The Great Venture Capital Rotation

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A couple of years ago, I was chatting with a guy named Naval, who had a site called AngelList. He had a fiery passion for helping founders and an outsider’s chip on his shoulder.

He wasn’t taken very seriously in the industry, and the venture capitalists I spoke to dismissed him as somewhere between a loon and a jerk.

I literally heard a dozen VCs dismiss AngelList and Naval. They hated it. Some hated him. 

That’s when I knew he was going to change everything.

One VC you’ve never heard of famously deleted his AngelList account in a huff (http://jc.is/16JrZnC). 

[I wonder if that VC – who turns out to be a nice guy – will ever do a follow up post?] 

Naval wasn’t a loon or a jerk; he was just three years ahead of everyone in seeing the power of decentralized funding – and it scared the living sh@#$t out of VCs.

So the petty VCs – especially the ones taking 12 weeks vacation while collecting 3% management fees and showing up late for board meetings – did everything they could to deride him. 

Last week he opened up a radical new platform called “AngelList Syndicates.” 

It’s basically a “pop-up” VC fund. 

Here’s how it works:

1. A “power angel” with a solid track record, who provides massive value, invites other angels to piggyback on his or her deals. 

2. AngelList manages that process and takes a 5% ‘carry’ for doing so. 

3. The “power angel” then gets a 15% carry. 

[Note: a carry is a percentage of the upside. So, if you invested $10k as a syndicate and it turned into $100k, there would be a $90k gain. So, 5% of that gain ($4.5k) would go to AngelList and 15% of that gain ($13.5k) to the super angel. This is fairly standard, with the top firms / fund managers getting 30-35% carry after years of proving themselves.] 

How much will this change venture capital? 

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A lot. My little ~$10M angel fund, The LAUNCH Fund, is planning to invest in 50-100 startups over the next five years. 

The average size of our investments will be $50-250k. 

I now have $300k+ in syndicates. In one week. 

One. 

Week. 

Any logical person would predict my syndicate will eventually reach $500k-$1M per deal. There is a chance that if this goes well, it might reach $2-$3M. 

There is a serious chance that I will have to TURN OFF access to my syndicate soon, because it will be too big. 

Next month, I will invest $200k in a startup I love and use every day (can’t say the name right now). 

My syndicate will join me for $300k+ (I expect). 

We will be the lead investor in this round. 

Previously I was < 10% of any given investment round. In fact, I was typically 3% of a round. 

Now I'm going to be between 33% to 100% of any round. 

That's a huge difference for the founder. 

I can now get founders fully funded and off to the races and I don't need to ask anyone for help. I don't have to ask anyone for permission. 

VCs take weeks to get their partners to agree on a deal, and I understand that’s part of their value to their LPs. 

But it also creates problems for founders, who are frequently caught up in the middle of partner conflicts (i.e. you didn’t support my Google investment and we lost $250M, so I’m going to not support your deals). It also means founders have to wait weeks, sometimes months, to get their funding closed. 

I take a couple of hours – and sometimes a couple of days – to make an investment decision. 

In fact, I typically decide in minutes.  Because at the end of the day, I’m a product guy. I can tell if a product’s good or not – and by extension, if the founders are good or not – in minutes. 

All I do is create, interview and invest in startups all day. I have a massive, unfair advantage due to my deal flow and knowledge of the space. 

Now I have a funding advantage. I can do the entire round of funding for an early-stage concern. 

So this changes everything. 

Who will this affect?

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The bottom half of VCs – the ones who don't really provide a lot of extra value – are going to find themselves never meeting with the best deals (they already have a hard time). 

The bottom half of VCs have already been at risk due to their anemic returns, so I predict this is the nail in the coffin. They’re fracked. 

Now, it won't impact Sequoia Capital (VC Firm), Benchmark, Accel Partners or other top-tier firms; they provide massive value. 

I have Sequoia Capital behind Inside.com and I see the massive amount of work they put into deals. My partner at SC flies to Los Angeles to come to board meetings. He shows up early and leaves late. He thinks about us constantly. 

Top firms are the the top firms for a reason – they ain’t going nowhere. 

But the bottom half of VCs will now be wholesale replaced by folks like Kevin Rose, Dave Morin and myself. 

The three of us have $1M in backers in the first week. That means if we collaborated on a project we can do an A-Round after a brief conference call. 

That means the three of us could have funded YouTube, Uber, Pinterest or Twitter’s angel round. 

Now, there is a long way between AngelList Syndicates and success. We have to make sure we get returns for the angels following us, and we have to make sure that we don’t include annoying people in the syndicates who slow down our founders. 

We have to make sure that the angels in our syndicates understand that 7 of 10 startups fail. And that’s a good thing! 

We want 7 of 10 to fail because that means they are trying high-variance projects that have massive implied odds. 

Chances *were*, crazy ideas like Yammer, Twitter, Pinterest, Dropbox, Uber and YouTube were going to fail. They only succeeded because of the massive skill of their founders to see the future and get us there. 

You can only succeed as an angel investor, I believe, if you are a massive gambler. You have to bet, bet, bet with ice in your veins: knowing that after dozens of failures, you’ll hit a winning bet of epic proportions. 

AngelList Syndicates is putting the power – the money and where it goes – in the hands of the angels with the most value. 

I’m so honored to be included. And humbled to be trusted in making these bets.

Let’s do this! 

best, @jason 

PS - My syndicate on AngelList: http://angel.co/jason/syndicate

PPS - The LAUNCH Hackathon is Nov 8th - 10th in San Francisco. It has a $100k investment prize from my angel fund (The LAUNCH Fund) and I’m going to syndicate the startup to AngelList. That makes the total prize for the LAUNCH Hackathon $435k right now. I’m guessing by the time the event rolls around the prize will be $500k. We’re literally going to create and fund a startup in a weekend. 

Signup for the hackathon here: http://hackathon.launch.co/apply (you must be a developer/designer – no spectators!).  

PPPS - If hanging out with up to 1,000 pre-vetted hackers (our goal this year!) is appealing to your company, please hit reply and let’s make you a lunch, breakfast, dinner or ice cream partner. We can’t do epic events like the LAUNCH Hackathon without your support. http://hackathon.launch.co