What is an online venture capital firm?
FundersClub was the first online VC firm, specifically acknowledged by the SEC via a no-action letter issued to FundersClub by the SEC in March of 2013 (see SEC website).
FundersClub takes on the activities of traditional offline VC firms--sourcing startup investment opportunities, vetting and screening them, funding the highest-promise ones, and providing value-add beyond capital to the startups--but FundersClub uniquely takes advantage of networks of people and software for powering each of these activities, in addition to the efforts of its own internal team.
While there are now an abundance of online startup investing platforms and online equity crowdfunding platforms which allow startups to raise capital online and investors to invest online, these are different from the VC model. First, from an investor standpoint, they are not necessarily seeking to attain aggregate portfolio returns and profitability and typically self-benefit from listing a large volume of companies for investment rather than focusing on only high quality. Second, from a founder standpoint, due to these platforms’ work with thousands of companies, they do not generally partner with the startups to help them attain success in the way a VC firm would. This is why FundersClub chose to create the online VC model and to operate as an online VC firm, to best align its interests with both investors and entrepreneurs.
While our LPs include institutions and ultra high net worth individuals, we are able to also include accredited investors (see Accredited investor startup investing rules). There are an estimated 20-30 million adults in the US alone who belong to an accredited household. Before FundersClub and online VC, these individuals could not easily invest in VC or startups.
Rather than having single large funds that are hundreds of millions to a few billion dollars in size each, online VC tends to produce many small funds, designed to deploy their capital quickly. This allows for efficient ad hoc investment and diversification, as well as greater liquidity, which is key for investment in a high risk, high reward, and relatively illiquid asset category such as venture capital. Furthermore, rather than deriving the value-add exclusively from our GPs, we also have been able to leverage the massive network of our LPs, comprising thousands of leaders worldwide, to assist with value-added introductions for the FundersClub portfolio startups, and to assist with dealflow and other activities of FundersClub.