If you track the venture capital industry it would be hard to miss the conversation going on this week over AngelList “Syndicates.”
From the hyperbolic Jason Calacanis weighing in that “The petty VC’s did everything to deride [Naval, the co-founder of AngelList]” as though the industry was collectively shitting its pants that AngelList was going to put us out of business. But Jason is one of the smartest thinkers in our industry so while style points in his eye-poking post might be low, he’s definitely scratching at something important.
My favorite new VC blogger, Hunter Walk, weighed in with some thoughtful comments about how Syndicates might actually pit, “angel vs. angel.”
And even the venerable Fred Wilson weighed in with how people “leading vs. following” in funding rounds played different roles and had different skills.
So there you have it. Many of the good and great of our industry are talking about AngelList.
I had a chance to discuss AngelList Syndicates with Naval at Michael Kim’s Cendana LP/VC conference on a panel with Naval, Roger Ehrenberg (IA Ventures) and Mike Brown, Jr. (Bowery Capital).
Is AngelList Syndicates really such a big deal?
If it gets broader adoption I think it is a big deal. I have a slightly different take on why I find it valuable.
For starters, what is AngelList Syndicates?
AngelList 101: As you know, AngelList is a platform where angels can invest in semi-screened tech deals. It should help some entrepreneurs to better access early-stage capital and should allow some angel investors better access to deal flow. As an angel you can look for the social proof in deals “Dave Morin is investing …” to make your decision. Social proof can be helpful. But it can also be destructive. It certainly shouldn’t be a proxy for good judgment.
AngelList Syndicates 101: While “AngelList Classic” was ‘each angel for himself’, syndicates allows an active angel to form a group of like-minded investors to invest together in a deal or deals. The syndicate lead can then take “carry” on the profits generated from the investment, turning some syndicate leads into MicroVCs.
While VCs usually take 20% carry on their funds (you get no profit until you’ve returned your investment fund and then share 20% of the upside after that), AngelList Syndicate Leads take 15% (AngelList itself takes the other 5%). And the other difference is that AngelList Syndicate leads don’t take any fees on the investment, which should help with returns.
Smartly AngelList requires a Syndicate lead to actually have their own money in the deal so they can’t just be packaging and taking fees – they actually have to put skin in the game. This is the same way with VC firms, by the way. If you know, VCs end up writing sizable checks into their own funds, which is important in better aligning interests.
So What’s the Big Deal?
In Jason’s mind half of the VC industry will now disappear as entrepreneurs flock to him and to Dave Morin for their money
… the bottom half of VCs will now be wholesale replaced by folks like Kevin Rose, Dave Morin and myself. The three of us have $1M in backers in the first week. That means if we collaborated on a project we can do an A-Round after a brief conference call.”
And Fred points out
It also means that they will have to learn to lead and lead well. They will have to step up before anyone else does. They will have to negotiate price and terms. They will have to sit on boards. They will have to help get the next round done. Essentially they will have to work.
… Not everyone is good at this. In fact, very few are. It’s hard to be a great lead investor.
Both are right. Jason, Kevin and Dave can move an order-of-magnitude faster than VCs and sometimes this is a good thing for entrepreneurs.
But as with many people who have a vested interest in fast rounds being assembled, they don’t quite get why it is so important that VCs actually take their time. VCs take their time precisely for the reason Fred articulates – they play the role of “lead investor.”
That means sitting on boards and helping entrepreneurs to handle the most difficult things that pop up like:
- founder fighting
- lack of traction, lack of downstream financing availability
- existential threats (Apple announced they are competing directly with you)
- strategic direction
- help debating before key negotiations
- M&A discussions (where your company is buying or being bought)
- interviewing critical hires at a time where they have 3 other offers
and much more. Call any CEO that has me as a lead and they’ll tell you that I’ve been on midnight phone calls the night before big meetings acting as a sparring partner. Why? I sit on less than 10 boards precisely so that I can be deeply involved when I’m most needed. And I have witnessed this from all of my peer group.
I have watched Jim Andelman blow out his personal life to help build spreadsheet models for one of our co-investments at a critical inflection point. And countless Sunday mornings I’ve had breakfast with Dana Settle away from our families to help our companies at critical moments.
This is what leads do. Less investments, more active. Therefore of course they need to be more selective when writing checks and can’t spread their bets across 75 deals.
It’s different, not better or worse. I know the populist sentiment about VCs is that many want to believe that taking one’s time to make investments is due to 8-weeks’ holiday every summer and not working past 5pm.
I have never experienced a co-investor VC who is a slacker or uncommitted.
Yet I still see Syndicates as an important innovation.
In virtually every deal I do I leave space for angels. If I commit to a $2.5 million round I might write $1.8 – 2.2 million and tell the entrepreneur that they can bring in angels or seed funds for the remaining investment if they want. I don’t mind flexing up the amount available or flexing down (I will gladly take the whole round if needed / desired).
Kind of obvious. Angels add domain experience. Angels have additional networks. Angels can be helpful champions of the company. I don’t believe that I have monopoly on good ideas for the companies in which I invest so to me, the more the merrier.
Up to a point.
I don’t want 40 angels calling the CEO with their opinions on a regular basis. That would add too much overhead.
I have been involved with rounds of funding where individual angels asked to have lawyers review the next round of financing and slow up deals over what amounts to $25,000 out of a $5 million investment.
I don’t want confidential company information leaking to 40 angels – some of whom may be totally responsible and some of whom may inadvertently or intentionally leak information.
I have committed to some deals where some of the individual angels dragged out their investment decisions because to them $50,000 was a boat load of money (as it is for most people) while I had already wired my $1.85 million and wanted the CEO to get back to running the business. Kind of ironic that in many cases angels can actually be slower.
So Why Do I Love AngelList Syndicates?
Precisely because it helps organize a group of angels in ways that are helpful to entrepreneurs and to VCs. Far from putting us out of business, I believe it will complement our industry.
1. Helpful to Entrepreneurs – The most obvious. Syndicates can move faster in early-stage deals than rounding up 40 individual investors. Awesome.
2. Helpful to VCs – I can have 40 investors but just one signatory on deals. I don’t have to chase down tons of individuals. Helpful because if I know that Jason or others are “fronting” others in a deal I can deal with one person to negotiation in difficult times. Helpful because at the time of rounds we’re not herding cats.
3. Helpful to Angels – But what I find most innovative in AngelList Syndicates is that it is helpful to angels. Of course it’s obvious that it helps the self-interested syndicate lead who gets carry if the investment is successful. But it also helps followers. In most deals angels have few rights. One of the most important rights is “pro-rata” rights to invest in subsequent rounds. With angel money being “packaged” and aggregated into large bundles it makes it easier for angels to ask for rights it might not otherwise have.
The most interesting thing is that this will change early-stage investments in unanticipated ways.
As Hunter astutely points out in his post,
My guess is there are also some angels who were popular when they represented a $25k check but won’t be as sought after if they try to push $300k into a round.”
This is my guess, too.
And of course syndicates unleashes many unintended consequences by creating a new breed of self-promotion amongst angels who previously told you how much they loved their 100 deals because it benefited their equity – now some actually have even more riding as carry – so as always caveat emptor. Of course the same goes with traditional VCs.
We of course have Naval to thank for helping to innovate in our industry. In the end he’s giving us all more tools to do our jobs more effectively. I’ve always been a believer that new competitive dynamics are good for industries because they favor those that are most nimble in responding to the new market dynamics.
AngelList does this. But it doesn’t radically alter our industry as some would have you believe. It enhances our existing working practices.
Mostly I’d like to thank Nivi. Because while Naval rightly gets a lot of credit for helping shake up our industry, Nivi is the co-founder who has always been behind the scene pushing the innovations just as hard and always happy to avoid taking any credit.
Thank you both for enriching what we all do.