- Launching a tech startup often means “bootstrapping” meaning the founders can spend their entire life savings on their companies until they generate revenues or attract investors.
- But what if founders could protect themselves from the risk of failure by attaching their fortunes to other startups, some of which are bound to hit it big?
- That’s the idea behind a new startup called FounderPool, which lets founders swap equity with other founders.
- Visit Business Insider’s homepage for more stories.
Imagine throwing your whole life savings into your startup but at the same time, not risking all of it on the success (or failure) of your company, as beloved as it is you.
A new community called FounderPool wants to help startup founders do exactly that, by spreading their financial risk across a spectrum of startups without any cash up front.
It does this by allowing members to hold equity in all the founders’ companies in a selected pool group but they do not take a direct ownership interest in each other’s companies.
The idea is to build a network of founders that each have, quite literally, a vested interest in helping the others succeed. But more than that, FounderPool founder and COO George Burke describes the idea as “insurance for startup failure.”
Founders contribute up to 5% of their share in their own company (not additional stock issued by the company) to be in a pool where they vet each other after reviewing public data that’s been compiled by FounderPool.
Applicants are interviewed personally by the founding team and are then chosen after 1:1 round-robin-styled calls between them and the other founders in their potential pool, FounderPool’s CEO and cofounder Chandra Duggirala told Business Insider.
Founders disclose an initial ranking of one another and once a top-ranked subset becomes clear, the founders can opt in and form the pool.
FounderPool then serves as the administrator and service provider of the pools. They charge a fee which covers the cost of operations, including legal, taxes, entity formation and maintenance, regulatory compliance, and community activities, among other functions. Founders can also get to know and support each other. Some pools elect to include mentors who contribute cash to finance operations.
The platform first launched in private beta in June, 2020, and a link to it went viral after it was posted on Hacker News in July, a site where techies discuss news and ideas. Then in September, it became a top product on Product Hunt.
“We were expecting a lot of skepticism from founders initially,” Duggirala told Business Insider. “The financial diversification was easy to explain, but we were unsure if founders understood the value of being in a network of other founders. So it was eye opening to see how vehemently some entrepreneurs defended the idea on Hacker News when investors tried to push back.”
Been there, done that
FounderPool’s team consists of Duggirala, who begun his career as a doctor; his brother Manoj, an electrical engineer who worked at the chip supplier that helped make the Apple Watch M8 chip; Paul Jeffries, an active angel investor and former head of legal operations at Facebook; and Burke, a serial entrepreneur who started the world’s largest biohacking meetup, SF Peak Performance.
The Duggirala brothers and Burke worked together on a previous startup called Fuel, a now defunct AI-based personalized nutrition service that launched in 2016, went through the 500 Startups accelerator program and raised $650,000 in 2017, according to Crunchbase. Jeffries came on board to FounderPool after Burke, a friend of his, reached out.
Jeffries told Business Insider he agreed to join FounderPool because he had long wanted to create a mechanism like it to better nurture startups. He saw thousands of companies fold while working as an early employee at Facebook, where starting in 2007, he served as the founding head of Facebook’s platform developer operations and support, he said.
“Just like VCs, founders need an opportunity to diversify their risk and build their networks,” Jeffries said.
Jeffries drives the FounderPool process, but verification of documents, funding status, SEC filings, as well as identity verification and other data about the companies is vetted by third parties, according to Duggirala.
A look at the model
FounderPool can be especially helpful now that startups are gunning for huge valuations, multiple rounds of venture investing, and staying private longer, its creators say.
“Exits take longer now while the cost of being a founder keeps growing,” Duggirala said.
He pointed out that “if one founder winds up with $3 billion or $4 billion personally from the IPO or sale of their company, then the pool winds up with more than $80 million to share among its members—and that’s just from one company,” Duggirala said.
Micha Benoleil is the CEO and cofounder of Nodle, a decentralized wireless connectivity provider for the Internet of Things (IoT), used by companies like Cisco Meraki and HTC.
Although Benoleil is not a member of FounderPool, he said their business model could go a long way to help entrepreneurs.
“It could create a stronger skin-in-the-game community of founders and help get direct, honest feedback from other entrepreneurs,” Benoleil said. Building allies among startups is a good thing, especially since “large players in tech are also making it harder for startups to innovate and compete,” he said.
According to Duggirala, since August, over 300 founders have joined the platform after learning about the operation from Hacker News, Product Hunt, or through word of mouth. The roster consists of mainly first-time founders of early-stage tech startups incorporated in the US, with each company on average having raised $15.2 million.
So far, Duggirala said FounderPool itself has been self-funded.
The idea has its skeptics including Barry Richards, a technology investment banker at Paradigm Capital, who sees FounderPool as a “very curated thing where a lot of the onus is on the intermediary who has to do a good job at selecting the right founders and companies,” he said.
However, Duggirala insists that they are designing these pools with precision and are using machine learning to help, building a model that grabs data on the sector, financing stage, similarity of career trajectory, and other personal attributes of founders.
“We are identifying and labelling the traits that make founders compatible. We are mapping the relationships between founders and their companies, building a ‘founder relationship graph,'” he said.
What’s the risk?
And others think the idea has merit. For instance, Jas Hothi, a risk consultant with Ernst & Young, thinks FounderPool is a “fantastic idea as founders often work in silos, and this pooling model builds ecosystems with non-competitive start-ups.”
She adds, “Giving up equity is a big deal for a founder but the upside risk here could be worth it.”
She also liked machine learning approaching, as long as FounderPool is ensuring that its data sources are valid, unbiased and personal data is protected. She did, however, warn founders to think through any reputational risk if they are somehow associated as investors in a startup that runs into some kind of trouble.
“It all comes down to the quality of the inventory and selection process, but they’re looking at the right sources,” she said, adding, “As new data is ingested, how are they ensuring biases are being identified and eliminated? What about the exchange of data between pooled startups as well? There could be privacy concerns.”
FounderPool CEO Duggirala promised that private data remains confidential and said all participants sign a confidentiality agreement. As for biases, Duggirala said “they are constantly testing and tweaking their models and using challengers to test the winning models to eliminate biases and confounders.”
Should FounderPool execute those promises well, Hothi thinks the concept could be a “game changer” because it diversifies risk to participating founders, she said, but also because successful founders will invite other successful ones.
Currently, FounderPool is running two early stage pools and a late stage pool. They plan to ramp up the pipeline of entrepreneurs admitted to the program in early 2021.
“Eventually we’d like to see every high-risk, high-growth entrepreneur, in every geography, in every industry, be able to join a pool easily and at-will,” Duggirala said.