
AngelList Announces $400M Early-Stage Fund - albertwang
http://www.wsj.com/article_email/coming-soon-from-china-a-400-million-bonanza-for-u-s-startups-1444622462-lMyQjAxMTE1NTEwMjgxMjI2Wj
======
DanBlake
Naval is such a genuinely nice and caring guy. So many investors say they are
entrepreneur friendly, but hardly any of them live up to that when things get
hairy. Naval is a guy who absolutely lives the mantra of putting entrepreneurs
first and goes above and beyond to help them out in so many ways. There is a
long story about the stuff he went through to get where he is (when he was at
epinions), google for it- its worth a read.

I wont get into it too much, but I owe alot to Naval for where I am today. The
help, advice and just conversations he gives to entrepreneurs is completely
'no bullshit, no fluff'. All in all, its very refreshing to see that AngelList
has risen to the top and has helped disrupt the 'old boys / sand hill road'
way of doing things.

~~~
rbres
++

Naval is an unbelievable investor, entrepreneur, and friend. He's completely
founder aligned in a way that is almost unheard of in silicon valley. Someone
you don't have to watch what you say and can simply be direct with. I've only
recently gotten to know Naval. But, immediately, he's risen to the top as my
favorite person to work with hands down.

Truly a unique founder ally amidst the staunch traditionalism of silicon
valley investing. Can't wait to see AngelList continue to change/democratize
fundraising.

------
albertwang
Blog post with full presentation and more details:
[http://blog.angel.co/post/131017147560/csc-
upshot](http://blog.angel.co/post/131017147560/csc-upshot)

------
EGreg
_Imagine some combination of the crowdfunding website Kickstarter and the
social-networking site LinkedIn, only everyone on the site has to be an
accredited investor. Early-stage startups show up, hat in hand, and 165
different angel investors, called “leads,” evaluate them.

If an investor likes what he sees, he can put in some of his own money, while
encouraging other investors, who are part of what is known as his syndicate,
to fill out the investment with their own funds. These first investments
average around $315,000 per startup._

Wait, what? We joined a few years ago and put several of our existing
investors on there. We're not well connected on the west coast and I never
heard from anyone major on the site. Was our company evaluated by one of those
165 people who then lead a syndicate? How does it work exactly? How do they
discover startups that are on the site?

------
memossy
It looks to be a pretty smart strategy, take the top 50 syndicate leads, put
avg $400k behind them in year 1 ($20m investment).

This grows platform, in year 2 put $500k behind top 100 syndicate leads ($50m
investment) as more money available for syndicate leads.

AngelList takes the management fee on the $400m ($4m a year say as a "fund of
funds" at 1%), 5% carry on the syndicate. Note 99 max investors per

The syndicate leads take the carry and do most of the due diligence, CSC
Upshot gets to follow on on whatever deals they like most.

~~~
7Figures2Commas
> The syndicate leads take the carry and do most of the due diligence...

What leads you to believe the syndicate leads are doing real due diligence?

~~~
memossy
> What leads you to believe the syndicate leads are doing real due diligence?

Never said real due diligence, just most of the due diligence that is actually
done

However, if one is investing in 1,000 startups then due diligence is actually
of less importance as you approximate a normal distribution of returns..

~~~
7Figures2Commas
> Never said real due diligence, just most of the due diligence that is
> actually done

Which in a lot of cases is zip, zilch, nada by professional standards. A few
lunch conversations and "social proof" don't constitute due diligence, but
that passes for a lot of angels in Silicon Valley.

> However, if one is investing in 1,000 startups then due diligence is
> actually of less importance as you approximate a normal distribution of
> returns..

The problem is that the "normal distribution of returns" could easily turn out
to be very different from what you expected. Markets aren't static. A lot of
fund managers who rushed to buy boatloads of subprime MBS without doing their
own due diligence learned this the hard way. They simply relied on the credit
rating agencies and assumed everything would work out.

Here, you don't even have credit rating agencies. You have a hodgepodge of
individuals ("syndicate leaders") who are black boxes. Just look at this[1].
According to [https://angel.co/syndicates](https://angel.co/syndicates), he
has the fifth largest syndicate on AngelList.

Pure madness.

When it comes to investing, ignore these words of wisdom at your own peril: do
your due diligence or eventually your due diligence will do you.

[1]
[https://news.ycombinator.com/item?id=10036321](https://news.ycombinator.com/item?id=10036321)

------
pbreit
Surely they could have sourced such an investment domestically?

~~~
7Figures2Commas
I'm not sure you could _easily_ find one LP willing to put up $400 million for
a fund that, according to the article, will potentially make more than 1,000
investments. AngelList, because of its platform, obviously has a way to deploy
this capital more efficiently than a typical firm, but these types of small
early-stage investments are still fraught with challenges and I think
sophisticated domestic LPs who have experience in venture capital would be
very skeptical.

As the WSJ article implies, CSC may have certain motivations that a domestic
LP wouldn't, such as a desire to get capital deployed outside of China. And
fast.

Personally, this looks like dumb money hoping AngelList can turn it into smart
money. It could very well distort market for early-stage startup investments,
but it isn't likely to change the way these investments tend to behave in
terms of returns.

~~~
mbesto
There is a big trend in Chinese PE throwing money into the US market with
expected returns that much lower than what the western market would expect,
and therefore western PE is continually being outbid by the Chinese. So, even
if Chinese get lower returns for their capital in the US than typical PE's,
those returns are still higher what they would get domestically in China.

~~~
7Figures2Commas
Yes, and the Chinese have logical reasons for accepting lower returns because
they're exposed to risk in China that domestic PE firms aren't exposed to.
This said, it should be noted that when the music stops, these firms aren't
guaranteed a return at all. Many of them are going to lose. It's just a
question of how much.

------
musha68k
It would be interesting to see the effects of a combination of something like
AngelList together with robust decentralized technology for identity and smart
contracts. How much work is still ahead of us until I'll just have to set up a
new team on a service like AngelList which will be a globally accepted
business entity?

------
sschueller
Why does AngelList needs so much cash?

~~~
morgante
AngelList isn't using this money for their own operations, they're using it to
invest in hundreds of other startups.

You question is equivalent to asking "Why does KPCB need so much cash?" to
which the obvious answer is "so they can invest in interesting companies where
are likely to generate substantial returns for their partners."

------
graycat
> We are, as ever, either at the dawn of a golden age of startups and
> innovation, as technology’s boosters claim, or soon we’ll be shaking our
> heads that investors ever believed the market for startups was as big or
> fast-growing as they thought it was.

Well, for at least 10 years now, _traditional, mainstream_ US _information
technology_ (biomedical is different) venture capital has been essentially
stuck in the mud due to a _dirty little secret_. As a result, on average,
_returns on investment_ (ROI) have been low, e.g., as reported in Kauffman

[http://www.kauffman.org/newsroom/2012/07/institutional-
limit...](http://www.kauffman.org/newsroom/2012/07/institutional-limited-
partners-must-accept-blame-for-poor-longterm-returns-from-venture-capital-
says-new-kauffman-report)

and at AVC.com, the blog of Fred Wilson of Union Square Ventures

[http://www.avc.com/a_vc/2013/02/venture-capital-
returns.html...](http://www.avc.com/a_vc/2013/02/venture-capital-
returns.html#disqus_thread)

Here is, apparently, what the secret is:

It used to be that venture capital firms could invest in a project described
only on a napkin, but this practice was brought to nearly a halt.

How? _Traditional_ US venture capital gets nearly all its funds to invest from
its _limited partners_ (LPs) which are mostly pension funds, insurance
companies, wealthy individuals, sovereign wealth funds (likely Mideast oil
money), hedge funds, and not much more.

Well mostly the LPs are quite conservative, invest only a tiny fraction of
their funds with traditional information technology venture capital firms,
and, apparently, have a relatively uniform _deal_ with such firms.

The deal: Invest much like private equity investment, that is, in a company
evaluated mostly via standard accounting except instead of revenue be willing
to substitute _traction_.

So, here's the _recipe_ for traditional US information technology venture
capital:

Look for a company (1) exploiting information technology, i.e., Moore's law,
computing, the Internet, the Web, the _cloud_ , mobile, etc., (2) with a novel
product/service, (3) addressing a huge market, (4) with traction significant
and growing rapidly, (5) that is desperate enough for some cash to be willing
to accept onerous terms.

So, here are some of the weaknesses of this traditional approach:

(A) Any _development_ work, e.g., writing software, needed for (4) traction
has to be already funded and done.

Result: This part of the _deal_ means that usually the development work has to
be what a few guys can do on a diet of Raman noodles, and that severely limits
what products/services can be offered.

(B) The _deal_ does not permit giving weight to real progress in research or
technology; so, venture partners will not attempt to evaluate such progress
and, indeed, nearly never have the background to do, or even direct, such
evaluations. Again, the evaluations are basically to be much like in private
equity, that is, based on traditional accounting.

Result: The companies that get venture funding are doing little or nothing to
exploit original research or technology. Maybe something about a market niche,
a user interface, or a partner list is novel. But, from US national security,
there is now a history of 70+ years of the astounding power of original
research and new technology, and, with the _deal_ of the LPs necessarily, that
power is nearly always neglected.

E.g., for a joke, venture capital would have said: You build and test the
first one, build and test the B-29, build a good base in Tinian, and build a
good base in Iwo Jima for fighter escorts, and for 30% ownership with BoD
control, a full ratchet, and 2X liquidation preference we will chip for in
half of the aviation gas for the Enola Gay. In other words, that is _vulture_
capital.

We should not expect _vulture_ capital to do much to bring us to

> ... the dawn of a golden age of startups and innovation ...

and it has not.

So, as a result of weaknesses (A) and (B), the information technology startups
are on average much less valuable than they should be. So, in particular,
there is an opportunity to do much better, in particular, to get much higher
ROI.

AngelList and YC have a chance for this progress and, thus, to _disrupt_
traditional US information technology venture capital.

If the CSC in the OP is willing to consider being an LP with a new _deal_ ,
then there is a chance of

> ... at the dawn of a golden age of startups and innovation ...

and much higher ROI.

~~~
vasilipupkin
Really? Venture firms in the past invested into projects described on napkins?
Is there any data to support this assertion ?

~~~
ThomPete
You have to think about that in the past building a company was actually much
much harder in every respect.

You didn't just build and app or used aws. You had to spend a lot of money on
getting things set up.

And if the problems where genuine enough then I think it's fair to say that
this happened much more often. But I don't have any data to back it up only my
own experience.

~~~
graycat
Yup.

> had to spend a lot of money on getting things

When I was at IBM's Watson lab, the PC on my desk had parts worth a total of
$50,000+.

When I bought my first PC at home, from Gateway, it cost me $10,000+. Single
core, 90 MHz clock.

Later a friend and I considered a startup, I went shopping, and saw that parts
for a good PC would run ballpark $6,000 -- we didn't do the startup!

Later I wanted a more up to date PC, and the parts cost about $5000. So,
single core 1.8 GHz processor, that is 1800 / 90 = 20 times faster for half as
much money.

Now I'm shopping for the first server for my startup. I've been assuming that
the parts would cost about $2000. Nope: How about $1000, for a processor with
8 cores, at 4.0 GHz, with 32 GB of ECC main memory, etc.

But I already have a spare screen and power supply, now really want to do
backup from one hard disk to another, both internal, and to a 2 TB external
hard disk via USB so don't need Blu-Ray.

And good 1 TB hard disks go for about $60 and, thus, make room enough for
internal disk to disk backup surprisingly cheap and easier than working with
Blu-Ray disks.

And main memory prices are significantly lower: E.g., the Kingston, 32 GB of
1600 MHz ECC main memory

KVR16E11K4/32

was $429 but now is easy enough to find for $230.99, nearly half price.

So, $700 gets such an 8 core box.

But, for my first server, really not sure I need the full 8 cores, 32 GB of
main memory right away so could settle for 4 cores with a slightly slower
clock and 16 GB of main memory and three disk drives 1 TB each, for under
$400.

So, start with a $400 server and, if it stays busy sending Web pages with ads,
then the ad revenue just from on the way to getting busy should be much more
than needed for some high end servers.

And now 1 GbE IP routers are much cheaper, too!

And for $90 a month my ISP can give me a connection with a static IP address,
no ports blocked, and upload bandwidth of 35 Mbps. Half fill that 24 x 7
sending Web pages with ads, and should be able to show a profit!

Several US locations have 1 GbE service!

Prices, they've been a coming down!

It used to be, to bring up a busy Web site, needed big bucks to, say, Sun and
maybe a T3 leased line, etc.

Now nearly everything about bringing up a Web site is much easier and cheaper
than 10-15 years ago.

E.g., my startup is based on Windows, so I get to use IIS and ASP.NET for the
Web site, ADO.NET and SQL Server for the data base, parts of the rest of .NET
for more, e.g., de/serialization of instances of classes for program to
program communications over TCP/IP sockets. Some big sites use this
infrastructure; it should work well enough for my startup!

E.g., I wrote my own Web site session state server key-value store using
TCP/IP sockets, de/serialization, and two instances of a .NET collection
class. The .NET collection class was great fun to use! Terrific
infrastructure.

Much easier, cheaper than 10-15 years ago!

~~~
ThomPete
Wow

Thats a great way to put things in perspective. Thanks for that. If you don't
mind I would love to use this as an example of the difference between now and
then in one of my future essays?

~~~
graycat
Go for it! Call it OSS! Glad to contribute!

------
rebootthesystem
The China part bugs me.

Why?

First, there's plenty of money in he US and Europe. I feel they could have
worked a bit harder to secure non-Chinese funding.

Second, like it or not the world is engaged in an economic war with China. The
industrial bases in the US and Europe have been destroyed to the point that
entrepreneurs have trouble finding such things as machines to sew socks.
Issues abound across a myriad of industrial segments.

While some in the western world might be all hippie/feel-good about China this
is at the cost of ignoring what has been going on. Before you call me a
paranoid asshole consider I've been manufacturing products in the US for over
thirty years. During that time I have seen, first hand, what the reality of
manufacturing has become. Over the years I've seen vendor after vendor
systematically taken out by China's expansion into every nook and cranny of
industry, even in areas you'd think make no sense.

Now the Chinese are going to insert "probes" into thousands of startups by
means of providing insignificant (to them) funding. This will give them
unparalleled visibility into trends, products and whole new industries ripe
for pillaging.

AngelList is a fantastic resource. I am sure they could have made an effort to
source this fund in the US and Europe. In the grand scheme of things $400
million is not that much money with the clout AngelList has, particularly if
spread across a range of investors. I, for one, would not want to have a
Chinese investor.

Down-vote away.

~~~
robbfitzsimmons
Even taking your skepticism about Chinese investment at face value, having LP
involvement is tremendously different from operational involvement or
investment committee involvement.

Having been involved in LP reporting at a seed fund, I can say that it happens
regularly but infrequently (quarterly, or at most monthly) and at a 30,000
foot level. I've really never seen LPs interact with portfolio companies at a
seed stage, beyond chatting at a cocktail party after the annual meeting.

Besides, given the nature of the platform, if they're looking into trends and
products, isn't that information publicly available (this is just adding money
behind the top syndicate deals on AngelList)?

~~~
rebootthesystem
You are probably absolutely correct. Yet, based on watching what's gone on
with China from my front seat in manufacturing I can't help but remember a
multitude of instances where someone said something akin to "what's the big
deal with having them ..." and few years later they are out of business or
hooked to China in a big way.

China looks at things at a different time scale than we do. Among other
things, companies can sell at insane prices because they make their profit at
the end of the year when the Chinese government hands out 15% "bonuses" on
their exports. I've been in businesses where a 15% net at the end of the year
would have been a dream.

When you are dealing with someone who has been systematically eroding your
industrial base over decades you have to, at one point, take pause. I know I
might come off as paranoid, I get that. There's a reason for that. I have
experienced the "China effect" personally. It can be absolutely devastating.
And nobody is doing a thing about it (not sure it is possible to any more).

------
spike021
Unfortunately I had an experience with Naval completely the opposite of what
you're describing. I'm a student and had heard of him before several times
along with using AngelList. Earlier this year I saw him walking in downtown
San Francisco with somebody else, so I thought I would say hi and introduce
myself for a moment since he seemed like a nice person.

I think they must have been having some kind of very important, heated
conversation because as soon as I went up to him and simply started to say
"hi, hope I'm not interrupting...", he stopped me and said "we're having a
conversation!!" and kept walking.

Most likely it was just the wrong time and place to do that but unfortunately
I now have a pretty disappointing first impression of him.

~~~
morgante
Sorry, but in what universe is it considered rude to _not_ talk to random
strangers who interrupt you in the street?

I certainly don't think you should hold this experience against him. Hopefully
he doesn't hold it against you.

~~~
DodgyEggplant
"We're having a conversation!" is a perfectly legit saying, even to someone
who is not a stranger on the street. On the other hand, Naval is a celebrity,
and it's more expected for a celebrity to get such requests - maybe not
wanted, but probably common. The deeper question is less anecdotal: to what
extent, to cite Kevin Spacey (who cites Jack Lemon), the tech community sends
the elevator back down. In this respect, AngelList has done a tremendous
change to open more opportunities to more people. It actually opened the
closed doors to many, and great news they are taking it to the next level. If
this fund succeed, even more funds will follow.

~~~
morgante
> On the other hand, Naval is a celebrity, and it's more expected for a
> celebrity to get such requests - maybe not wanted, but probably common.

I'm not sure I agree. He might be relatively prominent within the SV startup
community, but that doesn't make him a celebrity. The vast majority of people
(heck, the vast majority of engineers) would have no idea who he is.

