Some Thoughts On The Big AngelList Deal

I am so fascinated by what Naval and Nivi and the AngelList team have done, I’m overwhelmed with thoughts to I have to stop tweeting and just write them down, in no particular order:

  1. Video demos for startups are going to be even more important. It’s costly, but the most efficient way to quickly communicate information to the audience. For investors aren’t physically located near a potential investment, a video goes a long way.
  2. Founders will need to stay vigilant about the benefits/risks of having their leads syndicate to retail level. Say Company X allocates $250K to a known investor, and that investor allocates some of it to others. The founder has the ultimate say, but while the money is green up front, it remains to be seen if investors making very small bets would be in a position to offer downside protection, bridge financing, or other items in times of duress.
  3. Introduction of New Lexicon re: Syndicates and Backers. Better get acquainted with new vocabulary words, such as syndicates (people who lead deals and allocate a portion of their allotted carve-out to the marketplace, pending the approval of the company) and backers (people on AngelList who can act as LPs by backing the syndicate lead in their future investments.). Savvy syndicates can potentially earn greater leverage by allocating their carve out to syndicates, who would kickback a carry percentage (set by the lead) to the lead in the event of a good outcome. The carry can be 5% to be on AngelList, and the Angel sets their own carry on top of this. Backers enable some individuals to leverage their own brand and special access to allow other LPs to have the backer deploy their money, where the backer enjoys a carry on the proceeds of corresponding investments. (Note, people can also run “private syndicates” with a known group or group of friends via AngelList.)
  4. A syndicate example, “Company X”: Let’s say a great company from YC, Company X, was seeded by an early stage group. That deal would have been shown to premium VCs; now, the early stage group can use their anchor in the deal as leverage to syndicate on AngelList. For instance, let’s assume I could’ve invested in Company X in the old world, perhaps. Maybe. Now, in today’s world, I join the early stage group’s syndicate, where there would be no fee to invest into Company X, but any carry generated would net 20% of my carry to that early group.
  5. Syndicate has the potential to dramatically increase leverage for leads. Taking the Company X example a step further, let’s say the early investor group was allocated $250K (on $4M-post) and invested $25K itself and left the rest open for nine (9) $25K chunks of syndicates. Instead of investing all $250K into the company and owning around 6% of the company’s equity, by using this new vehicle, the early stage group pushes their equity ownership down to 0.6%, and of the remaining $225K invested from their Syndicate, earn 20% of the proceeds on any return that $225K into Company X returns. Say Company X is sold to Apple (!!!) for $20M (and assume no dilution, just for the sake of this exercise), in the old world, the early stage group’s 6% stake for $250K would amount to $1.2M (~5x return); in the new world of Syndicates, the early stage group’s 0.6% stake for $25K would amount to $120K (~5x return), but they’d also shave 20% off the carry on the $225K they allocated out, or about $200K on the $1M, for a total of $320K leveraged from a $25K check, or roughly a ~13x return.
  6. Backers Who Join Syndicates Pay 5% of Their Carry To AngelList: I missed this the first time around, and just noticed this. If you create a syndicate and have backers join you, the backers will earn a carry in a good outcome, and 5% of that carry will go to AngelList. Hello, marketplace transaction fees! In the example above, the backers clear $1M, pay 15% carry to the syndicate, and of their $850K remaining, owe AngelList 5% of the $800K, or $42.5k for brokering the transaction. Ka-Ching! They could even pool their carry and collateralize it and then (if it unfolded like this) gain liquidity through secondaries.
  7. First the fees, and now the carry. Most everyone agrees the “old” VC model is broken on many levels. Today, some of the best larger firms are either taking budgeted fees on their AUM or keeping salaries low in order to create an even stronger incentive for the partnership to focus on outsized returns. Disruptive platforms like YC and AngelList have helped slowly erode the oft-abused fee structure in funds. Now with syndicates, AngelList is threatening the carry, too, and for big institutions, it’s all about the carry, as often the fees are just a loan and often paid back as part of the return to LPs.
  8. AngelList had lots of PR, but juicy details surprisingly under the radar. None of the tech blogs really had any decent coverage of all of this AngelList news and all the nuances. I wonder why. It’s a huge, huge story, and so much of the tech blog “news” is about funding. Maybe I’m just a nerd about this stuff, but this is a very, very important deal in terms of the startup ecosystem and I haven’t yet come across one post that properly explains the details of why this is important. That’s why I had to write this late at night. Please suggest any improvements or corrections.
  9. I expect to see all kinds of experimentation on AngelList. For instance, when will a known VC fund lead a syndicate? Will fund LP agreements view syndicates as a violation of contract? Will VC funds prefer to not have junior staff and instead just “back” tastemakers and good pickers with good access, where the pickers enjoy the carry? Will AngelList get into the game of early liquidity, a la Second Market, as well as other potential revenue streams around recruiting, transaction fees, lead gen, and a host of other possibilities? What would AngelList reimagined for mobile look like?
  10. Android vs. iOS. I see AngelList having an Android strategy, an open platform where everyone can participate (to a certain level), with some curation through social networks and company-level controls. If true, then what’s the iOS of startups? Maybe it was YC? Is there room for another incubator/accelerator like YC to be more curated, hand-picked, like the artisan model? I don’t know, but there will continue to be great companies that, for whatever reason, stay away from AngelList, and that’s just fine as there is no one be-all solution.
  11. If some VC firms didn’t have a strategy for AngelList, now they’ll need to. Even if they don’t find deals there, reputation attention has shifted to the site and they can bring deals to the platform and/or help their existing companies through the platform.
  12. The road will be long, noisy, and bumpy, but important. I am long on Naval and long on AngelList. That said, I think the road will be bumpy. Potential investors will have to continue to learn some harsher truths about early-stage investing, such as the time it can take to get to liquidity, the lack of demonstrable financial data or metrics, and so forth. Founders will have to grow accustomed to more participants in their rounds, which could have an adverse effect on some investors paying attention to them during times when they need that attention. There will be a lot of noise with general solicitation and the opening of this marketplace with syndicates and backers, etc. It’s exciting. Even savvy investors are divided about what will transpire.
  13. Getting AngelList to this point is some serious ninja work. Not much has been written about all the gritty work done by Naval with regulators, politicians, and so many investors. In many ways, the path of AngelList is analogous to the Uber, fighting interests and regulations in a new economy. I also think people forget just how long Naval and company have been toiling away at this, it’s taken years, lots of work with regulators, lawyers, the investment community, and much more. What Naval has orchestrated to date is nothing short of remarkable and a true entrepreneurial achievement.

Haywire is written by Semil Shah, and is published under a Creative Commons BY-NC-SA license. Copyright © 2014 Semil Shah.

“I write this not for the many, but for you; each of us is enough of an audience for the other.”— Epicurus