
AngelList and Y Combinator Continue To Shake The Trees - semilshah
http://blog.semilshah.com/2015/10/18/angellist-and-yc-continue-to-shake-the-trees/
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mmastrac
My humble opinion: Angellist's syndicates and the CSC fund are great for
startups, a bit of a negative for the long tail of angel investors and a net
positive for traditional VCs.

We're seeing a glut of capital at the seed investment stage, which means
higher prices for all and more competition for hotter deals. This means that a
lot of angels are getting forced out of a lot of deals they might have been in
before, or have to enter a deal through a syndicate and take a 20-30% haircut
on the carry.

On the other hand, we're seeing good startups getting funded now because of
the excess capital -- startups that might have had a hard time raising because
they didn't have the right cachet with the investor network and didn't hit the
right milestones to make investment an easy case. A $25k investment today is
going to be more expensive or more risky than a $25k investment a year ago.

The increase in startups coming down the pipe is a good thing for traditional
VCs. More startups are going to pass the series A hurdles and find their way
into the VC pipeline. The VCs will end up with a larger crop to select winners
from.

If you don't have good dealflow as an angel right now, I'd say that it's a
good time to sit out from the startup scene and become an LP in a fund or two
instead.

Alternatively -- I'm biased here, admittedly -- US angels should take
advantage of the strength of the US dollar and find some early-stage deals
north of the border up here in Canada before AngelList opens up Canadian
syndicates and the seed valuations rise up to meet the US valuations.

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nwenzel
> This means that a lot of angels are getting forced out of a lot of deals
> they might have been in before, or have to enter a deal through a syndicate
> and take a 20-30% haircut on the carry.

Or maybe the growth of these super-angel funds means "only" money isn't enough
to get direct access to deals. "Only" money means you're going to pay the
toll/carry. But money + advice/connections/intros/brand is your ticket to
direct participation.

At a time when startups can start with relatively low capital requirements,
the "strategic" part of "strategic investor" would seem to be the valuable
part.

But, I wouldn't worry too much about angels getting cut out entirely. If
"their margin is [your] opportunity" (Jeff Bezos), then founders _should_ be
able to get better terms from a direct angel investment. Or, maybe more
accurately, an angel investing directly should be willing to pay a higher
price given that there is no carry.

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rcarrigan87
"Second, there is a potentially perverse incentive in how Syndicates are
currently structured with deal-by-deal carry (versus the pooled risk in a
fund) that could lead to more syndicates being formed because there’s no
natural governor to modulate it."

Can someone explain this?

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jegutman
Yea, normally in a fund with 10 investments you pay carry on the net
performance of the fund. So let's say the fund is $100 and 10 investments of
$10 each. One ends up being worth $110 and everything else goes broke.
Normally the carry would be 20% of $10 (the profit), but on a deal by deal,
the carry is 20% of the profit on each investment (there was only one) so you
pay it on the $100 (110 - 10) for the one deal that made money.

This is obviously a particularly bad case, but I think if you looked at the
"normal" distribution of fund returns, it's quite a bit worse as an investor
(although unclear what the means since they're investing in different
companies potentially).

I not sure this really creates a perverse incentive, the distribution already
looked pretty close the the worst case from the investor's point of view. It's
just generally going to be quite a bit more expensive than the quoted rate in
practice.

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staunch
Software is eating old boy networks.

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jharohit
For the YC fund it will be interesting to know how much of the new influx of
funds will be diverted to the YC Research Lab initiative, which I suspect
might have a lot of upfront costs (and possibly require continuous future
injection as well). And if it really eats into this fund (assuming this fund
is not ring fenced for later stage investments only), then the concerns
outlined in this article are not really substantiated IMHO.

~~~
hkmurakami
Likely ringfenced due to fiduciary duties to the LPs for this fund.

