Innovating on Innovation with AngelList's Naval Ravikant | Disrupt NY 2017

TL;DR

AngelList launched small, short-lived funds that let proven angel investors run their own venture capital. By shrinking the special purpose vehicle down and making it cheap, budding investors get a half-million to million-dollar fund, write checks, and receive larger funds as their track record grows, replacing the old ten-year VC apprenticeship.

Transcript

hi everyone well uh as Jordan sort of intimated everyone knows Naval serial entrepreneur longtime investor uh disruptor trying to shake up the way that uh startups are funded and Tech talents is hired um Nal thank you so much for coming yeah thanks for having me and uh thanks especially for using a 15-year-old photo that makes me look really good y... Read More

Key Insights

• AngelList's new product gives proven angels small funds by shrinking the special purpose vehicle (SPV), making it cheap, easy, and democratized, the same approach previously applied to syndicates for later-stage deals.
• The old path into venture capital was described as a ten-year hazing ritual of joining a VC firm and working up the ranks; AngelList replaces this by handing a half-million to million-dollar fund to angels who build a track record through syndicates.
• These are short-lived funds, small in size, intended to be invested over a six to twelve month period, allowing backers and limited partners to try out a budding venture capitalist before committing more.
• Accomplice Ventures, a Boston VC firm, raised a $35 million fund called Maiden Lane 2 dedicated to backing dozens of these new small operator-angels, effectively putting new venture capitalists into business.
• Entrepreneurs backing entrepreneurs is the model's core; in networks like Y Combinator the first $10,000 or $25,000 checks often come from other founders who offer relevant advice and customer introductions.
• Four VC firms are named participants: Accomplice, Foundation Capital, Bain Capital, and Crosslink Capital, plus traditional LPs like CSC and upshot funds, with a fifth firm still finalizing details.
• Signaling risk, once heavily discussed, has largely evaporated because everyone now accepts that not every VC can invest in every deal, and most lead angels have multiple LPs rather than a single backer.
• Around 1,500 companies on the platform have raised over half a billion dollars online and gone on to raise over $5 billion total, growing large enough that some names may eventually create secondary market demand.

Questions & Answers

Q: What did AngelList announce for angel investors?

AngelList rolled out small funds for angel investors. By shrinking the special purpose vehicle (SPV) that people use for big later-stage deals, they made it cheap, easy, and democratized. Proven angels who build a track record running syndicates are handed a half-million to million-dollar fund and write checks out of it. If it does well, AngelList refills the fund and gives them larger and larger funds over time.

Q: How does the new model change the path into venture capital?

Naval described the old model of entering the VC business as a ten-year hazing ritual, where you would join a VC firm and work your way up the ranks. With AngelList, you can instead run a few syndicates to build up your track record. Once you have that, they put a small fund in your hands, and successful investors keep coming back to receive larger funds, effectively training and scaling up new venture capitalists.

Q: How long are these funds meant to be invested over?

These are short-lived funds that are small in size. Ideally the managers invest them over a six to twelve month period. The short lifespan allows backers and limited partners to try out the new venture capitalist, the budding VC or budding angel, and commit to them as their track record builds up over time. This structure lets LPs evaluate emerging managers before making larger commitments.

Q: Which VC firms are involved in this effort?

Four firms are named: Accomplice, which is the biggest with its $35 million Maiden Lane 2 fund dedicated to backing dozens of operator-angels, plus Foundation Capital, Bain Capital, and Crosslink Capital. A fifth firm is still putting details together. There are also more traditional limited partners like CSC and upshot funds on the platform, along with thousands of accredited investors and family offices who invest in these small funds.

Q: What is Maiden Lane Ventures and who raised it?

AngelList raised a specific fund called Maiden Lane Ventures, specifically the second Maiden Lane Ventures fund. It was raised by Accomplice Ventures, described as a great VC firm out of Boston that has been very active on the AngelList platform. Accomplice raised this $35 million fund, which is essentially creating and putting dozens of new small venture capitalists into business by backing operator-angels.

Q: Why did AngelList wait until now to launch these funds?

Naval said it takes an enormous amount of work. It was not until 2013 that the idea of online fundraising was even semi-legal, which then enabled syndicates. Only now are there enough good, vetted angels on the platform that people feel comfortable backing them with blind funds. On the back end, LPs and backers have built enough conviction by seeing how early syndicate deals performed, giving them confidence to write a blind pool check.

Q: How does having multiple LPs affect signaling risk?

Naval said signaling risk was something the industry talked about a lot a few years ago, but at this point it has largely evaporated because everyone knows not every VC can invest in every deal they see, and lots of good VCs pass on lots of good deals. Most lead angels actually have multiple LPs, and they are not really beholden contractually to show every deal to their VC LPs; it is more of a relationship and friendship arrangement.

Q: Why doesn't AngelList run a secondary marketplace at early stages?

Naval explained that liquidity is the problem. Secondary demand usually concentrates in very few well-known names like Facebook or Snapchat before an IPO. AngelList works at very early stages where people often do not know the companies, and if someone wants to sell, that is such a negative signal that it is unclear a buyer exists. However, with around 1,500 companies having raised over half a billion online and gone on to raise over $5 billion, some names may eventually attract secondary demand.

Summary

Navall Ravikant, a serial entrepreneur and investor, discusses the new funding model introduced by AngelList. The platform now allows angel investors to run small venture funds, democratizing the access to venture capital. Ravikant also explains the importance of scaling venture capital to meet the growing industry demand, and the need for smaller investors who can provide relevant advice and support to startups. He mentions the VC firms and LPS involved in this effort and how it can help companies to find the right investors. Additionally, Ravikant talks about the future plans of AngelList, including expansion to different countries, the acquisition of Product Hunt, and the focus on recruiting.

Questions & Answers

Q: What does the new funding model introduced by AngelList allow angel investors to do?

The new funding model allows angel investors to run small venture funds, making venture capital more accessible and democratized.

Q: What is the main objective of the new funding model introduced by AngelList?

The main objective is to scale venture capital to meet the growing industry demand and provide smaller investors the opportunity to support and advise startups.

Q: How does the new funding model work for venture funds on AngelList?

Angel investors can start with a small fund of half a million to a million dollars. As they build their track record and demonstrate success, they can get access to larger funds. The funds are short-lived and allow backers and limited partners to evaluate and commit to the budding venture capitalists.

Q: Are these new small venture funds available for everyone on the platform?

No, currently these funds are available for the most proven individuals on the platform. However, AngelList aims to scale and provide funding opportunities to more early-stage entrepreneurs.

Q: Which VC firms and limited partners are involved in this funding effort?

The VC firms involved include accomplice, Foundation Capital, Bain Capital, and Crosslink Capital. In addition to that, there are traditional limited partners like CSC Upshot Fund, as well as thousands of accredited investors and family offices on AngelList.

Q: How does AngelList help companies to find early-stage customers and investors?

AngelList offers a network and access to investors, allowing companies to connect with those who can provide funding and expert advice. It also provides a platform for startups to launch and promote their products, such as Product Hunt.

Q: Is there any risk of signaling if the lead angel's fund doesn't want to get involved in future funding rounds?

While signaling risk is a concern, most lead angels have multiple limited partners and they are not contractually obligated to show every deal to their LPs. It's more of a relationship and friendship-based process, minimizing the signaling risk.

Q: Why did AngelList introduce the new funding model now and not earlier?

It took time for online fundraising to become legal, and for AngelList to have enough good angels on the platform. With the success of syndicates and the growth of the platform, they could now introduce these small venture funds.

Q: Is AngelList planning to enter the secondary marketplace business like Cedars?

AngelList is always exploring new opportunities, but currently, the secondary market for early-stage companies is not very liquid. They are looking at ways to make the data they have on the platform useful, but it's not a focus at the moment.

Q: How many investors are currently on the AngelList platform and is it still mainly Silicon Valley-based?

There are about half of the deals on AngelList that are Silicon Valley-based, but the platform has expanded to other regions such as Canada, New York, LA, and Seattle. They are also planning to roll out in India. The number of investors on the platform is not mentioned.

Takeaways

AngelList has introduced a new funding model that allows angel investors to run small venture funds. This model aims to democratize venture capital and scale up the industry to meet the growing demand. It provides smaller investors with the opportunity to support startups and offer relevant advice. AngelList is also focused on expanding to different regions and has plans to enter the recruiting market. The platform aims to be self-sustaining and profitable in the long run, through various revenue-generating services.

Summary & Key Takeaways

• AngelList rolled out small funds for angel investors by shrinking the special purpose vehicle used for big later-stage deals, making it cheap and democratized. Proven angels who build a track record through syndicates receive a half-million to million-dollar fund, and successful investors get progressively larger funds refilled over time.

• The funds are short-lived and small, invested over six to twelve months, letting limited partners try out budding venture capitalists. Accomplice Ventures raised a $35 million fund called Maiden Lane 2 to back dozens of new operator-angels, with Foundation Capital, Bain Capital, and Crosslink Capital also participating alongside traditional LPs and thousands of accredited investors.

• Naval framed the effort as a response to a growing industry needing more right-sized early-stage investors, essentially founders backing founders. He addressed signaling risk as largely resolved, discussed CSC's China-based capital, the crowdfunding spinout Republic, secondary market challenges, international expansion into India, and the Product Hunt acquisition.