Angel List Syndicates: Cutting Edge Financing or Bubble?

With the passing of the JOBS Act, there are new ways to raise capital.  All the rules and regs are not written yet, but rest assured, the SEC is ticked off.  Congress hit the ball to their court.   The SEC had things zipped up just the way they liked them, and now they have to re-regulate.

English: Diagram of venture capital fund struc...
English: Diagram of venture capital fund structure for Venture capital (Photo credit: Wikipedia)

There are a lot of unknowns out there.  Will this create a new avenue for capital to flow to startup businesses?  Will it create jobs?  Will it blow up the existing angel-venture capital finance structure?

Angellist is a place where accredited investors congregate.  They can co-invest on deals, follow each other, and follow companies.  For me, it’s always been an interesting place to see what startups are out there, how many are in a certain space and to get information.

Now, it’s possible to syndicate deals on Angellist.  I created a syndicate.  You have to be an accredited investor to join.  I am not soliciting here, just informing.

I live in the midwest, not Silicon Valley.  The midwest has great soil for crops, but midwesterners aren’t exactly fertilizing the startup ecosystem with a lot of cash.  Many companies I know are looking seriously at doing all their fundraising on Angellist.

There is tremendous potential here in four market segments.  Financial Services, Healthcare, B2B services, and Agriculture.

With a syndicate, it’s possible to attract capital from angel investors anywhere in the country, or world. They can virtually partner with you.  Angellist takes away a lot of the friction in syndication.  Before, I’d have had to contact everyone, set up a meeting and then herd cats to get investment.  Now it’s point and click.

But, would you invest using point and click?

In many cases, you would.  If you knew the other investors and had a prior relationship, you might be more predisposed to cutting a check.  But what if you didn’t have a prior relationship?  It’s hard to create “trust” in relationships virtually.

As a co-founder of an angel group, I can see where Angellist could be a threat.  Why join a group when you can just sit in your home and point and click?  No dues, no meetings.

If it’s an angel group that doesn’t add a lot of value, has a lot of fees associated with it, or doesn’t provide the investors a trusted network, Angellist will put that group out of business.

But well functioning angel groups are more like marketplaces.  There is diversity, and information sharing. Members get to know each other and begin to build relationships.  Good groups know what their members networks are like, and utilize them to benefit their invested companies.  Angellist will not be a threat to well functioning groups that are like entrepreneurial marketplaces.

Will Angellist function like that?  No one knows.  It could.  Or, it could become spray and pray investing.

As an angel, am I better off cutting a check to a founder that I have never met?  Am I better off sending money to some business where it will be hard for me to have a material impact by leveraging my network?

Or, am I better off finding a group and investing close to home the traditional way?  No one knows but it will be interesting to watch.

Hunter Walk has a post up that says it might be better to stay an independent angel.  My reading  of the law says it might be better to be in a group to avoid a lot of the regulatory hurdles, than go it alone.

There are a lot of folks I know that invest in startups that would have nothing to do with an online forum like Angellist.  They don’t want to be public, and prefer to do direct investing in private.

The other piece of the puzzle that I think is totally clear to a person with my background is a lot of investing will become Bayesian.

I learned a lot trading my own money in a trading pit.  Watching people follow the big traders, watching them follow other cues.  Followers usually got slaughtered, unless they had some other leg up on the market and were able to change course easily.  I always found if I didn’t run with the herd and made my own decisions, I did better.

The probability that a company will raise a nice round will depend upon their initial investor.  Great investor with good name, the probability will be higher they will get funded.  No name investor with lack of a strong track record, Angellist won’t make it any easier.

But, does an experienced name investor know more than the market?  Can they get you a better return than a no name investor?  There is data out there that says sometimes emerging funds do better than well established ones.

If we look at funds, the data becomes interesting.  “According to data from Preqin, small funds between $50 million and $250 million were more than five times more likely to return over 2x net invested capital to LPs, and over ten times more likely to return over 5x invested capital.”

A name investor that invests a lot might not be as successful as the no name that does fewer deals.  Will the mid range investors do better than the little guys or big guys?  Time will tell.

The probability of success for the business won’t be any better or worse with Angellist either.  For startups, it’s all about finding that sweet spot and then execution.  An online portal does nothing to affect that.

Over the past couple of years, a lot of people have wondered if the startup market is frothy.  On the coasts, valuations were up.  It was easier to raise some money.  I think the reason for that is in Silicon Valley there are a lot of “acquihires”.  Google and Facebook buy a lot of companies you never hear of because they want the talent, not the intellectual property.

All of this will shake out over time.  We don’t know what we don’t know.  It’s an experiment, and it has the potential to blow up the way angels and VCs do business.

I supported the JOBS Act in principle.  But I am dismayed at a lot of the after effects.  I would have preferred a wide open system with few rules and regulations.  I think that if any American wants to invest their hard earned money in any enterprise, they ought to be free to do it.

Tomorrow, I will blog about entrepreneurs.

Enhanced by Zemanta