Last July, thousands of investors and Silicon Valley watchers received an email about a mobile app that is trying to become the "Uber of shipping." Shyp users snap a picture of the item they want mailed, and a courier—the company calls them "heroes"—arrives to carry it away. The cargo gets packed at a warehouse and sent by U.S. Postal Service, or a private competitor like UPS.
The email, which included a link to Shyp's slide presentation, explained the business model: offering reasonable prices by getting volume discounts from shippers. (In a juicy aside, the email mentions that shippers give Amazon a 90% discount.) As a result, it says Shyp generates a 20% to 50% gross profit per pick-up. The founders were looking to raise $500,000 in debt financing.
There are scads of companies right now calling themselves the "Uber of" some industry or another. And nothing in the LinkedIn profiles of Shyp's founders, two Canadian engineers who met at another San Francisco startup the year before, would stand out to an investor. Most companies with this profile might wind up at a pitch-fest, or perhaps land a spot at an incubator. A lucky few might land an elevator pitch meeting with venture capitalists.
But this particular email was sent by AngelList, an influential startup investing platform. As a result, Shyp's CEO and co-founder Kevin Gibbon says he received dozens of queries from investors leading to about 50 meetings. By September, the company closed on $2.2 million in equity funding. The major investors were a firm called Homebrew, which is run by former product guys from YouTube and Twitter, and a syndicate of investors led by Tim Ferriss, the hustling author of The 4-Hour Work Week who has invested in several prominent tech companies. After the Ferriss syndicate raised $500,000, he discussed the deal on his blog and, he says, another $250,000 arrived within 53 minutes.
"At the end we were turning away people we never thought we'd be connected to," Gibbon says.
AngelList is one of a vanguard of firms—such as Y Combinator, Andreessen Horowitz, and Google Ventures—that is reinventing the future of startup funding. What began as a modest, though intentionally disruptive email list has grown to become the preeminent way for seed-stage investors to find opportunities, and for startups to connect with those investors as well as prospective employees.
AngelList's "V for victory" icons now appear next to LinkedIn and Twitter share links on Valley bigwigs' bio pages. At least 85,000 startups and more than 25,000 investors have posted profiles on the site. "If you don't have a presence on AngelList as an investor or a startup," says Michael Collett, a partner with Promus Ventures which has invested in AngelList, "you're either hiding something or don't know what's going on."
AngelList has insinuated itself into Silicon Valley's exclusive investing ecosystem. it estimates that more than 2,000 startups have raised upwards of $200 million after connecting with investors on the platform. The most high profile is probably Uber, which took in a $1.3 million seed round in October 2010, several months after CEO Travis Kalanick joined the site.
The force behind AngelList is 40-year-old Naval Ravikant, a handsome Indian-American who has been playing in the tech sandbox since the late 1990s. He has an unassuming manner that can seem at odds with his evident willingness to cause trouble, not least for himself.
For the last two decades the venture capital world, centered on Sand Hill Road, has gleefully upended industries like music, television, and publishing, all while remaining relatively hidebound itself. The traditional VC model relies on a tight network of firms capable of raising funds worth hundreds of millions or even billions. Over the same period, the cost of starting an Internet company has dropped precipitously. This has created an asymmetry between startups looking to raise six or low-seven figure investments and the major VC firms which have migrated to more established companies where they can park tens of millions in growth capital.
It's an exclusive community where companies seek out "smart money"—investors with networks and expertise that can help them—and insiders guard their edge. "This market just operates very much in the shadows," Ravikant says. "There's still, I think, some lingering sense amongst a lot of investors that, ‘That's my proprietary deal flow. Only I get to see that deal, and therefore I'm special and unique.'" While Ravikant mocks this clubbiness, AngelList is also very much a part of it.
In September, his company closed on $24 million in venture capital with investments from Google Ventures, Atlas Ventures, and prominent tech world types like Marc Andreessen, Mitch Kapor, and Max Levchin. In Silicon Valley, investors are willing to undermine their own business model.
AngelList has also been touted as part of a long awaited shift which could open early-stage deals in the next Snapchat, Twitter, or WhatsApp to some members of the general public. The company is unlikely to fully realize that idealistic narrative, but it could make Ravikant a very wealthy man—and give him a measure of vindication after a deal that could have cost him his career.
The genesis of AngelList can be traced back to 1999 when Ravikant co-founded a consumer review site called Epinions. The site survived the dot-com bust, and in 2003 it was bought by a company called Dealtime which then changed its name to Shopping.com and went public. In 2005, eBay bought Shopping.com for $634 million.
That same year, Ravikant joined several of his co-founders and employees in a lawsuit aimed at the venture capital firms Benchmark Capital and August Capital, and one of Ravikant's co-founders. In a case reminiscent of The Social Network, the complaint alleged that before the Dealtime acquisition the defendants had portrayed Epinions as struggling when in fact it had reached a two-year $12 million deal with Google that would double its revenue and boost profit by 1,400%.
"Through false and misleading representations and omissions of material facts concerning Epinions' financial affairs, business operations and prospects and how other shareholders would be treated in the merger" with DealTime, the complaint reads. "Defendants fraudulently caused plaintiffs to give up their ownership interests in Epinions for nothing."
The suit eventually settled in 2005 for an undisclosed sum. But it was an unusual move in an industry that prefers to keep its disputes private. At the time, commentators thought it would open venture capitalists to future suits. Years later a San Jose Mercury News reporter wrote that the case had rendered the name Naval Ravikant "radioactive mud" in Silicon Valley.
In retrospect, it wasn't a bad time to be out of favor with the money men. The tech industry had begun to power shift from investors to entrepreneurs. Mark Zuckerberg, as he raised money for Facebook, kept a controlling interest in his company, which he still maintains. In addition, a site called TheFunded, launched in 2006 by a spurned entrepreneur named Adeo Ressi, gave entrepreneurs a forum to gripe anonymously about their investors. Venture capitalists' kimono of secrecy slipped open a little further.
The Epinions debacle "made me far more aware of the mechanics and the rules around fundraising," Ravikant says. "Entrepreneurs didn't used to worry about the mechanics. They were just like, ‘Can I get the money? What's the valuation? Go.' And it turns out that terms matter."
In 2007 Ravikant began co-writing a blog called Venture Hacks, on what Ravikant calls the "game theory of venture capital." The posts, many of which were written by co-founder Babak Nivi, offered detailed advice on negotiating term sheets, explained which sections mattered, and which provisions were bogus. In one post Ravikant advised on how to pick a company co-founder:
Aligned motives required.
If one founder wants to build a cool product, another one wants to make money, and yet another wants to be famous, it won't work.
Pay close attention—true motivations are revealed, not declared.
"We wrote about all the different ways in which you might think it's your company, but if you sign a certain piece of paper it's actually not," Ravikant says. "You may own more than half but that doesn't mean it's your company. The control provisions are separate from the financial provisions."
Within about two years, Ravikant says he felt that the blog had covered most of what it could cover. And he found that readers were more interested in getting funding than getting advice.
By then, Ravikant also had a fund called The Hit Forge that made early stage investments. "I remember I ran into one investor and he said, ‘I have this deal—let's do this deal before anyone else finds out. I don't think he's hit the market yet. He doesn't know many people.' I thought to myself, "Wow, this is 2009. The world still works this way?"
So he regrouped with Venture Hacks co-author Nivi, and, near the end of the year, they made a list of about 25 investors they liked and let them know about interesting startups. It was a way to "open up dealflow and share it instead of holding it as this proprietary magical thing," Ravikant says.
As an investor, sharing information was potentially against Ravikant's interest. He says he didn't care. "I'm an entrepreneur who builds things and occasionally invests. I have no particular affinity towards investing and don't care about trying to preserve things the way that they are."
In February 2010, a Venture Hacks post announced the beginning of AngelList, boasting that 50 angel investors had signed up and intended to invest $80 million that year.
Ravikant describes AngelList as a way to connect parties who want to do business. "I think it's a problem that LinkedIn wanted to solve but never quite got around to," he says. "LinkedIn built the largest database of business people online but couldn't actually get them to do business transactions with each other through LinkedIn." He thinks AngelList is more like eBay or even dating site Match.com. "But we're doing it for things that have value in the hundreds of thousands of dollars."
Ravikant, along with Kevin Laws who's now AngelList's COO, also became vocal advocates for what became the Jumpstart Our Business Startups (JOBS) Act, better known as the crowdfunding act, which President Barack Obama signed in 2012. The law has attracted attention because it could enable ordinary people to invest in startups as easily as they put money into the stock market or a Kickstarter project. At this point only "accredited investors" can invest in startups. While that includes various large institutions, the government limits startup investing to individuals with $1 million net worth or annual income of $200,000.
Ravikant made two trips to Washington talking to "Senate and Congressional staffers, Steve Case, and influential Congressmen that would listen." He also helped to organize an online petition in support of the law that attracted signatures from more than 5,000 entrepreneurs and investors.
Although the law is popular in Silicon Valley, most industry players would rather surrender their iPhone than spend time twisting arms in the capital. Ravikant's time in D.C. earned him high praise in the tech world. Ravikant's reputation appeared to be restored.
But his ambitions for AngelList weren't yet clear. In February 2013, he told the San Jose Mercury News that he saw AngelList's employee-connecting service as a way to make money but that connecting investors was more of a community service. "Getting in the middle of financial transactions is a regulatory minefield," he told the paper.
A few months later, AngelList introduced Syndicates, a service that gets right in the middle of financial transactions. It enables tech luminaries to collect investor followers and funnel their capital into attractive startups. Ravikant describes the syndicates as, "Micro-VCs with no fees, no lockup, and the leads having real skin in the game." In other words, it lets tech honchos fund companies without going through the hassle of setting up a firm and spending months, or longer, courting universities, pension funds, and other custodians of the vast money pools that back venture capitalists.
"Syndicates is an old idea—we were discussing it in 2010," he wrote in an email. "It has always been the plan."
In theory, the arrangement offers something for everyone. Accredited investors can get in on deals they wouldn't hear about otherwise. Syndicate leads—who include Ferriss, Jason Calacanis, and Path founder Dave Morin—get to leverage their influence and take a "carry" on the profits from any successful deals. Companies get funding from many investors but only have to deal with syndicate leads, not scores of small stakeholders.
Gil Penchina, a veteran tech executive and angel investor who leads one of the largest syndicates, (almost $1.9 million in backing) calls it "all the best parts of running a fund," but without the lawyers, limited partners, or accountants.
AngelList also takes a 5% carry on all syndicate profits. As startup business plans go, taking a percentage on the bets placed by Silicon Valley all-stars seems like a fairly smart play.
The syndicate launch caused a small frenzy in the tech world blogosphere. While the press emphasized its potential to bring a measure of transparency and democracy to Silicon Valley deal-making, established investors started speculating about the fallout.
Jason Calcanis, now the CEO of news app Inside, wrote "the bottom half of VCs will now be wholesale replaced by [syndicate leads] like Kevin Rose, Dave Morin, and myself. The three of us have $1 million 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."
Andreessen Horowitz's Chris Dixon warned that crowdfunding could threaten tech's vaunted business climate:
When you look at the biggest crowdfunding markets—publicly traded stocks on NYSE, NASDAQ, etc—you find that a) In general, non-professional investors lose money when they try to pick individual stocks. This suggests that something similar to mutual funds would be the best mechanism for amateur participation. b) There is a constant cat-and-mouse game between regulators and sketchy market participants. If this happens with private financings, and more and more rules and regulations get added, many of the advantages of being a private company could go away.
The SEC is still settling on who will be able to use crowdfunding platforms and how much they'll be able to invest. At the moment, the law considers anyone with $1 million net worth an accredited investor. As a result, the investors who bring the least to the deal—the "dumb money," or the dumbest money anyway—are no longer lower-tier VCs, but rather any American who has $1 million but no relevant experience or connections.
Even when the new law settles, those investors may struggle to get in on choice deals. AngelList is implementing stricter controls that will favor Valley insiders and leave normals out in the cold. Naïve investors who are "going to lose their money, and be really unhappy" are unlikely to get in on a deal, Ravikant says.
In some cases AngelList even escalates its vetting process to direct contact with the hopeful investor. "If they say anything along the lines of ‘I'm going to 10-X my money or I heard about this cool…' then, no," Ravikant says.
AngelList's interpretation of democracy and transparency isn't the same thing as democracy and transparency. Even battle hardened investors can't assume that they have access to everything AngelList offers. Several VCs who have invested in AngelList say they're still meeting with companies that never appear on the site—but they might want to double check that with Ravikant. Some of the best deals, he says, are in companies that "control very carefully who can and can't see them. So you may think a given deal isn't on AngelList, but it's just not visible to you."
In one example he gave, a company coming out of stealth mode wanted to limit the deal to one syndicate. The lead "sent out the deal just to his backers. He also got a private link that he could share with investors that he knew in the real world that he wanted in the deal. He collected a syndicate, wrapped it up, and put it in the company...And then once the company comes out of stealth mode it will publish its profile and be visible and financed and ready to go for recruiting or future fundraising."
AngelList is still "far far far more transparent than anything that happens offline," Ravikant maintains. "Is it 100% transparent? No, this market will never be 100% transparent. We'll take it as far as we can."
"One thing that is already on the site is you can look at a lead [syndicate] investor and see who their backers are," Ravikant points out. "You can't look at a Sequoia [the powerhouse firm that most recently scored with WhatsApp] and see who their LPs are unless they choose to tell you, which is very unlikely."
Once the returns from their AngelList deals begin to emerge, Ravikant says the site will add investor scorecards. Plenty of private companies already rank venture and angel investors, but most charge a hefty premium in exchange for any kind of detailed report.
Opinions vary on just how far up AngelList can climb into the funding hierarchy.
One possibility is that it remains a vehicle for early-stage investing. "With every tech IPO, 1,000 angels are born," says Kevin Rose, who leads the AngelList syndicate with the most money behind it, $3.7 million. According to this version, AngelList will continue to feed emerging startups.
(Rose, who co-founded Digg, has a complicated relationship with AngelList: He's the general partner with Google Ventures overseeing its AngelList investment. Rose hasn't placed any investments through his syndicate but he says the ones he does do will be Google Ventures deals where he shares a piece with his backers. He says he won't take a carry from AngelList.).
Penchina suggested that syndicates could move into larger, later-stage investments "which is kind of scary for traditional venture." Venture capitalists tout the ways their advice and networks improve and support companies. Penchina suggests that major syndicate leaders like Ferriss, Calacanis, Rose, and himself have plenty to offer in smarts and connections.
Ravikant has a syndicate himself, and has invested in over 100 companies, but AngelList makes him even more of a kingmaker than that implies. Of all the startups funded through syndicates, he guesses that roughly 75% were featured in an AngelList email or given prime placement on the site. AngelList therefore has an outsize role in deciding which companies will get investors' attention. Just ask Shyp.
"You're not going to get a ton of attention unless there's something that stands out about you," Ravikant says. A degree from Stanford or a stint at Facebook helps, but AngelList also surfaces companies that have gained traction in users or sales, attracted the time or money of prominent people—it calls this "social proof"—or just because a company has a cool product.
Asked whether AngelList's future includes larger investments, Ravikant is more muted than some of the syndicate leads. "I don't even know if I get the right to draw the line. I think it just happens, and whatever the market decides is what it decides," he says. "What we're basically doing is, we're empowering individual angels to build these micro funds whenever they want to do a deal. There's no reason why those micro funds couldn't get larger."
"I think you'll see institutions, LPs, the classic limited partners up here backing some of these angels." But syndicate activity is "captured online forever," he cautions. "It's not like one of these little hidden deals that then you can brush under the rug and never talk about again."