Here's the caveat: Most of its returns are still on paper.

FundersClub, Where Folks Can Back Startups Online, Says It's Beating the Pros

EghtesadOnline: The 2012 Jobs Act let regular Americans invest in startups, spawning a glut of crowdfunding sites offering real ownership stakes in return for cash, rather than the new smartwatches or electric skateboards available on pioneering platform Kickstarter.

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02 April 2017

One of these "equity crowdfunding" firms, FundersClub Inc., says it's beating most of the pros. In its first three years, returns outpaced the median venture capital fund and much of the industry's top quartile of investors, according to data provided by the company citing Cambridge Associates, which measures VC performance for pension funds and other institutional investors, according to Bloomberg.

FundersClub's net multiple -- investor returns after the company's cut -- is 2.26 from its 2012 investments, 3.24 from the 2013 vintage, and 1.17 for 2014. The median VC firm's net multiple for the same vintages were 1.25, 1.14 and 1.04, respectively, according to the data from FundersClub and Cambridge Associates.

"We started in 2012, and at that time, a lot of what we were doing was considered novel," said Alex Mittal, FundersClub's chief executive officer. "Since then the idea of startup investing on the internet is less novel, but what has shockingly remained the case is this pretty high level of disinterest or lack of care for returns."

There are caveats. Most of FundersClub's returns are tied to the private valuations of the startups that it has backed. FundersClub sometimes holds startup investments at lower valuations than their last fundraising round, but it has still benefited from frothy, paper valuations. Of the $80 million that's been invested through FundersClub, only $3.3 million has been realized -- and some of that came in the form of more stock when portfolio companies were acquired by larger high-flying startups like Slack Technologies Inc.

"They have better paper returns than other folks -- if the asset class resets a bit, they'd be hurt less, you'd imagine," said Anand Sanwal, CEO of VC data firm CB Insights. "We've been in this period of very frothy valuation increases so we have to see if these companies can exit at these valuations, and we haven't seen that for a while."

FundersClub's investments include the grocery delivery company Instacart Inc., now valued at $3.4 billion, logistics company Flexport Inc., the bitcoin company Coinbase Inc., and T-shirt e-commerce site Teespring LLC. Bloomberg Beta, the VC arm of Bloomberg LP, is an investor in Slack and Flexport.

The site has a network of technology executives, founders, and other wealthy individuals who invest at least $3,000 per company. That's less than the standard early-stage startup investment minimum for individuals of about $50,000. The smaller check size opens up startup investing to more people, although FundersClub still requires investors to meet certain income or wealth requirements. Indeed, it dislikes the term "equity crowdfunding," preferring to call itself an online venture capital firm.

AngelList LLC, another equity crowdfunding site, takes a different approach. The firm helps individual "angel" investors raise money, creating what it calls syndicates and it also helps people invest in startups directly. AngelList says unrealized returns from its 2013 syndicates are 2.4. $525 million has been invested in 1,330 startups since its founding.

Equity crowdfunding hasn't become a booming business yet. Some members of Congress have floated passing legislation to let people become accredited investors on the basis of their financial know-how, not just their wealth or income. That's something Mittal believes could drive more people to startup investing.

"There is still mostly a focus on accredited investors so that hasn't brought in mom-and-pop folks -- which might be a good thing," Sanwal said. "I don't think this has become this capital-markets sensation folks were maybe talking about a few years ago. It's still a tiny asset class that's part of a relatively tiny asset class."