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Last month we held our fourth annual AngelList Confidential conference in San Francisco. The event brought together our community of startup founders, angel investors, VCs, and LPs to network and discuss the state of the industry.
The Future of the Early Stage VC panel featured (from the left): Jake Zeller, Ed Roman, Sarah Smith and Sriram Krishnan.
The day concluded with a lively fireside chat between AngelList co-founder Naval Ravikant and me. Here is an excerpt from our conversation.
The conference ended with a fireside chat between Avlok Kohli (left) and Naval Ravikant.
Avlok: The first fund you ran, Hit Forge, was the envy of Silicon Valley with investments in Uber, Twitter, Postmates and many more. You could have gone on to raise a much larger fund following the traditional venture path. Instead, you started AngelList and invested through syndicates and funds on the platform. Why did you go this route?
Naval: Even though I had a fund, I never thought of myself as a full-time investor. To me, managing a fund is more of a hobby. There are professional venture funds with big operations that lead Series A and Series B deals. But at the seed level—where you’re writing small checks—it’s not a full-time job. And to the extent that you make it a full-time job, it can actually hurt your returns. Unless you’re leading deals, you don’t need to be out there hustling for deals. The best ones come through your network. The big advantage in Silicon Valley is access. This is how the whole structure is set up.
AngelList started when a friend of mine who was running a seed fund called me and said, “Hey, I have this deal and we should do it before anybody else finds out about it.” This was 2010. I thought, What? It still works this way? We have the Internet. Why are these things still proprietary? Why are they still so closed? We started AngelList as a way to open up Silicon Valley and the tech industry to the rest of the world.
And as we’ve seen, tech has become more and more important since we started AngelList. Marc Andreessen was absolutely correct: Software is eating the world. Industries that you would have thought had nothing to do with tech are now under attack by tech-enabled businesses. Peloton just went public: That’s SoulCycle and spin class but tech-enabled. You can argue whether they’re doing well; but it was valued at $8 billion and the company didn’t exist eight years ago.
Danny Hillis famously said, “Technology is everything that doesn’t quite work yet.” There’s so much out there that doesn’t work, and there’s a small set of places in the world where the innovation is coming from. As an investor, you need access to this.
If you’re an investor today, what are your options? You can invest in government bonds—but it’s a terrible asset class; they’re printing money and paying you negative interest rates. You can invest in equities—but these are established, last-in-line kind of businesses with lots of insider and flash trading happening on Wall Street. It’s very hard to make money in equities; even Warren Buffet’s returns in the past decade haven’t been that impressive. You could invest in art and wine—but these are hedged assets, not earning assets. Gold is the same—a hedge asset that doesn’t create anything; there’s no productive activity happening underneath.
Because of this, more people have been driven to private investing. Private tech investing creates so much wealth because of the huge amount of leverage through code, capital and brilliant engineers. We’re opening this asset class to the world.
When I first got in the business in the late 1990s, there was a myth that Silicon Valley created only one or two great companies each year. People really believed that. By 2000 the myth evolved to three to five companies—and people really believed that. When people today say Silicon Valley produces just 10 or 20 great companies each year, I think, I’ve seen this movie before. I know how this goes.
The reality is, there is unlimited demand for great technology and an unlimited supply of young, brilliant, ambitious people looking to create the next generation of technology. I don’t believe limitations exist outside of networks, education and capital. And with capital, it’s only limited at the early stages. By the time a company is established and growing at the rate of an Uber or AirBnb, there’s too much capital. After it’s validated, everyone shows up.
Capital remains limited at the very early stage. That’s where there’s a high trust component, a high people component and a high network component. I call it specific knowledge: knowledge about how a certain industry and technology is built and works. AngelList is one of our efforts to crack that open. We wanted to build infrastructure—a machine—that directly connects entrepreneurs who are doing the work starting companies to sources of capital without layers of middlemen.
Avlok: In 2013, AngelList changed venture investment by launching deal-by-deal syndicates and, shortly after that, small venture funds. This brought a lot of new operators into the industry. And it’s clearly working: Funds on AngelList now participate in 28% of all venture deals backed by a top-tier fund. What do you think is different about the world today, compared to when you started? Where on the journey do you think AngelList is, in terms of blowing the door open on the gated access you referred to?
Naval: When we first started with syndicates, SPVs were a closed-door thing that were rarely done outside of very large deals. Using technology and financial infrastructure, we allowed people to do it at the early-stage level. Last year AngelList participated in a quarter of the high-quality, early-stage venture deals. Today, we’re in almost a third, and that number will continue to rise. Quality is determined by other top-tier VCs who invest and follow on.
All the power in Silicon Valley comes from the founders. It’s the “cult of the founder.” If you stand for the founder, you do well. What founders really want is money from other founders. They want somebody else who’s felt their pain; someone who understands them and gets it.
Behind most great tech companies there’s a great angel: This is the insight that led Paul Graham to start Y Combinator. An early angel helped him get started and bought a large portion of his company, about 10%—which is a lot, but at the same time he would have never made it without this person. With Y Combinator, Paul provides that same service at scale. Of course, Paul Graham alone can’t scale to the entire industry. Many high-quality founders coming up now have taken a couple of hard knocks and can educate the next generation of founders.
We are creating our own generation of up-and-coming investors. We’re enabling founders and operators to back other founders and operators. You can do that through one of the SPVs. If you don’t have a track record, you can invest deal by deal, building syndicates. If you understand how the model works and have a little bit of a track record, you can go into the fund. We also launched a program called Spearhead that allows founders to back other founders. We take founders in Silicon Valley with great networks who want to learn the craft of angel investing and run an incubator for them. We teach them how to angel invest and give them checkbooks.
The moment you move everything to the cloud and make it technology-enabled, you change a lot of things. If you’re running a small fund on AngelList, we handle everything for you: legal, regulatory, K1, accounting, pro-ratas. You want to do SPVs, you need an investor, you’ve got a hot deal, you want to do a secondary, you want to sell early—we handle all of these pieces. That way, you can focus on finding and helping like-minded people with their businesses—and writing checks. Some things you don’t change. It’s still a human business at the end of the day; it’s still about individuals finding other individuals and backing them.
There’s a whole new generation of investors who, thanks to AngelList, will never have to worry about the “back office” of managing a fund or raising directly from LPs. We’ll announce a new product at the end of the year that will take away what little headaches remain for them. The new product is going to completely change the industry again and open up new opportunities for investors. It’s going to be as big of a deal as syndicates were. We’re just getting started.
Avlok: In conversations leading up to me joining AngelList, you made a statement that really stuck with me: The illiquidity in venture capital is actually a bug. Can you expand on that thought? Is there a solution?
Naval: When I first pitched AngelList to our advisor Vikram Pandit, former chairman of Citigroup, he said, “Wait a minute. You basically are creating a marketplace for selling illiquid, opaque assets? Why would you do that?” I said, “Well, these are actually the highest performing assets in the world.”
In some ways it’s worse than it sounds; in some ways it’s better. It’s worse because it’s illiquid. You can’t get out early. And if you do, you’re often leaving a lot of money on the table. The illiquidity is frustrating because you can spend 10 or 15 years making no money whatsoever. And sometimes you want to get it early.
It’s also completely opaque. You don’t get updates from the companies or other investors. Some people on AngelList clamor for updates, but that actually can be a negative indicator. Many of the companies that are doing well don’t update you; they don’t want to talk to you. They’re busy scaling. Meanwhile, half of the companies that send monthly updates are good and conscientious. But the other half are desperate and need to keep investors happy because they will have to go back to the well. You have to get comfortable with the idea that it’s opaque.
I think this is starting to be fixed. You’re seeing more secondary funds pop up and an underground broker market happening.
This is tangential, but I did an interesting thing the other day. I went through the roughly 300 angel investments I’ve made so far and looked for commonalities. About 15 of them are unicorns valued at $1 billion or more; a bunch of others are doing well at different levels. I thought through all of the winners: What did I think about the founder at the time? What was the evaluation like? What was the sector like? I was looking for patterns—because every good investor should have a thesis, right?
I couldn’t find one.