May 17, 2013 10:00 AM

Follow the money: AngelList has blown open early-stage investments

This article was taken from the May 2013 issue of Wired magazine. Be the first to read Wired's articles in print before they're posted online, and get your hands on loads of additional content by subscribing online. "Whatever you write will be out of date," laughs Naval Ravikant, describing the growth of his business, AngelList, a three-year-old startup that's transforming early-stage investment via open data. "In 2010 we had no website, just a mailing list. In 2011 we launched the site, most of it closed to outsiders. In 2012 it was an open website, but ranked and curated, and the whole talent thing was coming along. This year is different again."

By allowing entrepreneurs and investors to see which startups major players such as Reid Hoffman, Marissa Mayer and Robin Klein are investing in, AngelList is bringing transparency to the secretive and high-stakes world of seed investment. Ravikant, Indian-born, New York-bred, is an irrepressible force in the Silicon Valley investment ecosystem, having worked as both entrepreneur and investor. His restless nature is tangible in AngelList, which has featured over 42,000 businesses and provided over 28,000 introductions to potential investors in a format that's, effectively, a social network for entrepreneurs and angels.

"It's truly transformational," says Laurent Drion, founder of Brussels-based investment company Emerge, which has 25 early-stage investments and recently backed four US-based firms featured on AngelList. "We can sift through businesses by category -- we would never have had time to find the opportunities there without it."

AngelList cuts professional venture capital out of the equation, allowing entrepreneurs direct access to a class of angel investors -- typically, wealthy individuals investing their own money in the hope of backing the new Airbnb or Twitter. Many are cash-rich from other ventures that have been sold or floated on public markets; nevertheless, angel investing is not for the faint of heart -- it's high risk, as most startups will not become the new Moshi Monsters.

AngelList enables angels to "follow" each other's investments at angel.co, ranking investors by numbers of followers. Startups pitch for attention by posting their details, democratising what was once a mysterious process that was heavily dependent on personal connections. Easy to use and transparent, the platform validates the investors who take stakes in successful companies and the startups that receive funding.

It's possible to keep track of some of Silicon Valley's most successful investors, such as Jeff Clavier -- a prolific financier via his fund, SoftTech VC; Chris Sacca, formerly of Google; Dave McClure, an early employee at PayPal who runs the 500 Startups incubator; and Mitch Kapor, the founder of Lotus. Notable Europeans include Danny Rimer of Index Ventures; Michael Birch, the founder of Bebo, which was sold to AOL for £550 million; and Eileen Burbidge of Passion Capital.

As Wired went to press, Reid Hoffman, the founder of LinkedIn, was the most tracked investor on AngelList with 21,558 followers. More revealingly, perhaps, it's also possible to see the 63 angels and startups Hoffman follows. The seventh-most-followed investor in February was Marissa Mayer, the CEO of Yahoo! (14,130 followers), who was the only woman in the top 20. The tenth most-followed was Ashton Kutcher, the actor/producer/investor, with 11,917. Mayer has eight investments listed -- Getaround, Square, Minted, One Kings Lane, Brit, Airtime, Lever and Periscope -- and Kutcher has 39. AngelList's transparent approach means that profile pages have sections that allow angels to explain "What I'm looking for" and "What I do". "It's like Facebook, it's addictive," says Christopher Muenchhoff, a Heidelberg-based investor who's made 15 investments through AngelList. The platform began as an offshoot of Venture Hacks, an advice blog for would-be entrepreneurs that Ravikant founded with his business partner, Babak Nivi, in 2007. Ask why the team launched angel.co and Ravikant, 39, chuckles: "I'd say it's been half accident and half grand master plan." He explains that, in 2003, he was burned by VCs when the IPO of a company he cofounded, Epinions, failed to provide the returns he expected.

AngelList is a way of turning the tables: as Ravikant puts it, the market for private fundraising is slow and stupid, and he's helping to fix it. But can transparency in early-stage investing really democratise startup funding the way that Kickstarter has with creative projects?

Ravikant's site receives details of 100 new businesses every day, claims to have raised up to $200 million (£130 million) for startups and has a staff of 12, based in a 250 metre-squared office in Union Square, San Francisco. Despite positive indications, the venture -- set up with backing from friends and the Kansas City, Missouri-based Ewing Marion Kauffman Foundation, a charity for entrepreneurship and education -- has yet to make a profit.

One strategy they're exploring is to increase the platform's presence in Europe. "Absolutely, we want more European deals," Ravikant says. "This was Valley-oriented, but it's a far flatter world than it used to be." One European who has first-hand experience of AngelList is Rodolfo Rosini, a maverick Italian who studied at the London School of Economics. His artificial-intelligence business, Storybricks, struggled for backing until he took it to AngelList. He's now a London-based adviser to Ravikant. Rosini, 38, made his first fortune selling Cellcrypt, a mobile-phone-security business, for £16 million. After damaging his back practising capoeira, the Brazilian martial art, he spent a lot of time playing World of Warcraft while recuperating. The experience prompted an idea.

[pullquote source="] "Games are built like movies," he explains, "and the role of technology is actually under-represented. I thought, 'What technology could disrupt game-making?' And I settled on AI." The core idea, he says, is to give emotions to the computer-controlled characters in games so that they understand the behaviour of players and react to it in real time. Rosini founded Storybricks, before touring academia and then signing up professors who could bring technical expertise to the project. Then he had to raise money. "Essentially we were doing wild things and, frankly, I didn't know many angels in the UK," he says. "I talked to VCs, but we were too small. Then I was introduced to Naval." Ravikant highlighted the business on AngelList;

Storybricks took off in July 2011. Its investors include Andy McLoughlin, cofounder of Huddle; Jeremie Berrebi, cofounder of Kima Ventures; and Sunil Gunderia, a former Disney executive. "There is a cultural problem in the UK," Rosini says, mentioning the government incentives that were put in place last year offering angels generous tax breaks for investing in new business. "The average person doesn't invest in startups, they buy property. The incentives in London are now insane but still people don't do it."

But American-based investors often prefer portfolio companies to be geographically close: Rosini chose to move Storybricks to San Francisco in response to this. And he's not the only European entrepreneur who has secured funding through AngelList and made the move to the US. NewsCred, which sells media rights, has done the same thing by moving to New York; Farmeron, a Croatian startup that helps farmers manage their data, has relocated to Mountain View.

Shafqat Islam, founder of NewsCred, says it's no surprise that angels prefer close proximity to their investments -- and that this can be beneficial for entrepreneurs too. "If you take money from investors you also want to be physically near them so you can get maximum value from them," he says. "We knew that we also wanted to be close to our customers, because we are a media company."

So does AngelList have much traction in Europe? One of the joys of the platform, as Ravikant puts it, is that you can "slice and dice it" any way you want, showing how many investors are focusing on a particular location or type of business at any one time. In February angel.co/europe carried the details of around 6,000 startups, with more than 2,500 angels following them.

Ravikant says that, since AngelList's launch, 61 European startups -- out of the 700-plus that have been highlighted -- have been identified as the "cream of the crop" for investors, and more than 4,300 "introductions" have been made in Europe. He wants AngelList's influence to grow over here, but he's not sure about his strategy.

So how many European angels work via AngelList? The numbers show fewer than 1,500 out of a global total of nearly 12,000, but that number will grow as economies become ever more connected. "Angel investing was 95 percent Silicon Valley ten years ago, now it's less than 50 per cent," Ravikant says. "For every example of an overseas company raising money and moving to the US, I can now give you opposite examples."

AngelList has collaborated with Seedcamp, the European micro seed fund for tech startups, and companies from every major US incubator -- including Y Combinator, TechStars, AngelPad, 500 Startups, StartX -- raise money and recruit on AngelList. Others, including TechStars, 500 Startups, AngelPad, Mozilla WebFWD, Excelerate and Launchpad LA, accept applications directly via AngelList.

Ravikant is well liked for his enthusiasm. "He is super-supportive," Islam says. Brent Hoberman, the Lastminute founder, says he's talked to Ravikant about linking with his Founders Forum. "We wanted to get involved -- it would be great for our deal flow and it's valuable to see the trends,"

Hoberman says. "But you have got to have DNA in there for it to work in Europe. Naval is at the heart of the community on the west coast, that's why it works." Also, Ravikant and Nivi "are not super-aggressive guys, and maybe we should not expect them to have world domination as an ideal."

Born in New Delhi and brought up in the Jamaica district of Queens, New York, Ravikant had a hard early life. "My dad was a pharmacist in India, but they wouldn't accept his licence in America, so he and my mum did clerical work," he says. "If you know Jamaica, it's a tough neighbourhood, not a place you'd want your kid growing up."

He told an interviewer recently that he had needed three jobs to pay his way through Dartmouth College, the Ivy League university. "And, you know, if you're the 17-year-old kid and you're working in the cafeteria and you're washing dishes and all the other kids are out there kind of having fun... it sticks with you."

That drive carried him through the 90s when he worked for @Home Network, which later merged into Excite. Then he cofounded Epinions, a high-profile startup that logged consumer reviews of products. It was sold to Shopping.com in 2003 and later became part of eBay. In 2005, Ravikant and a number of others sued two of Epinions' VC investors, alleging that they had been cheated out of nearly $40 million. The case was settled out of court. "I am legally bound not to talk about it," Ravikant says. "And frankly I want to put it all behind me. What I will say is I came out of it with a very wide-eyed understanding of just how inefficient the venture fund-raising process is..."

Why? He sighs. "The VCs have all the power. Having been on the receiving end of that, with a company that went public and from which I and other cofounders didn't share the rewards, we became experts in this, we fought for ourselves, and after that I had the reputation as the go-to person for this stuff."

One of those approaching him was Nivi, an MIT-trained entrepreneur who had cofounded two firms including Songbird, an open-source music player. "He kept saying to me, 'Why are we the only ones who know all this?' So he was writing it down and that was the start of Venture Hacks," Ravikant explains. The blog provided the impetus for AngelList, which started as a simple list of new startups emailed by Ravikant and Nivi to their key Silicon Valley contacts. It was based on the information coming in from those asking for advice. The current, open online version is not the first iteration of the platform. "We tried several incarnations, some through the Venture Hacks banner, some independent, but it never quite sparked early on," Ravikant says. "There were not enough companies looking for this kind of funding, and I didn't have the right connections.

Then, in late 2009, the small-startup seed scene exploded." Costs for running online businesses were falling sharply. The number of prospective angels who had cash in their pockets was rising.

One of the keys to AngelList's success is the way Ravikant and Nivi curate the site: they vet investors by insisting they show a track record and they thoroughly research the startups they highlight. The latter process places considerable emphasis on the founder's history and education over financial metrics: founders with proven startup success, a blue-chip background or high academic achievement receive higher status. But is the process purely meritocratic? Given that Ravikant's and Nivi's approval is a factor in a startup's visibility on AngelList, is the playing field completely level? "It would be elitist if we closed a velvet rope and only let in people we wanted," Ravikant says. "We have to rank it somehow and, to stand out, you have to hit certain criteria." He estimates that only a quarter of the startups whose details are posted are serious propositions as investments. "We work hard to make sure the unfundable companies don't clutter the system -- everything on the site is sorted/ranked/rated so the cream rises to the top."

That doesn't prevent questions being asked about their approach. One founder of a social-media/entertainment crossover complained that AngelList is only interested in businesses with easy-to-understand ideas and proven metrics: entrepreneurs proposing game-changing but complex concepts, especially if they lack west-coast connections, are at a disadvantage. Another in ecommerce complained that some angel investors flee at the first bump in the road -- and that startups are better off having one or two professional backers who can write big cheques when they encounter problems. Another issue is that, as valuations of businesses on AngelList rise, so the less well funded are squeezed out. Robin Klein,

London-based partner at Index Ventures, an active VC firm, warns that AngelList has a real downside: if you list your firm and nobody shows interest, what does that say about your business -- or you as an entrepreneur?

Ravikant shrugs off the critiques. "Everyone thinks their stuff is game-changing, and that the world can't recognise it," he says. "What does best on AngelList is the really extraordinary stuff. Of the three hottest companies this winter, one -- Transcriptic -- builds robotically controlled virtual laboratories; another -- NanoSatisfi -- was launching tiny cube satellites and will rent them to you at $250 (£160) a week; and a third -- Unmanned Innovation -- is selling operating software for unmanned aircraft. These are not your local social mobile-tracking apps.

Investors do have a keen eye for game-changing companies, and we highlight them more often, but the bar for game-changing is quite high. You have to actually run clients through those labs, build and launch those satellites, get those drones flying -- you can't just say you are going to do something."

[Quote"]AngelList has collaborated with Seedcamp, the European micro seed fund for tech startups, and companies from every major US incubator raise money and recruit on AngelList[/pullquote]

And what of the competition? A similar platform, Gust, matches tech entrepreneurs and investors, and CircleUp does a similar thing for consumer goods. So far, no one has replicated the appeal of AngelList. It's possible that other platforms, such as crowd-funder site Kickstarter, might be adapted to cover similar territory. LinkedIn could be an AngelList killer, if it added a few features.

Klein (1,393 followers on the site) says AngelList hasn't radically changed the ecosystem; the platform is just a catalyst that's sped up another trend: the rise of super-angels such as Clavier,

Sacca and McClure. Klein adds that their dominance could mean smaller investors find attractive deals harder to get in on. He also points out that, far from alienating VCs, AngelList works happily alongside them. "What's changed is that the capital needed by startups is much reduced, so the need for VCs comes later, and at that point the competition is much fiercer as it is clearer who the winners will be," he says. "But the best startups don't need AngelList now. They can pick and choose investors. It would be interesting to know what metric there is for companies which appear on AngelList and those who get their investment." Ravikant has an answer: of the 40,000 "claimed" profiles -- posted by the company founders, or claimed after they were listed by investors or advisers -- he estimates around 1,000 to 2,000 receive successful introductions. And the rise of super-angels plays to AngelList's strengths, points out Sherry Coutu, the Cambridge-based entrepreneur-turned-angel (853 followers). "One of the things you worry about is newbies piling in who don't know what they are doing."

But Ravikant is wrestling with what his next steps will be. He is already trying to bring in groups of smaller investors who can pool their funds to buy significant stakes in startups, further democratising the investment process.

He also wants more non-tech startups. "There are some charities, some consumer-goods companies, a few movie-production studios on it. But they don't get much investor attention, unfortunately."

And then he has to figure out how to monetise. "We haven't made a dollar from AngelList, but we are not running a charity; this has to support itself," he says. "I think it could be a lot like Craigslist, cost a little compared to the huge value for the community. So we want to create a great ecosystem, then figure out different verticals, and it makes sense to charge for some of them."

One revenue model AngelList has considered is recruitment. "We've brought in 40,000 company profiles. Many put up their team info and fail to raise money. So you end up with 160,000 people who like startups -- matching them with companies that have raised money has taken off like a rocket,"

Ravikant says. "We place 40 people a week." Professional recruiters, he says, charge more than $30,000 (£20,000) to fill a $100,000 (£66,000) job in Silicon Valley. "We won't charge so much, maybe $10,000 (£6,600) or give us a bit of equity, or if you don't feel like paying maybe there will be an honour system instead."

Ravikant admits he began working in technology because of his desire to make money, but now he says he's just happy to do something that shakes things up. And does he still dream of world domination? "I'm 39," he says. "In Silicon Valley terms that's ancient. You're competing against 23-year-olds who don't sleep..."

Andrew Davidson is a freelance journalist and author based in Kent, England

This article was originally published by WIRED UK