Mark Suster

What’s The Real Deal With AngelList?

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Editor’s Note: This is a guest post by Mark Suster (@msuster), a 2x entrepreneur, now VC at GRP Partners. Read more about Suster at Bothsidesofthetable

There’s lots of discussion out there about a new and much-loved service called AngelList that connects entrepreneurs to angel investors.

I was reluctant to write about AngelList because the debate on pros / cons is pretty nuanced. But with some heat flying I felt it worthwhile to give anybody on the sidelines a better understanding of the issues.

  • Bryce Roberts, a person whose opinion and judgment I greatly respect as well as a person I consider of high integrity has gone on record as having “deleted his AngelList account.” You should read this post. It is thoughtful and respectful.
  • Shervin Pishevar, another person who I respect wrote the following on Twitter, “Saying you don’t like @AngelList is like saying you don’t like Email. It’s a communication tool. Not an investment philosophy“. I understand the sentiment of this post and it’s how I view AngelList (like email), but I feel like it loses a nuance about AngelList.
  • Jason Calacanis weighed in with his disrespectful post calling Bryce a crying baby. I know Jason well. I know this is his style so I take it with a grain of salt. Still, as I’ve written in the past, what I love about blogging is the ability to have a public debate where we can all learn. Often my opinions shift as I read comments on my blog or others’ reactions. I think Jason’s post was unnecessarily bullying and I don’t like seeing good people bullied. So I feel the need to speak up.
  • Babak Nivi is one of the most understated, helpful and important people on the entrepreneur / startup scene in NorCal. What he gave the community with VentureHacks is a pure gift to the community. What he (along with Naval) started with AngelList is also a very important transformation to the communications between first-time entrepreneurs and angels. I am on record speaking effusively about AngelList. I believe everything I wrote then.
  • Still, I have some concerns. These are the same concerns I echoed on the phone with Nivi before they even launched. I said, “if you can help first-time entrepreneurs get access to investors – that’s golden. Still, as a VC, I value proprietary dealflow and long term relationships. If AngelList becomes too hot I worry that each deal gets over-hyped and doesn’t give investors and entrepreneurs the time to really get to know each other and decide whether to work together. I worry about that.”
  • Since I invest in lines, not dots, I worry about the rushed decision-making and over-hyping of deals. Getting to know each other before exchanging money for stock certificates is important for both sides.
  • AngelList isn’t hot. It’s hotter than hot. I worry about hotter than hot for reasons I’ll try to respectfully discuss. I know it was over heated when a deal where I wrote one of the first checks on (as an angel, not VC) went out on AngelList. An investor called the founder, spoke for 30 minutes on the phone and committed to funding having never met the team. I’m sorry, but that’s dumb. Isolated incident? I don’t know. But worth a moment of caution? Of course.
  • Robert Scoble has weighed in calling AngelList, “The New Silicon Valley Hype Machine.” I’m not sure if that’s how AngelList would like to be branded. The post is balanced and worth reading. But on Bryce’s blog he wrote the following comment, “don’t think your decision will hurt you much, because you’re part of the O’Reilly ecosystem. But it +is+ an anti-entrepreneur stance.” I don’t believe Bryce’s statements or not being on AngelList will effect him one way or the other. Mostly, I don’t believe that a VC not being on AngelList is “anti entrepreneur” – it is not.

Where do I stand on AngelList?

1. My personal use

I have no reason to delete my account. As Shervin said, it’s just email. I have now put a filter on my email so it is auto-filed in Gmail. I mostly don’t look. It has become too much noise, not enough signal. This is what I feared up front. If Nivi ever sent me a deal I’d meet the team without any question or pre-review. But AngelList is now a place where many people post deals. That’s less interesting for me as a VC.

I’m still assuming these are all pretty high-quality intros but the top end of my funnel is already full of interesting dealflow. I’m pretty easy to get in touch with. I don’t do very well with unsolicited because my volume of email is too high. Still, I live in public and am pretty easy to get introduced to.

2. My view for entrepreneurs

AngelList is a great way to market your deal. Lots of people will see it. So as I said, for this I’m grateful to Nivi and Naval for having started the service.

I cannot stress enough, though, that I believe getting access to the right investors in critical and spending time getting to know who these investors are is equally critical. Far from being a waste of time, the fund-raising process introduces you to a lot of experienced entrepreneurs and VCs who will offer opinions on your business and approach. It should be a continual process.

“Filling out a round” with extra investors you don’t know well to take a round from $500k to $750k is fine as long as those additional investors don’t have significant rights and aren’t PITAs.

Just don’t use AngelList as a short-cut for the hard work. But to be clear, used properly there is NO downside to AngelList for entrepreneurs.

3. My view for VCs

Where I think Robert’s comments are slightly wrong is that AngelList is a net positive for VCs. Most VCs fund companies with a degree of traction. If we have way more companies to observe who have money from angels to get to a point where they prove traction (or don’t) that’s a gift to the VC community. I don’t think AngelList hurts VCs at all. If anything it’s complementary.

4. What about “seed” investors?

I don’t believe AngelList hurts seed investors either. I believe that AngelList will increase the total number of deals funded in the same way that YCombinator does. Great seed investors like Bryce Roberts / OATV (and other great ones like FloodgateFounder CollectiveIA Ventures or Rincon Ventures) still get all the dealflow the need.

If I were a founder I would personally start with these kinds of seed funds. They bring specific expertise (e.g. Floodgate / Information Arbitrage do “big data” amongst other things), or Founder Collective (consumer and ad-tech knowledge of people like Chris Dixon) or geography (Founder Collective is in Boston / NY, Rincon is the best early-stage in Southern California).

I would consider supplementing with AngelList to see whether you can bring on additional value-added angels. That way you can have the best of a fund that has deeper pockets and angels so you can have more people helping.  If you haven’t read my post on “how many investors are too many” I describe it all here.

5. What about “angel” investors?

Here is where I actually worry the most. There are many sophisticated angels and I suspect AngelList is a perfect tool for them to organize dealflow. Nivi and Naval are doing a great job of making it more useful by adding geographies and such. It will be a great way of organizing your dealflow as a sophisticated angel.

But there are many angels who either don’t have enough money to allocate to this class of investment or don’t have the experience to drive real returns from angel investing. Let’s just say this: if you’ve invested through boom and bust cycles then you have a realistic perspective. If you’ve been in only boom cycle or have invested less than five years you’re in for some surprises.

I wrote a series on angel investing in direct response to my fear that everybody was becoming an angel investor and I felt I had seen this movie before.

I feel angels need:

My biggest fear is that people confuse the “social proof” of other prominent investors on AngelList for real insight. Indeed, in a bubble people generally chase what other people are chasing leading to group think. The most innovative ideas are the ones that other people aren’t doing yet. How’s that for irony?

Still, we’re nearly 2 years into a bull market for angel investing (read: bubble) and 1 year into a VC bubble. Prices are crazy, behavior is turning herd-like and deals are being evaluated too quickly and terms are skewing toward the inane. I decided to stop talking about this publicly because I realized that nobody likes to hear this. But privately here is what I say every week,

“I was at the dot com cocktail party in 99-2000. We were all drunk and stupid. The hangover was sure painful for everybody involved. 2011 is one big cocktail party all over again. Different kind of party, but the margaritas are a flowing just the same. This time I’m sober. And after writing my previous post about the market being in a bubble, I learned this:

Nobody drunk at a party likes to hear the sober guy telling them how silly they’re acting after five drinks. So I’ll keep my mouth shut for now. And in the morning when there’s a bad hangover, I’ll also try to not remind people how they acted.

Still, if I can help a few people privately put down their next drink I think they’ll thank me one day.”

That’s how I feel. Enough said on that topic – enjoy the party.

And I worry that there are too many angels out there who have never felt the morning as angels. So they’re sprinkling their money. Let me turn once again to the wisdom and knowledge of Nivi and Naval in their angel investing guide.

  • Don’t do this to make money becaase you probably won’t
  • Assume your investments are lost the day you make them
  • Balance your portfolio with ultra-safe investments

Hear, hear.

On Bryce’s post:

It was a thoughtful and legitimate contribution to the debate. Jason’s response was not only unnecessarily bullying but it was wrong. There is a transformation in startup land – it is cheaper to launch a company. But this doesn’t negate the benefit of having valuable investors with real experience. I have come to accept that combining higher-volume investors like Dave McClure with focused investors like Bryce or similar can be a smart strategy.

But to his point that, “Today things like Angel List have boxed out VC–especially small ones like your firm–to the point at which you are not needed in the food chain” is inaccurate. To encourage people to run from skilled investors is bad advice. Ask anybody who has worked with a hand-on early stage investor (Fred Wilson, Josh Kopelman, Jon Callaghan) and they’ll tell you they wouldn’t do it any other way.

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