You're absolutely right to call out these concerns ChuckMcM. FundersClub is a curated VC platform that carries out vetting and due diligence; fewer than 5% of inbound startups end up even making it to our vetting panel.
Even in spite of the above process, startup investing is risky, as we disclose in our FAQ. No one should invest money they cannot afford to lose in the startup asset category.
Also, something that might get lost in the noise around this article: "Technically, it’s not crowdfunding, but rather a venture capital advisor that raises funds online through a streamlined process rather than offline with traditional paperwork."
Hmm... So I go and buy a lottery ticket. Then go around selling people a piece of the ticket for 1/10 of what it cost me ($1, so 10 cents). I sell it to 100 people, and manage to make $9. Cool. I made money. But what happened to the lottery ticket? Did I win? No. The aim was never to have the winning ticket, but to sell a piece of the ticket and profit. What happened to those that bought a share of the ticket? They stopped playing the lottery.
Even in spite of the above process, startup investing is risky, as we disclose in our FAQ. No one should invest money they cannot afford to lose in the startup asset category.
Stop calling it an investment. What you do is pure speculation. It is not an investment fund per se. But a speculation fund. But you can't call it that due to how people do not like the word "speculation" (for a reason).
I just think this "startup" is going to set off a lot of copycats and thus mark the beginning of the end.
Anyhow, I'm not against it. God knows I want this model to happen, so I can buy more cheap stocks.
I don't really follow your math. In your scenario, you're over-selling shares in the lottery ticket (a la "The Producers"), meaning you (as the intermediary) profit if the underlying investment fails, but you lose if the investment succeeds.
As for whether this is investment or speculation, as I understand the Funders Club model, every extra dollar that comes out of an investor's pocket results in one extra dollar going to a startup company. If providing a company with additional capital to pay for up-front costs before they're profitable isn't investing, what is?
Still speculation because these are startups. Had these been stable companies this fund would not have such high ROI potential. Calling it investments has people think there is some sort of security here. There is none. Well, only for the "market makers".
I don't think you really understand how FundersClub works.
As a FundersClub investor, you are buying shares in a fund, where the fund only holds assets (either convertible debt, preferred equity, or common equity) of the specified companies. Your money invested in the fund goes directly to the companies (minus fees).
It's really no different from investing in the companies themselves, except it wraps the multiple investors to a single fund which itself makes the investment.
I do understand how it works. It's the standard fund arrangement, except that you are dealing with very high risk (junk level of risk) securities. These are still born businesses with no market or valuation based in assets/profits. Hence my lottery ticket comparison. However, you do reduce risk a little by spreading the risk. But the fund is also a startup. Meaning that people who give you their money have a bigger chance of losing because your stability and the security of the funds are directly tied. If you go down in two years any long term investment potenti is lost. Given that on average a startup takes about two years to develop to a profitable level (no ramen), your finacial unstability (because you are a startup) does diminish the chances of this working out.
Of course, I want this to work out and would love to eat crow. But it is a very risky strategy to take. Though give how Cherry got 5 million to wash cars, I can't see how this wont manage to make billions (which is the aim of YC).
Each FundersClub fund is its own independent LLC entity, which is basically the point of the article describing why the SEC is green lighting the process.
If FundersClub does go down, each fund's LLC survives, with it's investors owning their fractional claim on the funds' assets.
Similarly to buying stock in a company using ScotTrade or equivalent. If ScotTrade goes down, you still own the equity you purchased and which they were holding as your custodian.
> Technically, it’s not crowdfunding, but rather a venture capital advisor that raises funds online through a streamlined process rather than offline with traditional paperwork.
Nice. So the VCs won't have to answer to big limiteds, who would make demands like lowering fees (as in the dot-bomb).
It brings up the more general question: Since the avg retail guy is clueless, what prevents them from getting severely taken advantage of? So far, this looks a whole lot like CMGI.
Even in spite of the above process, startup investing is risky, as we disclose in our FAQ. No one should invest money they cannot afford to lose in the startup asset category.
Also, something that might get lost in the noise around this article: "Technically, it’s not crowdfunding, but rather a venture capital advisor that raises funds online through a streamlined process rather than offline with traditional paperwork."