism, recruiting, & connections. This will get more powerful when the JOBS Act fixes the 99 investor cap.
Third, we offer exposure. We have a mailing list of 36,000+ investors who love startups, and might want to purchase their products, if not invest. This power will also accelerate in the future. We also intend to build a brand that features only the best startups.
Fourth, we fixed all of the legal hurdles that would prevent startups from using us. Unlike most of our competitors (except AngelList and FundersClub), we manage a single-purpose fund that small investors invest in. This way startups only have one investor on our cap table: us. There's no other way to work with high-quality companies. We don't consider any competitor that doesn't do this to be legitimate.
If you ask this question, you don't understand our ambition. We're talking about integrating with the entire economy. We want to accelerate GDP growth by making us a nation of owners. Not owners in static big companies on the stock market, but owners in the true engine of our economy: small businesses and fast-growing startups.
Right now, we're focused on funding high-tech startups in San Francisco. We've funded startups like Zenefits, that increased in valuation from $9million to $560 million in 18 months, creating hundreds of jobs.
But that's just the start. Our ambition is not to be a VC. We're talking about creating a funding platform that can allocate more capital to all sorts of worthy and promising businesses, be it a local community-supported coffee shop or a small fashion company. We 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 SF. We're going to fix it.
We've been relentlessly pursuing our vision for three 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, and were mentioned by name in the Congressional Letter of Intent. We're still working with the SEC and Congress on the roll-out, slated for October this year.
When we first started, we did not appreciate what we were getting ourselves into. Now we do. We were already proven product designers (Nick having built and designed apps used by hundreds of thousands, Greg getting his engineering degree from MIT) and both Nick and Mike had 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 the highest sought out startups in the world (as part of Y Combinator).
But, most importantly, we have two years of hands-on, practical experience with raising money from accredited investors outside of SF, for some of the hottest startups in the country. We've learned a TON of secrets that will be applicable to unaccredited investing. No one is going to be able to catch up to us. We have a vision, practical experience, and a formidble will to make it happen.
We built this for ourselves to make investments.
One of Nick's best friends is angel investor Bill Warner, who founded a public company and sold another for about the same return. 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 $5k. 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 be a stronger part of the community that startup is building, to give back, 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.
We were surprised to the extent that other investors on Wefunder 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) 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 self-service funding platform for unaccredited investors. Balancing these two demands is our greatest challenge.
We need to fight the battles in the accredited investing space against competitors like AngelList and FundersClub and continue growing 20% month over month without losing the greater war: we must be prepared for the JOBS Act implementation at the end of 2015.
We must 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.
There is a risk the SEC might not follow the spirit of the JOBS Act when writing the final rules. Over-regulation could lead to the best startups with multiple funding options to avoid crowd investing, leading to a subpar market of companies that can't raise funding anywhere else. That's the worse outcome.
To help guard against this risk, we're heavily involved with the Congress, SEC, FINRA, and the Crowdfund Intermediary Regulatory organization.
We've had in-person meetings with the SEC and had the opportunity to fully air our views. We're also working with the Deputy Majority Whip - Congressmen McHenry - who is crafting legislation with some improvements to the JOBS Act.
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