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AngelList, CapLinked, And Financing Marketplaces

Posted on Friday, Mar 4th 2011

AngelList has been generating  a lot of buzz recently. Today, Business Insider has a piece claiming that they are scaring VCs to death. Really? I have a hard time believing that! In any case, I thought this would be a good time to give readers my perspective on AngelList, as well as other fund raising services that are coming into the market like CapLinked, which has recently raised money from star investors like Peter Thiel. Other related services are SecondMarket, Kickstarter, ProFounder and Invested.In, the latter three specifically focused on crowd funding (not CapLinked’s approach), while the first is more of a brokerage.

I like these services, most of all because they are injecting a level of liquidity to the startup community that did not exist before and democratizing our otherwise elitist business dominated by the mafia of certain elite institutions (my alma mater included). If you recall what I suggested as a vision for Capitalism 2.0, it is precisely this kind of democratization that would help create a more distributed entrepreneurship ecosystem.

And I love how Naval Ravikant has explained the phenomenon:

Ravikant: There’s no question that prices and valuations have shot up. There’s a couple reasons. Number one: VCs are seed investing, and they are less price sensitive. Number two: there’s a lot more money around in general and lot less opportunities to deploy it. Traditional investments like real estate and bonds are poor asset classes.

So there’s a global macro bubble in safe haven sectors, and oddly, a diversified portfolio of startups suddenly seems relatively less risky to say, government bonds, than two years ago.

And a third reason is that entrepreneurs are getting more done before they raise cash, thanks to free leverage from the iOSAndroidFacebook, Twitter, GoogleAmazon, etc., so they’ve made more progress and created more value before the money shows up.

But there’s no giant macro bubble in early stage startups. There just isn’t enough cash. Even if every early web startup blew up, it would have no immediate effect on Ben Bernanke’s dashboard. It wouldn’t warrant a single bailout. The total additional capital invested in early-stage went up by $500 million to $1 billion. That’s just one small hedge fund or large VC fund.

So there isn’t one big bubble. But there may be lots of small bubbles.

One thing that might be worse is that this time, $10 million might be scattered across 20 startups, whereas last time it was in one or two. So the number of companies failing will be a lot higher, even though the wealth and employment impact will be the same. But it’ll just look really bad in the headlines as company after company goes out of business, even if they’re all just 2-4 person shops of 18-25 year olds who would have been working in bad jobs otherwise.

So a positive outlook might be that since most VCs and angels lose money, we’ve found a way to efficiently tax the rich to fund the education of the best and brightest. Because these young entrepreneurs are getting an education better than any grad school; instead of having to go get jobs, they’re expected to create jobs, instead of paying they’re getting paid and instead of learning, they’re researching, creating, teaching.

So, the net effect of more companies being created is great. That young entrepreneurs are getting their feet wet in entrepreneurship early and at a faster rate is great.

My personal interest is to see that we can also help these entrepreneurs become successful. So I am all for more startups, more entrepreneurs, more financing. But I am also for trying to reduce Infant Entrepreneur Mortality, which I have set as one of the missions of 1M/1M.

Now, as for VCs being upset – I have a hard time believing that. There is very little classic seed/early stage investing that goes on in the venture business, anyway. So all this extra liquidity is doing is to create a bigger pipeline for the VCs and their late stage investment strategy, which, by the way, is where they seem to be the most comfortable, and largely focused these days, anyway. So why would they be scared to death? Instead, they should be focusing on raising their large funds, as Bessemer and Greylock have signaled recently. The management fees are great with the large funds, and as we have seen over the past decade, VCs love big management fees. [Read: Fund Envy on Forbes]

I see the new excitement around financing marketplaces as the market’s response to fill the gap that opened up in the last decade when VCs started abandoning early stage funding, and moving to late stage, large funds, and chasing big management fees.

As for entrepreneurs, there are three options: bootstrapping all the way with no financing at all, bootstrapping with some angel money and getting to an exit, or bootstrapping to angel financing, and then on to venture capital. These were the three options all along, it’s just that, now, we have more angels in the market, and the level of liquidity may be higher. Hallelujah!

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Thanks for bringing some sanity to the faux-debate, Sramana. The BI article is pretty balanced too, but the headline there is designed for maximum clicks :-) There are 400 happy VCs active on AngelList, and increased liquidity is good for the ecosystem, and by extension, for the vast majority of its inhabitants. I like your phrase “Infant Entrepreneur Mortality,” and will use it (with attribution) going forward. IEM will, unfortunately, rise, but it’s a sign of “creative destruction” and faster iteration as much as anything. I owe you an interview as well. Just suffering from press exhaustion, but we’ll get it done.

Naval Ravikant Friday, March 4, 2011 at 1:20 PM PT

Naval, IEM doesn't HAVE to rise. Let's chat when you come up for air.

Sramana Mitra Friday, March 4, 2011 at 2:13 PM PT

Very nicely answered Sramana! I too believe that angels have infact helped VC better sort the startup clan. This is a Win-win situtation for all the stakeholders in ecosystem.

kinj28 Friday, March 4, 2011 at 9:56 PM PT

I really like this fact based – unbiased recap of Angel / VC investing and the entrepreneurial ecosystem. Loooking forward to a net effect: more bright people starting a company rather than looking for a job – and seed money available to support the brave.

aparmegg Friday, March 4, 2011 at 11:41 PM PT

I agree with all that's been said, but encourage you to have some perspective on the world outside the major technology centers and outside internet-enabled businesses. In terms of the raw number of startups – 600,000 a year in the US – how many are affected by this trend?

Don Gooding Monday, March 7, 2011 at 5:05 AM PT

Don,

1M/1M is working with entrepreneurship communities far, far outside the major technology centers. For now, we are focusing heavily on technology and technology-enabled businesses globally, and that probably covers at least a few hundred thousand businesses around the world if you consider e-commerce, outsourcing, etc.
Right now, about 20,000 e-commerce companies are coming online every week in the US alone, so presumably, if we can help these businesses succeed, that would go a very long way in reducing IEM.

As the Internet penetration in the world increases further (China, Indonesia, Brazil, India – major movers), the impact of Internet / technology / technology or Internet enabled entrepreneurship will be enormous.

In my opinion, this is a perfectly worthwhile area to focus, and will impact billions of dollars in global GDP.

In addition, many brick and mortar businesses use the Internet as one of their most significant marketing channels. Look at hotels, restaurants, spas, stores – everyone has to understand and embrace the Internet.

Sramana Mitra Monday, March 7, 2011 at 10:49 AM PT