Naval Ravikant’s AngelList is disrupting Silicon Valley’s venture capital ecosystem. Hot Topics visited the firm’s San Francisco HQ to find out more…
With a career that has spanned entrepreneurship and venture capital, Naval Ravikant is now disrupting tech industry funding, through his well-publicized AngelList platform. The site, which has embedded itself as part of the venture ecosystem in the US, is now expanding globally and launching new vehicles to enable its syndicates to participate in later stage deals.
Hot Topics: What do you think makes a great entrepreneur?
Naval Ravikant: Entrepreneurship, by definition, is solving a problem that hasn’t been solved before. The path is different every time and there is no single formula. Experienced investors have their own judgment of what to look out for and there is usually a set of things that people will generally agree upon. Persistence is a big one because every start-up is hard, every start-up faces near death experiences and you have to have the ability not to give up. Related to that; passion, conviction and deep expertise of the area you are playing in is important. These days, especially in the technology business, product CEOs or product-based entrepreneurs are finding a lot of success so I think you can look for those kinds of patterns or correlations.
HT: How do you define AngelList?
NR: AngelList is a platform, which helps start-ups raise money and recruit talent. We took a lot of the pieces of the venture business that could be moved online and did just that. We introduce start-ups to venture capitalists who fund them, we run syndicates which are lightweight on-demand seed funds that help gather up money from limited partners and angels, we help companies make connections with high quality talent and we run a mini LinkedIn for the industry.
HT: Why was there a need for AngelList?
NR: For companies to receive tech industry funding, even though it creates all of this disruption in other industries, it is still quite offline. There are pieces of it, which can be made more efficient by moving it online. If there are great engineers who want to find a job in tech but are sitting in Minsk for example, you want to be able to connect them to a company that is raising money and has good momentum and traction but maybe doesn’t have a big personal network. Or when you have angel investors that are investing their own money into a company and sending a strong signal, there are people who would like to back them and put money behind them but the only way to do that was through venture capitalists. That’s where syndicates come in. It’s really just moving the industry online, making it more transparent and democratizing access.
HT: How have more traditional VCs reacted to AngelList?
NR: VCs that have a strong brand realize that there is no such thing as proprietary deal flow any more. Deal flow is everywhere; it’s on TechCrunch, it’s on AngelList, it’s on Product Hunt, it’s at demo days, so I think there is a mythology around proprietary deal flow that is now largely gone. There is such a thing as proprietary access, and good VCs know that and they have good access because of their brands and their networks. We bring some of that access to other people who might have good brands and good capability and reputation but might not have the full-blown networks. I don’t think any good VCs are threatened by us and we do deals on AngelList all the time that have everyone from Andreessen Horowitz to Sequoia to Matrix Partners as the lead investor. I’ll bet there is some back-biting. It never happens in front of me but, if you feel the business is becoming commoditized and competitive and you’re not happy about that because you occupied some geographic or vertical niche or you’re making a living by having proprietary access to information that is now more widely distributed, then I think you may not be happy with it. That’s the internet for you.
HT: What is the best way that VCs can work with you?
NR: There are hundreds of VCs that use the platform. We helped Menlo Ventures discover Uber, which they did the Series B in, Matrix Partners has done two or three Series A rounds in companies they found through us, as has First Round Capital and there are dozens of those examples. Lots of VCs have sourced lots of deals on AngelList that they have then gone on to fund.
HT: How do you monitor the angel investors that invest through the platform?
NR: They have to verify their accreditation, which is a legal issue and we have various tools for doing that. We also track their sophistication and reputation – they can put down what companies they’ve invested in which the entrepreneur has to verify. They can get references from entrepreneurs and all of that is exposed and transparent. Anyone who is not willing to be that transparent generally does not participate on our platform.
HT: How difficult was it to gain regulatory clearance for AngelList as a whole?
NR: It depends on for what. The syndicate’s online portion is explicitly legalized by the jobs act, which passed in 2012 in the US. We’re working on regulatory clearance in the UK for the model, which will require some differences. Every jurisdiction requires its own nuances. For example, in the UK, crowdfunding is legal and you see companies such as Seedrs and CrowdCube, whereas in the US it’s not legal yet.
HT: What is the current geographic focus of AngelList?
NR: We offer the online investment syndication product in the US and we’re working on getting regulatory clearance elsewhere. Then there is just the basic email introducing companies to investors and they can consummate the transaction offline, which obviously works anywhere, which is the same with the recruitment side, where there is no regulatory issues.
HT: What is the revenue model?
NR: We don’t have a strong one yet. On the syndication side we take a small piece of carry, which is a percentage of the profits for funds invested online. On the recruitment model we will probably roll out a premium service for larger companies, but we don’t monetize that yet.
HT: In terms of a rollout into the UK, how do you see the platform working given there are less experienced, successful angel investors?
NR: It will be smaller, however, one of the great trends about the last decade is that companies are becoming so cheap to build so they are being built everywhere. The day and age where you had to move to Silicon Valley to start a tech company is over. You may still come here (Silicon Valley) to maximize success, for access to local capital or for specific kinds of talent but I think we are seeing great companies now being built in Europe or even in so called third world countries, especially if they are attacking local markets.
There is going to be opportunities and models all over the world. I wouldn’t be surprised if half or more of the profits made in this industry over the next decade or two are international. The industry as a whole is increasing – so that’s not to say that Silicon Valley won’t do extremely well, because it will, but other places can do well also.
HT: What is your advice to aspiring angel investors?
NR: There is a lot of nuance to angel investing. You obviously want to back great entrepreneurs. Value for your portfolio matters, so you do want to be disciplined on early stage valuation. You generally only want to go after companies that are targeting large markets. Not because you can’t have small or medium sized wins but generally companies fail because they run out of cash and they always need more cash than they think they do.
VCs won’t fund anything they don’t think can be a huge market and as an angel investor you have to adopt that same kind of mentality up front. You want to invest with other people that can help you keep an eye on the company and have a track record and reputation. You don’t want to get too hung up on details and terms and trying to control the company and you don’t want to own too much. I notice that a lot with European angels where you’ll see that they’ve bought 50% of the company. If you own 50%, you may as well own 100% as you’re now doing all the work so you don’t want to remove the entrepreneur’s incentive or drive.