AngelList recently announced that it is raising a $400M fund from CSC Venture Capital, the venture capital arm of a Chinese private equity firm, to invest in startups that raise money on AngelList. The money won’t be invested all at once. $20M will be placed in the first year, followed by a growing amount up to $50M in subsequent years.
To give you a sense of the impact of this fund on the investments which take place on AngelList, we need to have a sense of how much investment activity is currently taking place on the platform. In its 2014 year end review, AngelList shared that $104M was invested through its online platform.
It’s safe to assume that AngelList’s new funds will go towards existing startups that received investment on AngelList, rather than new startups, because these are the startups that investors deemed worthy of investment. This means that roughly 20% of the investment volume which took place on AngelList last year will now be performed directly by AngelList rather than syndicate leads and syndicate investors. This will grow to 50% of the investment volume in future years.
This analysis assumes that the total amount of funding which takes place through AngelList stays steady at around $100M each year. This figure would fall if there’s a short term decline in investor appetite for tech startups, but it’s likely to grow over time as the tech sector’s importance grows and AngelList’s disruption of the traditional venture capital model deepens.
Syndicate leads are unlikely to lower their share of each investment they make since they provide access to the startup through their relationship with the founder. So syndicate investors are likely to be the ones who are crowded out.
However, there will be a limit to AngelList’s fund’s ability to crowd out syndicate investors. Syndicate investors are fragmented and this gives syndicate leads the ability to set their deal terms, specifically their deal carry. The greater the fraction of a syndicate’s total investment which is taken by AngelList’s fund, the more power AngelList’s fund will have to influence the deal terms. Since syndicate leads won’t want to lower their deal carry, they’ll want to continue to include smaller investors with less negotiating power in their syndicate. And since AngelList relies on the deal flow and access of syndicate leads for its success, it will need to balance its desire to allocate more of its own funds with the demands of its syndicate leads. So, although less than before, there will still be room for smaller syndicate investors.
It will be interesting to see if the deal terms for the AngelList fund diverge from those for smaller syndicate investors making the same investment. While AngelList will in many cases be able to negotiate better terms for its larger ticket size investments, doing so would hurt its relationship with the smaller syndicate investors that it has supported so far. However, the simple laws of supply and demand may win out in the end. This makes the prospect of tiered deal terms based on an investor’s ticket size a real possibility.
I look forward to seeing how this plays out in the coming years. As is the case for all forms of technological disruption, consumers (startups) will be the ultimate winners.