FlashFunders, a Santa Monica-based capital fundraising platform, has just launched its beta product. The fundraising tool boasts that it's the first FINRA certified online fundraising platform. The company believes that standard, and the platform’s lack of fees, will separate it from a growing pack of crowdfunding and investment websites.
“We saw an industry that was very much the wild wild west. So we wanted to create an industry standard,” said co-founder Vincent Bradley. “Startup investing is a very complex process; it is not simple. We believe it should be simple.”
FlashFunders gives startups a place to post profiles of themselves online and solicit capital from accredited investors (typically individuals with over $200,000 in annual income or $1 million in net worth). This in itself is not unique, platforms like AngelList have similar features. However, to simplify the fund raising process even further, FlashFunders spent a lot of time working on its due diligence. The startup went to FINRA, the Financial Industry Regulatory Authority, and were certified as the first licensed online equity fundraising platform. Flashfunders helps prepare all investment documents and even handles escrow.
Having a FINRA certified process matters because all too often startups raise capital in an illegitimate way, only to later get burned.
“If you raise capital in a non-compliant manner your company can be unwound,” said Bradley.
Unfortunately, the cost of ensuring compliance and finding investors often leads startups to cut corners. Automating capital raising should help smooth out the wrinkles in the process and reduce the risk of poorly constructed investment agreements.
What’s more, if you invest in a company without the proper due-diligence, your investor rights may be less than expected. Often not investing in a FINRA certified way, means investors are passively taking stakes in holding companies, investment vehicles that don’t always give the same rights as a direct investment.
“Some of our investors have horror stories of being tied up in indirect investments,” said Bradley.
According to Bradley, one such indirect investor in Zynga, had to watch in horror as that company’s stock soared, then plummeted. He learned too late that his indirect stake made selling his stock nearly impossible.
Flash Funders itself is funded by Skype’s investors, including Mark Dyne, who was one of the first to give the company seed funding. Though Skype is an institution within the Microsoft empire now, the company’s future wasn’t always secure. Very early-on Skype struggled to get the funding needed to survive. In fact Skype nearly failed, before getting the funding needed and gaining traction. That story is all too familiar within the startup world. Great ideas often slip under without enough initial capital to float them.
“Raising capital in this country is incredibly difficult,” said Bradley. “We truly believe we will open startup investing for the masses.”
FlashFunders’ second aim is to greatly increase access to capital. In America, “there are 8.5 million accredited investors and only three percent actively invest in startups,” said Bradley.
To clear the pipes for new capital flows, FlashFunders charges no fees to list or use its equity marketplace. The company only makes money by exercising an investment option that is part of its terms and conditions. FlashFunders has the “right to purchase, from the issuer, an additional 25 percent of the original offering amount” for up to three years after the initial offering, “at the same price and terms as the investors in the offering.”
Though FlashFunders will be taking stakes in some of the companies that raise funds on its platform, it in no way will be picking winners early-on. Instead the philosophy is ‘if you build it they will come.’ They being the best startups; startups that FlashFunders will be able to invest in once they have shown real traction.
“Trying to pick a winner these days is nearly impossible,” said Bradley. “There are many platforms that are trying to pick to winners via a good-ole boys curated list. We make sure every company is SEC compliant, but we make sure the market picks the winners.”