A few months ago at a New York PandoMonthly, Fred Wilson predicted that the venture business as we know it today would not exist. “The idea that everybody has to put hundreds of millions of dollars into these ten year closed end funds seems unsustainable,” Wilson said. To elaborate, he imagined how AngelList — the site where angel investors and startups seeking funding can network — might work in the future.
Think about if everybody has an account on AngelList. Think about if you put your company up on AngelList and I said, ‘Sarah I’m gonna take 25 percent of that investment and I’m gonna take a board seat.’ And then everyone could pile into that investment. I would provide the director and the management of the investment going forward and maybe get a little extra equity in your company for doing that. But everybody could participate in the round and it was done in a Kickstarter-y sort of way.
Now, a mere three months later and with the advent of the JOBS Act, AngelList is doing exactly that. The platform has launched “Syndicates,” where investors crowd fund money for a startup by recruiting other investors. It has been in beta for the last month and a half, but today marks the grand opening.
Each additional investor will pay a 5-15 percent carry — the cut of the profits when the startup gets acquired or goes public — to the lead investor, who will advise the startup on its growth and management. The investments can occur online and AngelList has removed all initial fees associated with investing through the platform. The only cost for using AngelList is that the lead investor will need to pay a 5 percent carry to AngelList down the line, if and when a profit is made.
Angels like Tim Ferriss — author of The 4-Hour Workweek — have wasted no time in promoting the startups they back. On his blog Ferriss asked other people to join him in a syndicate crowd funding deal in which he’ll charge twenty percent of the profits from each investor. Such public solicitation is legal now thanks to the JOBS Act, which Erin Griffith discussed with AngelList founder Naval Ravikant last week.
AngelList is also introducing a Backers program, still in beta, where wealthier angels can act like LPs and invest in a specific angel, instead of a company. That means they can invest a lump sum in a particular investor, and therefore sink money into all the syndicate deals that investor makes. But unlike an LP-VC relationship, investors are not tied to a ten year fund lock-up. They can withdraw their money at any time, and there is no management fees.
This type of program is exactly what Fred Wilson predicted at PandoMonthly, but he did so by accident. At the time, Wilson did not know that AngelList was going to be rolling out these new developments. He was just imagining what the future could look like. AngelList founder Naval Ravikant contacted Wilson after PM to tell him he hit the nail on the head. Ravikant says Wilson was surprised.
The changes to AngelList will give angel investors more power, almost like a VC firm, because they can raise much larger sums for the startups they support. Ravikant also believes that the removal of fees and the new Backers program will increase the AngelList profile. More wealthy armchair investors will want to use it. After all, they can invest in a company without ever leaving the comfort of their home, doing it all online and trusting the due diligence of the lead angel investor they’re backing.
Angel investors have become more and more prominent in recent years. Their presence, plus crowd funding platforms like Kickstarter, have increased competition among traditional VC firms for the best early stage deals. That’s part of the reason Fred Wilson predicted the future demise of venture capital as we know it. As Wilson said:
Technology is allowing money to be aggregated and invested and allocated in ways that weren’t possible 10 or 15 or 20 years ago, and the venture business is operating in a model that was invented in the forties or fifties. That’s why I think it’s going to change a lot.
[Image courtesy leafar]