When startup equity co-investment platform AngelList first launched, its goal was to make investing in startups accessible to everyone.
Whereas VC funds managing large pools of capital invested in great startups in the past, AngelList wanted to make the same startups accessible to investors able to commit as little as a few thousands dollars. By pooling the investments of many such small investors, AngelList became a viable alternative for startups to raise rounds up to $3M. Larger rounds still remain the territory of venture capital so far but this may change in the future if small investors see strong returns from their AngelList investments. This will give them the ability to start writing larger checks while also attracting more small investors onto the platform. Very successful companies like Uber, Postmates, Shyp, AltSchool, and DuckDuckGo were all once on AngelList, so this is likely to be the case.
The fact that these companies were all available on AngelList shows that the traditional VC assertion that AngelList suffers from a self-selection bias where the best companies still go to VC’s that can add value to the startup, and the remaining poor ones are left for AngelList isn’t correct. There’s simply too much uncertainty around a company’s chance of success at an early stage, and so much more of a startup’s value is created by its team than its investors, for this to be the case. AngelList has the very real possibility of further disrupting the VC industry and this is why VC’s can be defensive.
Whether AngelList will be very successful in the long run is no longer an interesting question for me. I have little doubt that its influence will continue to grow. The more interesting question is whether AngelList can stick to its original goal of making investing in startups accessible to everyone as its influence grows. The initial results suggest that it won’t be able to.
As AngelList has been able to pool greater amounts of capital for startups, it has attracted the interest of angel investors with a very strong track record who want to increase their firepower when making an investment. This includes Naval Ravikant (AngelList’s founder), Elad Gil, Kevin Rose, Gil Penchina, and Jason Calacanis. Rather than invest $100K of their personal money, these angels use AngelList to invest $100K of their own money and $400K from a syndicate of backers. Just like Limited Partners pay 20% carry (share of profits) to the General Partner of a VC fund, the backers of these syndicates pay a carry between 5% and 20% to the syndicate lead as well as a fixed 5% carry to AngelList. This is a total carry between 10% and 25%.
So AngelList is no longer making investing in startups accessible to everyone, but rather everyone who is willing to pay a carry between 10% and 25%.
More recently, AngelList introduced a pre-funding feature. Rather than reviewing startups and deciding to invest through an opt-in mechanism, investors are now able to pre-fund syndicates. This means that you have money in your AngelList account and when a new deal is shared by a syndicate lead, you’re already opted in by default. You still have 5 days to review the deal to decide if you want to participate or drop out, but the default is that you’re participating. Pre-funding gives syndicate leads greater visibility into their ability to raise money for a startup. Syndicate leads reward their pre-funded backers by sharing the startups they’re investing in with them before sharing them with their regular backers. As a result, sometimes regular backers never get a look at the startup whose round is already filled with the contributions of pre-funded backers.
So AngelList is no longer making investing in startups accessible to everyone, but rather everyone who is willing to pay a carry between 10% and 25% while also pre-funding syndicate leads.
This sounds a lot like how VC funds work. The only differences are that investors in VC funds don’t have 5 days to opt out of an investment (opt-in is not the default status but a requirement), and VC funds raise capital on a fund basis, rather than a deal-by-deal basis.
Although there will be short-term reversals, I believe that the supply of capital for tech startups will continue to outstrip demand for this capital in the future. First, technology and mobility are becoming a more and more important part of our daily lives and this trend shows no sign of going away. And second, although a tough job, being a supplier of capital for tech startups is easier than being an entrepreneur. As long as both of these facts still hold, AngelList will grow increasingly influential in the future. This will give it the ability to continue to further segment investors on its platform.
I wouldn’t be surprised if syndicate leads first remove an investor’s ability to opt out of investing in specific startups, and then start raising an aggregate amount of capital to invest in a number of startups during a fixed period of time (a fund) rather than on a deal-by-deal basis.
In other words, AngelList may become the very system it was looking to displace.
However, this departure from AngelList’s original goal isn’t the company’s fault. Like any startup, it’s simply shifting its product to meet the realities of a changing market. Markets are a reflection of supply and demand, and AngelList is sitting right in the middle of a great one.