FundersClub launches YC-based fund; the first of many

Y Combinator-backed VC raises $1.1 million for select YC startups from the Winter 2013 class

In a move to start creating mini-funds around accelerators and incubators, FundersClub, a new online venture capitali firm, raised $1.1 million to invest in about five to 10 Y Combinator-backed companies from the Winter 2013 batch, that went public in YC's Demo Day today.

Some 86 angel investors participated in the round, making an average investment of around $12,700 into the fund. FundersClub CEO and founder Alex Mittal said the Y Combinator Winter 2013 fund is just the first of other funds based on the portfolio companies of accelerators and incubators. Think 500 Startups Mini Fund or TechStars Mini Fund. 

It's pretty obvious that these types of funds would make a lot of sense for this new software-powered VC firm.

It seems a more reasonable investment for an angel investor to spread small bets across a batch of startups rather than just one. In the last 7-1/2 months since launching, FundersClub has raised $3.7 million through 10 separate funds for startups such as Soldsie and Virool, with the YC Winter 2013 fund being the first fund to invest in multiple startups. It's also the fund that raised the largest dollar amount, suggesting there's more interest in funds that invest in multipe startups than funds around just one startup. 

Interestingly enough, an investor in the YC Winter 2013 fund will only have interest in at most 10 startups out of the 46 startups that went through the YC class this winter, begging the question: Why 10 and not 20? Wouldn't the new fund's chances of getting a homerun be higher if there were more companies in the pot?

Not necessarily, said Mittal.

"We come out of the YC program summer 2012 batch," Mittal said. "It was the largest batch with 83 startups. YC decided that was far too many. In a similar vein, what we have recognized is that we as FundersClub want to focus on quality, not quantity." FundersClub has already selected two of the startups and expect to have their due diligence on the other startups done by next Tuesday. So we may know who the other three or eight are by YC's Demo Day.

The other reason FundersClub may not be able to invest in more than 10 startups is that the value proposition for the startups diminishes if the amount they receive from the fund goes down. If the $1.1 million was spread across 46 startups, that's under $25,000 per startup. For many startups, that amount may not be worth taking. For others, it may be the minimum. 

After all, newly-minted  YC-backed companies have been known to get funded fresh off the stage of a YC Demo Day, making a FundersClub option somewhat of a curious route. 

Clearly, the FundersClub has positioned itself as less of a platform, and more of a venture capital firm, with an ability to provide more than just financing.

So what value does FundersClub provide to startups? The vast network of 5000-and-growing accredited investors, said Mittal. "We're not just a fundraising platform." The relationships created with the investors can be leveraged, Mittal explained. For example, Soldsie - a startup that raised money through FundersClub - needed a data scientist. They eventually found one through their network of investors that came through FundersClub. "The value add [to startups] was for our investors to open doors for us."

For investors

Since the minimum amount invested in FundersClub funds is vastly smaller than what someone would have to invest in a typical venture firm or as an angel investor, the typical angel investor on FundersClub is pretty diverse, said Mittal. "We're democratizing access to participate in the value-creation process." 

FundersClub also doesn't charge a typical management fee or carried interest (share of the profits), which are typically 2.5% and 20% respectively. FundersClub charges a 10% administration fee to cover legal costs of filing the funds. When I asked Mittal how much higher the legal costs were to raise $1.1 million from 100 investors vs 10, he wouldn't disclose the costs.   

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