As one who spends the vast majority of my professional life working with companies that are raising capital from angels and VC firms, I have been completely immersed in the recent developments in the funding environment. Particularly, the change in the general solicitation rules and the unveiling by AngelList of new mechanisms for funding companies - syndicates and backers.
For those who haven’t yet had the time to become fully educated on Angellist, there’s a great collection of blog posts which have been curated by William Mougayar at his Startup Management blog.
This is a radically disruptive development in private company financing and we are at the very earliest stages, which makes this all very exciting and also a bit scary as I’m not sure anyone knows exactly how it will all play out. That being said, here are a few of my real time thoughts:
Everything is now different; Everything is still the same
The AngelList changes - particularly the ability for individuals to create what equate to mini-VC funds in next to no time at all through the Backer program - has the potential to be completely disruptive. Investing in private companies (especially those that are early) is really, really hard to do successfully. What may be even harder is figuring out how to convince institutional limited partners to part with their cash so they will invest in your fund so you can attempt to invest their money and generate returns that justify the risk.
If one wanted to be a full time investor and earn any sort of livable salary via a standard management fee (in addition to operating expenses of the fund), he or she would need to raise a minimum of $10mm in capital from external sources. Ask any of the general partners who have been out pitching to LPs recently and they will tell you tales of horror about the experience, unless there is a verifiable track record of investing success (and even then it can be hard!)
Then along comes AngelList syndicates and the highest profile angels have been able to get to close to $1mm in backers in less than a week. Take a look at an example like Dave Morin (founder of Path) who plans to invest in 12 deals a year with $50k of his own money in each deal. As of 10/1, he has more than $900k in backers who are committing to participate in deals that Dave gains access to. Let this sink in for a moment - Morin has effectively created a vehicle by which he can invest close to $12MM a year and only has $600k of his own money at risk (with potential upside of 15% carry on the $11.5MM in backer capital). And all this was committed in a week or so. This is democratization of investing and it is amazing.
It’s not just amazing for Dave or for Brad Feld and the Foundry guys (who announced a Syndicate vehicle today as well) but for any accredited investor who has wanted access to the asset class but never had the ability to see the deals that a Dave Morin or a Brad Feld sees. Now they can participate (passively) alongside those who get the best deal flow. Disruptive democratization.
But, as the title of this section suggests, not everything is different. If you take a look at the current list of angels with the large syndicate backings, it’s a who’s who of Silicon Valley/NYC startup-celebrities. In other words, it’s still an old boys club it’s just that power is now being shifted in many ways to the individual and away from the centralization of the firm. It’s conceivable that as this trend plays out that the best partners at the best firms will perhaps make a leap and fly solo. Or, perhaps a more likely scenario is that there will be new rising stars who are able to more quickly grow their careers by building a demonstrable track record without having to rise through a partner track at a firm.
This leads to a second observation - Angellist and platforms like it (because there will be more) provide the technology and methodology for a new realm of investing, but it will still be mainly about relationships.
The reason these startup stars have been able to attract millions in backer commitments is because they have the ability to see and invest in the “best” deals. They have, as Howard Lindzon likes to say, social leverage. So while it is easier than ever to get your money into the hands of a top tier investor like Brad Feld, and AngelList provides a mechanism for Feld to hypothetically invest in companies all over the country, the best angels have built a track record on investing in people who they know and connect with personally. It has yet to be proven how willing investors on Angellist will be to look at deals out of their typical regions and even if they invest how valuable they will be outside of simple capital.
This is why historically it has been very difficult for companies outside of the very top tier VC markets (Silicon Valley, NYC, Boston) to attract any meaningful investment traction from investors on Angellist. There are certainly outlier cases where a round is filled out or even completely done via Angellist (NC-based Spreedly has a great example here) with investors who are not known by the entrepreneurs. But in working with 100+ companies over the last few years in the SE and Mid Atlantic that are raising money, it has almost always come down to building lasting personal bonds with investors and this is really hard to cultivate via a software platform. So there may be lots of new capital flowing through these new, democratized channels but will it find its way to markets beyond the Valley et al?
Which brings me to a final thought - there is an opportunity for leaders in secondary entrepreneurial markets to emerge as syndicate leads to help identify the top emerging companies that are off the traditional investment radar.
The best part of this opportunity is that it wouldn’t take $1MM in syndicate backing and dozens of additional financings to make a material impact in an early stage tech market like North Carolina or even all of the broader Southeast and Mid Atlantic. There is an opportunity for people in these markets who know the participants personally and have the know-how of the startup financing world to kickstart additional activity with 5-10 new financings a year. These leaders will ideally have networks (or begin to develop networks over time) that bridge beyond a particular region so they can serve as conduits to the larger entrepreneurial ecosystems. A dozen new seed financings a year is a drop in the bucket in Silicon Valley but could be catalytic to a market like the Triangle, and I’m eager to figure out how we make it happen.