Last week, at StrictlyVC’s inaugural event, investor and founder Naval Ravikant joked about the trials and tribulations of entrepreneurship. He also gave those gathered a comprehensive look at the near-term future of AngelList, his fast-moving, 22-person, San Francisco-based company that’s perhaps become best-known for its pop-up venture funds called Syndicates that allow angel investors to syndicate investments themselves. Indeed, according to Ravikant, more than 243 companies raised $104 million through the platform last year, making AngelList the “largest seed fund in the world.” And AngelList is hoping to double or triple those numbers this year.
More from our chat that evening, edited for length, here.
You say of the $104 million that your 15-month-old Syndicates program funneled toward startups last year, $7 million, or just less than 7 percent, was from institutions. Are you happy with that number?
No. [Laughs.] Obviously, institutional investors come later to the game. They need more certainty, more diligence. It takes more time.
A few venture firms now actively use Syndicates, including Foundry Group, which did something like 40 deals last year on your platform. Have you also talked with big mutual funds that now make big bets on later-stage startups and that might diversify even more by getting into earlier-stage investing?
They have no idea what this is. I’ve tried to explain it to them and it’s too bleeding edge for them. Sometimes we’re too far out ahead of the curve.
Where are these angels coming from – the Bay Area primarily?
A lot of them are [from the] Bay Area. A lot are entrepreneurs, angels, or maybe individual VC partners who are backing each other. We also have hedge fund managers, oil traders, people in the finance industry who have made some money but aren’t in Silicon Valley. There are definitely the dentists and radiologists, who the finance industry seems to hate – I don’t know why. And they do try and come on and we either reject them or we put them into [a new series of index funds] that are managed by us so they can invest in 100 startups at a time [and hedge their bets].
You have Syndicates. You have these index funds and other products. What do people use the most at AngelList?
Actually, [they mostly use] the recruiting site, which we started on a lark in early 2012 when we noticed that people were raiding failed companies on AngelList for employees. That’s by far the highest activity thing on the site, because everyone is looking to hire. We have around 7,000 companies recruiting on AngelList, of whom more than 3,000 log-in every single week and go through . . . 120,000 candidate profiles that are active.
Are you ever going to make money off those listings?
That’s the obvious source of cash. But it works because it’s free for the startups. If we do monetize that — and we’re running some experiments — it will be at the high end for people who have more money than time.
Last year, angel investor Gil Penchina raised $2.8 million via Syndicates to invest in Beepi, a used car marketplace, alongside DST Global. Was that the biggest syndicate to date by far?
We’ve had a couple of others that were over a million bucks. It’s relatively constrained because you’re gathering checks from individuals, so when you collect $2.8 million, that’s 90 different checks and wire transfers and so on, and we’re limited because we form a special purpose vehicle to invest in each company, and that SPV is limited to 99 unit holders by law. So I would not extrapolate and say, okay, $2.8 million today; tomorrow, it will be $10 million, then $20 million. It’s fun to think it could go to that range, but I don’t think so, not yet.
Penchina recently told the WSJ that he has poured his entire life savings into AngelList. Does that concern you? What if things go south for him?
That might have been an exaggeration. [Laughs.] But sure, it’s never good when someone loses their shirt, that’s true of any startup.
Has anyone come after you over a deal that didn’t go as expected?
No. In the entire history of AngelList, we’ve never had a single related case of fraud or a lawsuit threat. We follow the rules, we have a no-action letter from the SEC, we have disclaimers, we’re trying to deal only with sophisticated people. This is America, and anyone can sue you and someone eventually will. But so far so good.
How do you keep people from getting in over their heads?
We look at what angel investments they’ve done before, and if they don’t have a history of doing them, then we’ll run them through a questionnaire that asks them: What percentage of your net worth are you putting in, what kind of return do you expect, how liquid do you think these investments are, how big a basket of these do you think you need to assemble? And based on their responses, we’ll either reject them, we’ll cap the amount they can invest, or we’ll move them into one of the index funds and say, “You can put a small amount in here.” Or we’ll say, “Go offline, go to your local angel association and lose some money there, then come back to us.” The test we’re looking for is: have you lost money before.
How much of someone’s net worth would you advise investing in nascent startups? Up to 10 percent?
No, I would say anything more than 5 percent is probably silly. Obviously, I’m personally far more leveraged than that – I’m “all in” on startups — but that’s because I’m living in Silicon Valley and I’ve bought into the dream.
You talk a lot about the advantage of moving investing online.
People like to think that it doesn’t create that much value, but we forget that when you move online, there are all kinds of things you cannot do offline. An example: By the end of this year, you’ll be able to go into Syndicates and say, “This person sourced the deal for me so I’m going to give this person carry. This is passive capital, so they’ll pay full freight. The pro rata will get gobbled up by following entities.” You can even start doing differential pricing. You can establish that the first $250,000 into a deal gets a 20 percent discount and the next $250,000 gets a 15 percent discount. It breaks that logjam of: Why should I be the first one to write a check into the company.
Online would also seem to play into this notion of continuous fundraising or rolling closes. Do you think that’s a sustainable trend?
We’re going to see a lot more of it. Companies are getting much better at raising money whenever it’s available and they’ll raise it in dribs and drabs until they get to the scale or product-market fit where a VC will come in and write a $10 million check. I think it’s a natural trend and I do think it’s easier online than offline. We already enable it to an extent in that Syndicated deals can stay open for months and keep collecting capital if you want it to . . . My guess is that by the end of next year, it’ll be a common thing.
In the past, entrepreneurs had gotten a lot of advice from the venture side, which was kind of talking their own book, which was, “Get your ducks in a row and raise money once and get a good board member.” It’s all good advice, but it’s a little self-serving, whereas accelerators give almost the opposite advice, which is: “Go get the money right now, get it from anyone who will write you a check within reason, and keep taking money as long as you can and just don’t run out of cash.”
I’ve also seen you mention getting into secondaries. How serious were you?
Yes, they’re becoming very popular now because household names like Uber and Airbnb and Dropbox are staying private longer and people are running around trading in the companies’ stock on the side. But it’s very tricky because [secondaries are] regulated in a very different way. Insider trading laws apply to secondaries; the companies often don’t want there to be secondary trades, so they have a right of first refusal. A lot of the secondary trades that are going on are in violation of the companies’ bylaws. A lot of them have counterparty risk, where you don’t actually run it through the company; you just get an IOU from someone who could skip town.
A lot of this going on right now. It’s possible that the amount of secondary trading going on in Silicon Valley under the covers is going to match the amount of primary financing soon. And if you look at the public markets like the Nasdaq or the NYSE, it’s almost all secondary. The IPOs are a tiny piece of the trades, and then it’s all secondary trading going back and forth. So it’s something that we’re looking at, but it’s very difficult, and because we’re so large and so watched, we have to do it by the book. We’re looking into it, but it’s a hard problem.
[Update: The original version of this story was titled: “In Silicon Valley, Secondary Deals Quietly Reaching ‘Primary’ Funding Levels.” Ravikant asked that we change it, given that our choice in wording was more predictive and certain than his original comments or intent. Our apologies to Ravikant and to readers.]