FundersClub's 2012 bet: online $1,000 startup investing for accredited investors

FundersClub, a Y Combinator Summer 2012 startup backed by Y Combinator, First Round Capital and Start Fund, launched in July 2012 as an online marketplace for equity in private startups. TechCrunch's July 25 launch story described investors browsing a gallery of startups, each listing business data and the amount it was trying to raise, with payments and legal documents executed online; once the funding goal was met, funds were transferred, and if the startup was bought or went public, investors got paid like angels.

The pitch was that venture capital's economics were ripe for disruption: a 2% yearly management fee plus 20% of profits means a ten-year $1B fund charges investors $200M even at break-even while most VC firms underperform the S&P 500. FundersClub charged investors only the accounting and filing fees it had to pay, and planned to make money on liquidity — charging when an early stake transferred, and running programs where large private companies bought out employees' stock so outside investors could hold the rights, helping firms stay under the 500-shareholder limit and delay IPO.

Selling real equity, not rewards, separated it from Kickstarter and donation-based crowdfunding — and made regulation the whole game. For launch it accepted only accredited investors (over $1 million net worth or $200,000+ yearly income); the JOBS Act, passed but not yet in effect, was the path to letting anyone with $1,000 participate, either through its rulemaking or by FundersClub registering as a mutual fund. The article also flagged the counter-move: incumbents could lobby to keep the general-solicitation ban at the SEC's August 22 review, or load the JOBS Act with rules.

On 2012-07-26 the story drew 136 points and 37 comments on Hacker News, item 4294411. Commenters quoted Paul Graham's earlier line that a very large number of inexperienced investors is the worst scenario possible for a startup and that the right way to get money from crowds is to sell product; others answered that FundersClub was accredited-only, debated whether such investors need a middleman at all, and one commenter described the design as making FundersClub the single investor on the cap table, sparing startups a thousand shareholders.