The most patient man in Silicon Valley
“We want to give you $100 million….”
Well, that was easy! Even Naval Ravikant was stunned at what he was hearing, mid-way through the first meeting between his company, AngelList, and Chinese private equity firm CSC Group. The Chinese firm wanted to back a new early-stage seed fund for US startups, and was considering partnering with AngelList somehow.
Shan Xiangshuang-- the CEO of the CSC Group and co-chairman of the China Venture Capital Association-- had already experienced what Ravikant called the “DST Moment.” He realized he could get instant access to deals and instant credibility simply by blanket-backing some of AngelList’s best syndicates, just by giving them a checkbook, similar to the way Russian billionaire Yuri Milner’s DST became a force in the US by agreeing to back every single Y-Combinator company back in 2011.
Investing early is all that matters in the venture world, and coming from outside the Valley, you need a hack. “Everyone [in the US or Silicon Valley] already thinks they have access, whether or not they do,” Ravikant says. “They get hit by deals all day long. But someone on the outside thinks they can’t get access to those blue chip Silicon Valley deals, except when they go public.” They need a trick to skip ahead in the foodchain.
It took less than one meeting with Ravikant for Shan to see in AngelList what Milner saw with Y-Combinator back in 2011. And for Ravikant, it was going to solve one of the biggest problems a subset of his best syndicates faced: Knowing how much they could commit the moment they decided to do a deal, not days later when their star power finally pulled in enough names.
Done and done!
Only Shan wasn’t done. Not even close. He wasn’t even done with his sentence.
“...For the next ten years.”
You don’t have to be a VC to do the math. Someone had just offered in one meeting-- make that half a meeting-- to create possibly the world’s first $1 billion seed fund, existing entirely for the purpose of backing AngelList syndicates. A unicorn-sized force of funding within a single startup, if you will. That would be the very definition of a good problem to have.
Ravikant’s response: Something almost no one in the Valley seems to be able to do right now, but something in keeping with every move he’s made since the beginning of AngelList. He turned it down.
“That’s too much. You’d destroy the entire market and put prices up 20% overnight,” he said.
They settled on $400 million and, today, the two are announcing the release of CSC Upshot on AngelList. At the decreased amount, it’s still one of the world’s largest seed funds and a juggernaut of capital injected into AngelList. And it takes syndicates – pop-up venture funds marshalled by well-known tech figures that have funded some 650 startups in two years – to a whole new level.
The privilege won’t be extended to everyone, and the money will be injected slowly, so that it doesn’t destroy the delicate marketplace of founders and other founders who fund them. Just $10 million or so in the first year, and then more as they see how it goes. “Deploying $400 million is not trivial,” Ravikant says. “It’s an absurdly large amount for a seed fund.”
It’s another brick in AngelList’s wall.
* * *
Too much in Silicon Valley revolves around hyperspeed. Everything in the startup world is an emergency that needs to be solved in an all-nighter last night, if you allow it to be. The genius in Ravikant’s AngelList is its measured, methodical, brick-by-brick pace to build a software platform to replace, save, wreck, or augment – the verb depends on your point of view – a business that everyone insisted for decades was incurably human, boutique and done with deeply-trusted partnerships and eye-to-eye handshake deals.
In addition to the new $400 million checkbook for syndicates in the form of CSC Upshot, AngelList has two other announcements today. The second is AngelList SPVs – one of its first products especially for venture capitalists. It’s a new, streamlined way for venture capital firms to quickly roll up “special purpose vehicles” to fill pro-ratas in late rounds.
In non-VC speak here’s what that means: When early stage investors put in cash, they get the rights to always participate in future rounds, called their “pro-rata.” But many early stage funds are small and never have the amount of capital to keep doing pro-ratas – especially in this current climate of mega deals.
AngelList now helps VCs to quickly and easily roll up a group of investors – or SPV – to pool their money and take the pro-rata. They could always do that before, but it normally costs upwards of $100,000 to set up and is a huge hassle. AngelList has tweaked its platform to allow VCs to set up a private offering, invite their investors to take part, collect all the money through its own ACH platform, and form and manage the fund for ten years. When the startup exits, the firm just sells the position, puts all the cash in a bank account, and AngelList divides it up and gives each LP the right amount. The entire thing only costs AngelList about $10,000 out of pocket, because it’s run on existing infrastructure. It passes that cost onto VCs, but doesn’t charge them anything beyond that.
The third announcement is the most straightforward: It’s an app that takes all of AngelList’s data of some 50,000 active developers, designers, and other startup professionals looking for work and what jobs are open for them and dumps it all into a Tinder-like iOS matching app. Swipe, swipe, hire.
* * *
Each of these announcements is a significant fix for a problem faced by some corner of the startup universe and could be an interesting news story in its own right. But for those who don’t care about such granularity, what they say about the macro story of AngelList is just as fascinating. And it’s a story worth paying attention to: AngelList is continually making a bigger and bigger impact on what technologies get funded and developed – and who ultimately profits from them.
Looking back today, AngelList seems an aggressive automation of so many expensive, cludgy, human-powered parts of the venture world. A Silicon Valley libertarian’s wet dream of market disruption. But if software has eaten part of the venture world in the form of AngelList, it’s prepared the dish as methodically as boiling a lobster one degree at a time.
It’s not the moves themselves that matter, as much as the pace at which Ravikant does it all. With each passing year, AngelList grows through its own marketplace network effects. He layers on the next new product, taking advantage of what the platform is already doing.
He’s building a huge, defensible foundation – or wall, depending on your view – brick by brick by brick.
Here’s where Ravikant has done something culturally remarkable: Plenty of VCs are skeptical or even resentful of what he's doing. But marketplace businesses are what all VCs lust after. Once the flywheel spins, they are nearly impossible to disrupt. The more they grow, the more they benefit users. The more they grow, the more money they make. The more they grow, the more they grow.
Even a VC dubious of AngelList has to admire the machine Ravikant has built slowly and methodically. What started as a something that looked like a VC social network has just become just a tiny bit more powerful and unstoppable with this trio of seemingly wonky, insidery announcements today.
To wit: AngelList first launched the jobs functionality in 2012. I asked Ravikant why it only now rolled out an app. He said he needed it to get to critical mass first. Ravikant doesn’t like to launch things until he knows they’ll work. So much for that rule that you should be embarrassed by your first stab at a product.
But also he adds this: “We’re short-staffed. We had just one person on jobs, and late last year we had two people, now we have four people. I don’t want to tack on dozens of people, because it’s a free service. Startups don’t have the capital to pay for it.”
He acknowledges that some probably would pay today, but that’s a bull market phenomenon and he builds for beyond one market condition. So AngelList – a company with ten years of capital in the bank – didn’t move fast, didn’t landgrab, didn’t inflate its burn rate to double down on growth.
And even now, with a whopping four people on the team? The app was built by one guy over the weekend at a hackathon. It takes enormous discipline to build a company this way when you don’t have to, and while the rest of the market is moving at a totally different speed.
Brick. Brick. Brick. Brick. Mortar. Brick. Brick. Brick. Brick.
Then there’s the SPVs-- something that seems like a wonky announcement only a VC would give a shit about. For Christ sake, you have to explain how funds work to even spell out what it is, much less what it means.
But it’s a significant brick, strategically. It makes AngelList more useful to the very group that’s always distrusted and disdained it the most: Traditional VCs. It brings more of them and their investors onto the platform. And it brings those hot, pro-rata rounds in later stage companies onto the platform too. Should those rounds be hard for VCs to fill? Well lucky for them, AngelList has funds like CSC Upshot offering certain investors blank checkbooks. No wonder he isn’t charging VCs for the service.
Some pre-seed funds forming now who want to stay small, but still have flexibility to keep investing in their biggest hits, are even baking this functionality into their long-term plans.
Brick. Brick. Brick.
And as for that $400 million venture fund, it solves the biggest problem with syndicates by giving them a way to instantly say how much they’ll commit to a deal, not having to wait to see how much they can pull in.
Syndicates were already popular, even if they are derided by some as mini-cults-of-personality. Some 165 syndicates have raised $205 million for 650 startups over the last two years on AngelList. Some 4,400 investors have taken part in syndicates so far. Think of them like a venture capital version of Voltron, rapidly aggregating a bunch of small checks to form a meaningful investment in a startup. Now they don’t have to wait to “Voltron up” to make a meaningful commitment to a startup.
Brick. Brick. Brick.
In the startup world, Ravikant’s pace and patience is downright Godot-esque.
I remember one day Paul Carr and I went to visit Ravikant in his office on Maiden Lane – more a place for Marin housewives to spend more money in an hour than I earn in a month and sip wine with friends than the center of a venture capital revolution.
It was in 2013, just after Ravikant had raised his whopper of a $24 million venture round. We were there to see if AngelList might be a good avenue for NSFWCORP to raise some capital.
AngelList certainly didn’t feel like a frantic startup. We sat in a glass encased conference room and watched AngelList’s employees play video games, eat, and drink. One even serenaded a girl with a guitar. Anything but work. They seemed to be play-acting the company’s hippie-ish peace sign logo in some sort of startup performance art.
At one point during the meeting, Paul remarked on the absurd scene-- with something funny and acerbic and British, I’ve long since forgotten what. Ravikant rolled his eyes, “Honestly, I’m lucky to get a good eight hours a day out of these guys.”
Looking at all AngelList has done with a small team, that’s clearly not quite true. But at the same time, the lack of the usual macho startup intensity is very AngelList. Ravikant leans on his team when he needs to but he gives them time to breathe, just like the platform.
He isn’t about immediate, he’s about eventual. In that same meeting he told us of his new fundraising, that he now had enough to stay in business for ten years – no matter what. That’s not usually how entrepreneurs raise capital. Typically they jump from 18-month lily pad to 18-month lily pad, hoping they’ll prove enough “traction” and “milestones” over that time to get the next round.
Ravikant did it all in one blow. He then said a phrase I’ve quoted more than anything I’ve ever heard any VC or entrepreneur say in fifteen years of doing this: “Companies only fail for two reasons: The founder gives up or they run out money.” He said it less about his business and more as advice for me and Paul: “Don’t be proud,” he said. “Get the cash wherever you can. Cash is everything.” (In a journalism startup, unfortunately, the challenges and ethics of raising money are a little more tricky than that – but that’s another story.)
In a world obsessed with the short game, Ravikant has been playing long since AngelList’s earliest days, he’s always been vague about his ultimate end game, and we’re only now starting to see how his vision is coming together.
Consider all the micro-moves, all but ignored by mainstream business press. There was the announcement back in 2012 when it launched free seed closings for startups. There was the painstaking lobbying of the JOBS act to change the rules around general solicitation. While more “disruptive” startups tried to shock and dare the SEC into action, Ravikant wanted it all on the up and up. He worked with legislators and many in the Valley to change the laws, a story he told in detail at a PandoMonthly years ago.
Then there was the jobs board he released later in 2012. Today there are more jobs found on AngelList than funding rounds.
And now we have syndicates with bigger, guaranteed check books. And an app to make recruiting fun and easy. And a way for VCs to raise near-instant special purpose vehicles to invest money they don’t already have.
The jobs app? Still free. The SPVs? Free to VCs, AngelList merely passes on the puny $10,000 cost it pays out of pocket. Everything else on AngelList? He just takes a 5% carry of the deal.
Brick. Brick. Brick. Brick. Mortar. Brick. Brick. Brick. Brick. Mortar.
Don’t mind AngelList with its hippy peace sign logo, and its “lazy” employees. It’s slowly changing, modernizing, and automating this sixty-year-old asset class.
There’s plenty of talk that AngelList is just “founders funding founders” and “additive” to venture capital, just a part of the trend that includes seed funds, incubators, pre-seed funds, and plenty of other ways thousands of startups are getting funded these days. But make no mistake: It is a threat to the way the business of funding startups has been done.
Two big things are disrupting Sand Hill Road, and Ravikant is a big part of both. I’ve talked with Ravikant about both of them for at least four years, and every single brick he lays cements the trends.
The first is proprietary deal flow, or the idea that VCs see a deal before anyone else because of their track record, logo, name on the door, or network. As Ravikant told me back in 2012 "The Holy Grail is finding a company before anyone else. That is disappearing. The idea that you are the only investor to see this deal is highly, highly, highly, highly unlikely."
The second is who does the first round. As Ravikant said on a panel with me just a few months ago, venture capital was built on being the first money in and today it’s almost never traditional VC firms who are the first money in. He said to a national convention of the country’s biggest VCs: “You have to find a way to be the first round. This is why Josh Kopelman was a branding genius. First Round Capital. He put it in the name. He’s always going to be the first round. You can lie to your LPs, but don’t lie to yourselves. You are doing Series Bs and Cs right now. You are just calling them As.”
Ravikant hasn’t just paced his rollout of new products, laying each brick laboriously on top of each hardened brick. He’s throttled the platform’s growth at several points, by not allowing every investor who wants to be on AngelList onto the platform, by worrying as he saw the capital trading over it mounting, by wanting it to be absolutely legal before he expanded the functionality, and by even today limiting the size of CPC Upshot's impact and which syndicates get that blank checkbook.
Those scared by the disruption of AngelList should be heartened by Ravikant’s approach. In differnet hands, AngelList could have mushroomed to many times its current size deals, volume and other vanity metrics. It also could have become the posterchild for this era’s funding excesses and ended in tears.
But there’s a difference between pacing and contentment. At times – like the Friday afternoon when his staff was doing everything but working – Ravikant’s calm demeanor can come off as complacent as his hippie peace sign logo.
Whether it's good news or bad depends on your point of view. AngelList is moving slowly, responsibly. But that also means it’s here to stay.
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