VC 101: The Angel Investor's Guide to Startup Investing
Chapter 5
Chapter 5
Online VC & Equity Crowdfunding
The difference between online venture capital and equity crowdfunding, and the characteristics to look out for when deciding which online startup investing platform to use.

What is an online venture capital firm?

Online VC firms provide all the services traditional VC fund managers perform – sourcing, vetting, and screening startups, as well as supporting their portfolio companies after the investment – but provide an online investment platform dedicated to startup investing.

FundersClub became the first online VC firm in March 2012, as was specifically acknowledged as the first online VC by the SEC in this no-action letter, in March 2013.

There are now an abundance of online startup investing platforms.

When selecting an online platform to invest with, we recommend looking out for these characteristics:

  • Quality over quantity: look for a platform that provides vetted, high-quality investment options, rather than a long, unfiltered list of lower-caliber companies.
  • Cleanly reported returns: make sure that the platform you choose has consistently delivered competitive investment returns, and beware of cherry-picked or otherwise incomplete returns data (read the fine print!).
  • A history of exits: look for exits and/or IPOs, and returns that are competitive with benchmarks like the Russell 2000 index or the Cambridge Associates VC Index.
  • Value-add to founders: Top VC firms provide additional resources beyond investment capital to ensure their portfolio companies’ success, and to attract the best founders. It serves both founders and investors well if the investing platform is wholly dedicated to helping the startups in their portfolio succeed long-term, as startup success drives investors returns and, in turn, VC profits.
  • Open to accredited investors only: Online VCs can legally only allow accredited investors to invest on their platforms. In the US, there are 12.4 million households, in addition to institutional investors, that qualify. Online startup investing platforms that permit unaccredited investors to invest are regulated by the JOBS Act, which may ultimately attract lower performing startups).

EXAMPLE

At FundersClub, we discover and vet thousands of high-promise startups per year to arrive at a relatively small number of companies that pass our investment criteria. We then privately list VC funds on our online platform, open to accredited investors.

Minimum investment sizes for our single-company funds are typically $3,000, and $10,000 for multi-company funds, although individual check sizes can and do reach seven digits per investment on larger funds.

When FundersClub was just starting out, the online VC model and opening startup investing to all accredited investors were revolutionary concepts.

To prove that online VC worked early on, FundersClub co-founders, Alex Mittal and Boris Silver, decided to raise FundersClub’s $529,000 pre-seed round using our own platform.

We have since invested in over 200 startups and counting, and have supported them with the connections, advice, and resources they need to build and scale their companies.

We offer more in-depth information on our investment model and the benefits we offer to our founders on the FundersClub site.

What is crowdfunding?

Crowdfunding, in the general sense, refers to the practice of pooling small payments to fund a specific goal, and has been a common way to raise money for centuries (think: collecting taxes to build a community park, or parishioners contributing to the church collection basket).

When crowdfunding moved online, it became a popular way to raise money for creative projects, charitable causes, and product ideas. Popular crowdfunding platforms include GoFundMe and Kickstarter.

Individuals make monetary contributions to creative projects in exchange for a reward – often a piece of branded apparel, or a discounted price on the final product on platforms like Kickstarter and GoFundMe.

When pooled together, and when the project’s fundraising target is met, all the individual contributions can trigger enough collective capital to finance a project or goal.

People use crowdfunding sites to raise money for a variety of goals – from marathon runners collecting sponsorships for a charity race, to raising equity financing. This last example is called equity crowdfunding.

What is equity crowdfunding?

Equity crowdfunding is the use of crowdfunding to raise money for startups and to invest in startups, often via online platforms, known as Title III investing.

Although “equity crowdfunding” is sometimes used as a generic term to reference all online startup investing platforms (including online VC), it specifically refers to online startup investing platforms that permit non-accredited investors to invest in startups.

We discuss equity crowdfunding and the regulations that govern Title III investing, and who is allowed to invest in startups, according to SEC guidelines, in greater detail in the following chapter.

What is the difference between online VC and equity crowdfunding?

The main difference between online VC and online equity crowdfunding is that online VC applies the best-practices recognized in the venture capital industry, and the existing rules and regulations for VC.

On the other hand, equity crowdfunding isn’t governed by the best practices or regulations that top VC firms follow, and instead is governed by the JOBS Act, which we also discuss further in Chapter 7.