The Right Investor
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B BUS 471
AngelList Case
November 12, 2014
Case Summary
The insight approach that RaviKant and Nivi used to identify the need for AngelList was to simply bring starter-ups and investors together. Many start-ups had a difficulty of finding the right investor to help them launch their big or small ideas into reality, and thats the need that Ravikant and Nivi saw, so they set out to break that barrier. Ravikants vision for AngelList was to create a more transparent and liquid market for the services that new and existing start-ups needed by helping them have easier access to funds and talent acquisition through Syndicates, Fundraising, and talent identification. The syndication process help entrepreneurs have access to more cash through the lead and their back-ups. Investors and ready to invest, and entrepreneurs are hungry for money to fund their start-ups.
This move was definitely an attractive business opportunity because their initial intention was to create a blog they can use to give advice and information for start-ups, and the fact that they were able to turn it into a platform for start-ups to meet their potential investors makes it attractive. The attraction doesnt only stop at bringing entrepreneurs and investors together, but it goes a long way to help them avoid transaction cost and administrative friction that made investments difficult for both parties in the past. The fact that AngelList also profited from the talent introduction fees, small fees from the carry, and create a partnership with SecondMarket, is an attractive business opportunity for them.
The Syndicates product changed the incentives and behaviors of the early stage investors by:
A: Allowing investors to manage such a large pool of their capital with the help of backers. The incentive behind this is that with backers putting the bulk of the money together, the lead investor still gets to manage the funds, and in turn gets a carry fee that can sum up to 15%. This also allowed investors to be able to diversify their investments to start-ups as low as $1000 per start-up.
B: Eliminating transaction costs and administrative friction is another incentive because those fees imposed a difficulty in investments in the past.
C: The hassle institutional investors faced through dealing with middlemen, their management and performance-based fees were eliminated, and thats another incentive that change in the early stage investors.
D: Many of the steps in the closing time were automated so that the frustration of taking forever to close a deal was eliminated.
I do belief that Ravikants vision that syndicates is scalable because AngelList did not only stop at bringing investors and entrepreneurs together, but it spread its wings to the various ways it can make money from their services, and in the process scaled itself there by raising $24million in financing and valuating at $150 million. For example, as of 2014, AngelList was charging companies $2000 per full time hire made through their platform, which is basically a fraction of what recruiters would have charge employers to help them find potential employees. Not only did they stop there, they have the potential of helping entrepreneurs connect with lawyers, accountants and customers which is a whole new market for them. There are lots of growth opportunities for AngelList, which include but not limited to entering the real estate and entertainment industries. Also, the fact that AngelList received assurance from the U.S Securities and Exchange that they can earn a performance-based fee without a broker-dealer status, which means that they only make money when investors make money based on their performance from investments is also scalable. The 5% carry they earn from backers, and potential 0-15% for the lead investor, elimination of transaction and management fees that were traditionally charge to investors and entrepreneurs is another reason they belief that syndicates is scalable. The Self-Syndication, which is a variation of Syndicates that helped start-ups syndicate on their own by having at least a $100,000 from a lead investor is also scalable because the self-syndicated start-up paid 10% carry to AngelList. Finally, the AngelList Talent that brought failed entrepreneurs that were highly employable together with successful entrepreneurs that needed the necessary talents to take their businesses to the next level by evaluating each other through interface is another reason why AngelList is scalable.
If I were a venture capitalist, I dont think AngelList is a good thing for my business model. It is really bad for my business model because as a venture capitalist, there is usually a high risk involve in investing in a start-up, and to compensate for the risk, they usually own a large chunk of the start-up together with equity, and significant control in order to protect their investment. With AngelList, the sense of protection is taken away from them because the platform of AngelList allows angels to become leads through Syndicates, and basically take the role of a venture capitalist without labeling themselves as