Hacking AngelList syndicates with cofounder Naval Ravikant

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Hacking AngelList syndicates with cofounder Naval Ravikant

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Jason: Hey everybody! Hey everybody! It’s Jason Calacanis and this is this week in Startups to show what we learn how to build companies and board that we have a doozy for you today. This is my exclusive interview with Naval from AngelList. We sat down at the Launch Hackathon and we had an incredible conversation about what matters in terms of building companies, raising money for those companies from Angel investors and the future of Angel investing.

Now that we have this crowdfunding syndicates, it’s an incredible episode. It is required listening for any entrepreneur in 2013 and 2014. Get in there and listen to this amazing episode.


Hey what a great amazing episode. This was with Naval. Stay tuned for our friend James Altucher on the audible author series coming right up.

Please join me and welcome Naval Ravikant. All right. Welcome Naval.

Naval: Thanks. Thanks for having me.

Jason: I appreciate you’re giving up your Sunday to come to talk to all of us.

Naval: I think these people are doing the real work. I’m just sitting here and talking. 

Jason: They are. They are. 

Naval: Which I think it’s still cold. 

Jason: You started as an entrepreneur. You can pull up slide number one here. You had two companies I think of note. Tell us about them.

Naval: Yeah. Epinions was a company started in the first [bubble 00:02:31], the .com boom and it was a product review engine. It went public as far as shopping.com. Then vast.com is a white label classified big data analyst company. It’s still private, doing pretty well. 

Jason: Now, those companies, what was your role of them, founder, developer?

Naval: Yeah, founder and CEO.

Jason: Founder and CEO.

Naval: Yeah. 

Jason: When you look at that first wave and that crazy bubble with live through, compare it to what some people are calling Bubble 2.0 or at least frothy and it tells we use it.

Naval: Yeah, it’s frothy for sure in that it’s completely different. First Bubble, our first wave you could say there were tons and tons of money being poured into silly projects. You get literally a hundred million dollars behind something that was just made no sense and had no chance of ever making that money back. 

Things are very, very different now. The markets are much larger. Everyone is on the internet. Everyone’s got on their pocket. We had broadband. We have 4G. People are much more comfortable using things, paying for things. There’s API stock structure. Scale the opportunities play a hundred experts. It was back then. 

It’s much, much cheaper to build a company. Epinions, we spent five million dollars just building the first original Web site because there was no open source softwares. You use [Solaris 00:03:41] servers and Sun and pay some licenses in oracle databases and host our own data center because data centers weren’t established and key one lines and there was no CSS. We had to write everything in tables from scratch. No deploy scripts.

You just have to build everything from scratch. What used to cost five million bucks to do, eventually cost five hundred thousand dollars to do and that cost fifty thousand dollars to do. Now, we’re in a completely different phase. We’re in [inaudible 00:04:06] explosion sort of scenario where there’s tons and tons of small startups and more and more being started every day. They’re very cheap and you need to start. 

That said these are still winner take all markets with huge network effect. You get this incredibly outsized one of hundred companies winning and they win huge. The nature of the market has fundamentally changed. The distribution curve is very different. I do think it’s actually a much [inaudible 00:04:31] time to be investing as long you’re evaluation is sensitive and you stand the portfolio dynamics of how few companies actually succeed. All your returns are going to come from being in one or two at those winners.

Jason: A lot of talk of a Series A crunch and being very hard for people to get that series A. Is it true or not?

Naval: It is true. The numbers of companies is split, gone up by a factor of a hundred at this point or rounds to that. The number of venture capital is not increased. What venture capital now does is basically growth capital. Series A has really done by the accelerators and the Hackathons. Series B is done by the Angels, super Angel seed funds. Series C and up is where the VC start.

I think I believe there is a fundamental misunderstanding still working its way through the system about how to build a company, which is people think the right way to do it is to kind of raise a million, a million and a half from some Angels then prove something out then go to VCs and try and raise series A which is a classic model and that fails. 

Really the right answer is fifty thousand dollars build your product, launch it, accelerator style. Five hundred thousand dollars prove something big. Then maybe your next round is a million, million and a half and get to profitability because it doesn’t take that much to build a company anymore. 

Those of you who are trying to hire like 30 or 40 people into your company, you’re setting yourself up for a very, very tight funnel that you you just squeeze through on the growth capital side with the VCs.

Jason: Why is this go … I will go small or go lean strategy in your opinion being probably the most knowledgeable person of the angel space? Why in your opinion is this the best reason?

Naval: Small teams are innovative. They move faster. They get more stuff done. Most of AngelList was built by six people. Even today after ramping up quite extensive last year, we’re only still 15 people. It doesn’t take a whole lot of people. Look at Instagram four people, Snapchat, 20 people. To the extent that you’re hiring a lot of people especially in software, that’s most your ego talking. Unless you’ve got a billion dollar opportunity tiger by the tail and you’re clearly winning and people are throwing money at you, do not scale up. Pretty much you’re scaling of a debt at startups.

Jason: Great. 

Naval: Keep in mind it’s in everyone who’s writing checks incentive to tell you to scale prematurely. 

Jason: Why is that?

Naval: Because they’re going to bill you out. They’re the ones who are going to show up and then negotiate the terms to bill you out. It keeps them relevant and powerful. The part of the reason why AngelList exists and Angels exist is because the cost of building companies come down so much that the number of people who qualifies investors are some exploded. They couldn’t make a difference before. A twenty-five thousand dollar check would make no difference to you in 1999.

Jason: Yeah, but a twenty-five thousand dollar check can build a proof a consent.

Naval: Today.

Jason: Today, right.

Naval: But not through early.

Jason: The VCs or some of the bigger investors, they suddenly realized they might miss the chance to own 30% of your company?

Naval: They do it now but they do it through growth capital. They wait until you’re big and growing then they come in and they bid. The venture capital game at this point has become about branding yourself and to get good deals that are obviously hot deals.

Jason: Let’s talk a little bit about AngelList in the early days. Maybe we pull up slide number two for a quick second here. You started doing Venture Hacks and you even started writing this great blog post unpacking the venture capital industry back in 2007. People were not happy about you doing this, were they?

Naval: Yeah, it was mixed results but at the end of the day, information knowledge wants to be free. [Nivy 00:07:59] and I used to sit around and talk a lot about how opaque term sheets were and how as a founder. This is basically pre-accelerator, pre-blogging. You go in and you get a term sheet from a venture capitalist and we have no idea what it means. You basically sign … The series A was the most important. You basically sign your life away then you find out five years later what it meant. 

There was a game theory to this whole thing, to all the different terms in how to play out [V2 rights 00:08:22] and all that stuff. Even your lawyer, although your lawyer you could trust as your lawyer, nevertheless they spent more time serving to VCs and working with an ecosystem. You were the single move player in the game. The VC is the multi move player in the game theory sense. They’re always going to get the benefit of the doubt.

They created all these things that were standard and then your lawyer would say, “Oh, that’s standard. That’s standard. That’s standard. That’s standard.” Pretty soon you find out, that evaluation is temporary but the control is forever. You’ve given a control every company. It’s no longer your company. You’re the entrepreneur but you’re working for somebody else. I think it’s a horrific situation that still many, many entrepreneurs I know it.

I just had another coffee meeting yesterday … I’m sorry, Friday with an entrepreneur who was doing great or his company is flying high. VC took over, merging another company, kicking him out. It still happens. You got to be very careful. 

We wrote it all down in Venture Hacks, but people said stop telling me how to negotiate the term sheet. Get me a term sheet. That’s where Angel started. 

Jason: Next slide. As you can see here, the most recent version I think of Angel is or one of the recent versions, it started just you e-mailing people opportunities that you met when you were out having coffee with people, is that correct?

Naval: That’s right. Yeah, I was having all the … I had a small investment fund that’s investing startups. I remember I had coffee with one investor and he said, “Oh, I got this great high deal and we should move on it before anyone else finds out about it.” I was like, “Really, 2007 still works like that? You can use proprietary information to get some kind of advantage, it doesn’t make sense.” This is 2010. 

I’ve talked to [Nivy 00:09:51] and I said, “Look, I know a bunch of investors. I do deals. Let me just take my deal. I start sharing it.” We took 25 investors. We started sending out just e-mails, and then we searched the Mailchimp, and then we had Wufoo and then nine months later we started coding.

Jason: The site has gone quite big now. How much has been raised through the site as a result of the site?

Naval: Yeah, it’s about a couple a hundred million directly through the site. It’s a result of introductions from the site. It depends and I count them like for example we introduced Sherwin to Uber. He put in 100K into C and then he did the Series C later. Do we count that or not? We don’t. 

If we just count direct investment through introductions, it’s about two hundred fifty million bucks by ten million a month. Then on top of it, we also move it by four million a month, five million a month, just purely online through what we call it through syndicates essentially where people commit to small dollar checks online.

Jason: You yourself have invested in a lot of companies. Maybe we can go just to slide number five. 

Naval: Yeah, it’s far too many.

Jason: Yeah. It’s impossible to read but how many companies have you invested in and what you’re current pace of investing?

Naval: I probably do one a month small, one a quarter big, very opportunistic. I mean this business that I love technology. I love entrepreneurship. Even I keep telling myself, “No. I’ve done investing.” I’ve got enough investments. I always see something new and shiny come along like “Oh, that’s a great idea.” Those people didn’t know what they’re doing and I just get caught up in it. It’s hard not to.

Naval: Let’s talk about something big which is the [jam-zat 00:11:27]. Explain to folks who don’t know what that is? What exactly happened that is relevant for founders?

Naval: Yeah. It’s sort of the only major by its partisan built to pass congress and get signed into law in the last four years which both sides sort of supported. It is a whole bunch of nice things for startups. There’s stuff that allows companies go public more easily. The shareholder rule, the 500 shareholder max is raised getting up 2000 shareholders. 

But the two most interesting things from most recent in the audience is one is the general solicitation band is lifted, which means you can fundraise in public. It used to be illegal to go out there for example even at this conference stand up here and say, “I’m fundraising”. That used to be against the law. Supposedly you’re only allowed to market to accredited investors basically proven rich people that you had a pre-existing relationship with. 

Now that’s changed. You can market to anyone. The downside is you can do a lot more work after the fact to prove that they’re rich and sophisticated and can take the risk. That can be pretty the owners. You got to check their income tax forms, talk to their lawyers, credit reports, those kinds of things. We’re automating that and building that in AngelList and we got to provide that as a free service to everybody. Be accredit ones and then we use it wherever you go.

The other piece that’s relevant is through crowdfunding where non-rich people can invest small limited amount using Startup. That’s coming down the pipe. It’s still not legal yet. In all these cases, the SCC drives additional regulations to kind of mandate how it works. SCC being a C, they’re going to automatically lead a little bit more towards what Wall Street once or how hedge funds work. We always have to write to them and get the community together and say, “Hey, look this is how Startups is doing. This is how it needs to be a startup friendly.”

Jason: You decided when … I guess it was September to launch public facing syndicates. I was one of the first to sign up for it. 

Naval: Yes, if there’s a hundred times many startups, we need a hundred times many investors. That just seems logical. You’re not going to have billion dollar funds allocating capital into all these little startups here fifty thousand dollars at a time. This micro VCs must exist and they need a platform. We created a platform for micro venture. 

What syndicate is it allows any Angel who is putting their own money, [scheming 00:13:44] the game which keeps you ethical and moral. To also raise money on the fly in the Cloud from people who want to back them like kit starter before equity. You can build up and put them in the backer base. Get first look at your deals and exchange for having first steps on them. We try to make it very simple and move it all online. What we have is we now have close to a hundred Angels who across them have close to a hundred million dollars in annualized backing. 

Every time they write a check, their money gets multiplied 5x, 10x, 20x, comes into the same terms, gives them a piece to the profits. We formed a single purpose LSC in the sky that aggregates the money and puts one signature under the cap table which that Angel controls. 

The backers are basically backing people who are putting their own money at risk, only paying a piece of the profits. There are no fees. They can start or stop backing at anytime with one click. They owned interest in the LSC which good itself is a secondarily traded and they got a beautiful in the sky dashboard brokers to view of all their holdings.

For the lead, they basically have a liquid back end to LPs now. They don’t have to be a full time venture capitalist. They can continue to do their job as an entrepreneur or whatever they want. Once in a while when they see a good investment from our entrepreneur, they are now in trust. They can scale up, do the series, this whole C drown with the Series A and then move on.

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Where do you think this is going in terms of your doing it right, doing it lean strategy which you outlined earlier which is to say, if somebody was going to do the fifty thousand, five hundred thousand, one point five million dollar deal, it seems to me that alliance would exactly what AngelList syndicates and AngelList sub classic is capable of doing.

Naval: Yeah. Essentially doing incubators AngelList and syndicates, Super Angel, seed funds, you should be able to get to escape velocity, and that’s the point at which you go for venture essentially especially in the consumer side. It’s a little different in the enterprise or hardware but especially in the consumer side. No, series A “VC” wants to talk to you unless you have escape velocity or unless you’re an extremely branded entrepreneur and even then they want you to have a product in some indication that you’re going to hit escape velocity.

Jason: I kind of hit that road already now.

Naval: Yeah. I think even the Super Angels and the seed funds are starting to operate in that basis. The bar has gotten really, really high because there’re so many startups. 

Jason: You have to show traction.

Naval: You have to show some traction, or you got to show something, or you have to show, you do something really unique and difficult which is very hard to calibrate because everyone thinks we do something unique and difficult but you need a third party validation on that.

Jason: Something like Pinterest or Airbnb or even Dropbox might own its surface not look very difficult. Those things if they existed today, what would they need when each of those examples in your perception to get an A round from a top to your VC?

Naval: Today, the need like a hundred thousand monthly users climbing fast kind of thing, at least.

Jason: Dropbox would have to have a hundred thousand monthly users climbing at 20%?

Naval: At least 20. Yeah, 20 is probably the minimum.

Jason: Wow. They weren’t doing that when they raise previously?

Naval: Yeah, but the bar just moves up in the market constantly. 

Jason: Wow.

Naval: Yeah, that’s just the nature of the [beast 00:18:47]. I think Dropbox its first round was pretty money of three million or four million, something like that. The evaluations were lower back then. In 2007, ’08, ’09, the evaluations are probably like two, three, four million. In 2009, ’10, ’11, ’12, they kind of went little crazy. Got up as high as 6, 8, 10, now they’re coming back at that 3, 4, 5 range. 

Jason: What do you think of the accelerators and their future and all of this? I mean we have obviously the [wide commenter 00:19:17] and texters are for sure, the gold standard went there. Then a lot of people creating derivative, knock off, or with good intention and sometimes well-executed, sometimes not well-executed. What is your advice to folks? Should you give 6% of your company away for 15K and join with our company or was it worth it?

Naval: Yeah, accelerator is a very complicated topic. We’re basically witnessing the unbundling advice controlling money, knowing what’s to give controls. That’s where the Angels come in. They come in with money. Syndicates bring backers and more money. The accelerators have sort of branded advice and institutionalize it. I think [inaudible 00:19:58] the new graduate schools except and instead of paying to go, you get paid to go. Instead of going out and getting a job, you got and create jobs. Instead of doing derivative work, you do original works. They’re better at graduate school and they’re shorter and faster.

If you’re just starting out, if you don’t know the context, if you need some help in which you’re building, if you need a network and if that first 25, 50K really matters to you, then by all means do an accelerator. If you have already built your product and start to get a little bit a traction, you can get their on your own. If you’re pretty savvy about how to build a company, and if you already had your network in place, then it’s a pretty expensive deal. But obviously it depends on the accelerator. 

Yes, there are too many accelerators but there are also too many VCs, there are too many companies, there are too many Angels. There’s always too many of everything in this business. It’s like the Kentucky derby. Yeah, there are 16 horses running. Their 15 too many but you don’t know in advance which 15 are too many. That’s the whole point. You have to let them all run. 

On the accelerator side, you could have argued that [texters 00:20:54] were redundant but they turned out to have some great classes. Angels Pad is redundant. It turned out that to be a great set of ex Googlers. Lemnos is redundant.

Jason: Which one is the most impressive to you in the last year? Pick the top … pick your top three most impressive accelerators that aren’t like [inaudible 00:21:07] than last year or texters?

Naval: Yeah, I don’t want to so much pick favorites. I would say I was …

Jason: What’s the most impressive class?

Naval: Yeah. I was surprised by a couple of outliers that came in from that field. Startmate seems to [inaudible 00:21:20] scheme Australian and bringing the best Australian company.

Jason: Which one is that?

Naval: Startmate.

Jason: Startmate?

Naval: Yeah. They bought some really good companies from Australia. They’re little off the radar. MuckerLab has had some great companies out of LA. There’s been Lemnos Labs has had some great hardware.

Jason: Where are they?

Naval: Lemnos are right here. They’re in the city.

Jason: Specializing in hardware?

Naval: Yeah, they had momentum machines which just get to find out by coastline and airway which a guy done by Andrei Sin and a few others. Angel Pad obviously crashed it MoPub exit but there are lots. To find your Startups is killing it internationally. Maybe they have a great space in mountain. Even the US they can beat the [inaudible 00:21:57] and texters and all that. But you go international, do the only game in town and they have a great brand and great reputation.

Jason: If you had an idea today which you can get your basic funding for … but you could go either enterprise or consumer. Let’s say you had the idea for Twitter and Yammer and you’re sitting there with your team of four. You’ve got your funding equal for either ideas, so you could get your 50 or 100K to start building, which one should you build and why in today’s market?

Naval: Well, it depends. First, build the one that you’re more passionate about because you have to be the best in the world to what you do. It’s the old Glen Ross. Number one gets a Cadillac. Number two, gets a set of steak knives. Then number gets fired. That’s the salesman hierarchy and it’s kind of the entrepreneurial hierarchy too. You have to be number one. In that sense you need to be passionate because you’re competing against the best in the world doing what they love to do. 

That said most people are much more passionate about consumer stuff. If you can get excited and be passionate about something on the enterprise side, if you have some experience there, it would probably be foolish to wander away from that. 

Jason: What are the chances of success today for Startups pursuing an enterprise strategy versus a consumer’s strategy? If you just say out of 10, this many will have a pretty good outcome versus a not good outcome?

Naval: Yeah, a consumer it’s some fraction of one out of 10.

Jason: Less than one.

Naval: It’s less than one. Yeah, and an enterprise is probably … it was like one out of three, one out of five. It’s probably one out of 10 now because it’s getting crowded. It’s just good to just teach your class. But that said entrepreneurial ventures fail all the time. Most of my companies fail. I actually started seven companies and I’ve launched for about 40 or 50 projects over my career. Angel is the first one that I would truly say its product market entrepreneur fit for me and might succeed down the road.

It’s a low heat rate over your career but you only have to be right once. It’s like your relationships. You only get married to one person. It’s like what you study in school. There’s only one set of things you study that stuck with you that you made a career out of. You only have to be right once or twice. Just keep trying. Just keep reiterating. Flow with it. Stay open. It helps if you have an arc or a theme through your life like people Evan Williams I think are always hammering on the same problem.

Jason: Publishing.

Naval: Yeah, micro publishing or easy publishing on the web. He just keeps hammering the same problems, so he just gets better and better and better at it. It helps if you have sort of an arc or a bent to your life and you’re not just hopping from sphere to sphere project. But that said, just a lot of this market timing and you learned a lot of lessons. 

At first you learned how to … you do everything wrong. You make a whole set of mistakes by your first startup. Then the second one, maybe you do things right but you do it with the wrong people. The third one, you might do with the right people in the right way but at the wrong time. You learned all these painful lessons and so it’s just don’t lock. Just stick with it.

Jason: How many years did it take you to get to Angel Hacker? How long have you been into this profession?

Naval: AngelList?

Jason: AngelList rather.

Naval: I started early for my generation but back then everyone need to start Startups later. My first Startup started when I was 23. I started AngelList when I was 36 and now I’m 39.

Jason: Thirteen years.

Naval: Thirteen years pounding at Startups non-stop. I always like I would do my startup during the day out of my day job. I ran home at night. I brainstorm more startups. I just love it. 

Jason: We’re going to get to audience questions in a minute. When you started AngelList, there was significant pushback from powerful people. 

Naval: I don’t think anybody who is doing well under the current structure likes change but AngelList is a byproduct of the fact that Startups have gotten so cheap to build. They’re so many of them. Whether it was called AngelList or it was called something else, it would exist in some form or another. It’s one of those things … There has to be a place in the ecosystem to organize all the companies and all the investors. 

Jason: What was the thing you found out about later that you thought was like somebody try to stop you the most because people have tried to stop this training. What some examples of people who tried to see the names of people. But have you tried to [scuttle 00:26:17] this project?

Naval: Sure. I mean the number one way in which people try to scuttle is people have a lot of money and they’re used to the old way of investing. We’ll tell the entrepreneurs “Don’t go in AngelList. Only the desperate companies go on there.” I think we’re sort of …

Jason: The desperate people go on there?

Naval: Yeah. It was the same thing they got said about [White Com 00:26:32] in the early days. I think at AngelList we work very hard to make sure there’s no adverse selection. We don’t take a cut from you from listing or forgetting funded. We don’t … All companies are on there. Now you have Yelp and Pictorn and others is recruiting on there. There’s no social stigma to being on there. That was something we fought with over the years.

Jason: They tried to make the companies look like they were the desperate ones. I agree with that. 

Naval: Yeah. I don’t think it’s any like grand conspiracy. I think it’s more just human nature. It’s just like when you’re telling your investors that “Hey, I have unique access to deal flow. I’m this person that sees things that other people don’t see.” You have to be consistent with those statements that you’re making all the time. You go to entrepreneurs and you basically keep under this illusion of proprietary deal flow. I think people have given that up to now. 

Deal flow is public, its access as proprietary. Access as proprietary still based on fuzzy brand but I think what we are arguing is that first we’re going to make that transparent. What you’re value add is, let’s see, put your cards on the table and let the entrepreneurs know and give the choice. 

The second is there are a whole bunch of people today who are highly value added who have good access but don’t necessarily have the capital and that’s what syndicate sells. We’re sort of unbundling all the pieces to make them transparent. This idea that there are only certain people can invest and see and other people who can do growth is a false dichotomy.

If everyone can see everything, than you can cross boundaries all day long. You should have …

Jason: You’re back.

Naval: We’re back. You have Angels who should be able to do a series C or series D. There’s no reason with someone like you or David Sax at some point shouldn’t be able to put a million dollars into a company, have a ten million dollars syndicate behind you and do series B. At the same time a venture capitalist should be able to say, “Hey, the accelerator deal, I want to set up an accelerator in the cloud but I want to offer a hundred thousand dollars or hundred fifty thousand dollars for the 6% instead of the twenty five thousand dollars and here’s my structured network.”

The moment you take all the companies and all the investors and you fit all them in one place together, people can start cross pollinating. 

Jason: I got it. When you started getting that resistance to AngelList, did that act as motivation and a signal that you were doing something right? Or did it make you feel like maybe I’m becoming an outcast? I’m too much of a rob-aroused?

Naval: Well, I’ve always been an outcast, so that’s easy.

Jason: It’s kind of easy to accept.

Naval: Yeah. [Red Herring 00:28:57] hit a job on me back on the day which says something like this guy will never work in this town again.

Jason: That’s what people say when you went to AngelList.

Naval: Yeah, and Red Herring is gone and I’m still here. 

Jason: Yeah, you [inaudible 00:29:09] Red Herring.

Naval: Yeah, but I don’t care about that. The reality is just made sense. I mean there’re some things you just know with the core of your being that you’re meant to do in that array. You don’t care what other people think. It’s like when I married my wife, all kinds of people start coming up and giving me opinions, “Oh, she’s really good for you or I think this man …” I don’t care. I don’t need the opinion. I got it.

Jason: You should hear what they think with your wife?

Naval: Yeah, exactly. They try to talk a lot of it. Yeah, I would say that if it’s a right company then that means you know your domain. You know you’re meant to do it. Yes, other people’s data matters. If they really mean well for you and they have data, keep an open mind. But if they’re just giving you opinion on whether it worked or not, that’s useless. Just go to write a comment in TechRanch. 

Jason: Right. How bad is journalism today? Specifically … I’m not going to mention any publications, but just in general, being inside who sees the actual real data, the real information and you have journalist who are writing who have never run a company, never failed, never succeeded, never took the company public, never sold the company, never did lease, never done investments basically opining on the industry, what percentage do they get right overall this sort of tech press? On a percentage basis, a hundred facts, how many they are right?

Naval: Facts. 

Jason: Facts, opinion they have.

Naval: They probably have the most to the facts right but they missed all the new ones and the new ones matters a lot. The problem is that journalists are not domain experts. Not really. Then they do not have much time. They’re paid on page user whatever. They don’t dig in. They don’t have the time to dig in. A lot of reporting is very superficial and incorrect. 

The interesting part is the people who know the most and who can do the best writing are bloggers like Samuel Shaw for example. He is entrepreneur and now a VC. Understands that space, builds a brand by blogging, and you see there’s a lot. A lot of the great bencher brands now get though by blogging because those people can really, really dig in and understand the new ones. 

The problem is that they’re incentivized. The moment you’re a venture capitalist, then you can start talking about how it’s really important that you take growth capital and you take money from the right people a.k.a. me and that you scale it fast. You have to filter out all the bias in the system and there’s a lot of bias in the system. Everybody has something that they’re going to try to sell you. I’m frankly when in business, right, because this is all business, at the end of the day, you’re here to build the product to make money. You’re not here for just to …

Jason: It’s not charity.

Naval: It’s not charity or you’ll be in the art gallery or you’ll be in the studio or something? Because the business everyone has bias, everyone has an incentive bias, and you guys attract their bias out when you listen to them, and what calls me is just a huge amount of blogging that goes on with no disclosure of the bias or maybe it’s just little line at the bottom. But the whole thing just drips of bias.

Jason: Right.

Naval: I think fundamentally people get passed that. People don’t like … They don’t necessarily it was like the sound of truth because it is harsh but I think people like the feel of truth. They know what truth feels like. I think it’s very important whenever you’re communicating with other people in this industry to try and drop your bias. That’s very hard to do. Very few people do. 

I think that’s one of the reasons why Fred Wilsons ABC blog is so popular. Whenever I read it, there’s just like a certain honesty that comes off the pace. James Altucher, a guy bleeds on every page. He’s so painfully honest, I cannot believe him.

Jason: It’s train rack and awesome.

Naval: But yeah, people if like such honesty, such truth, I wish there are more journalists and bloggers like that who spent the time, did the homework and try to remove the bias from the reporting. 

Jason: What makes a company … because I’m going to start putting companies obvious at the back? I’m hoping to put the top two or three companies here and put them out to syndicate if we make them real companies. What makes a company … this is final question before the audience goes … what makes a company in your mind worthy of me or Kevin or Dave putting it out to our syndicate? What do you want us to feel [inaudible 00:32:58]?

Naval: Yeah. I mean what makes a great company is actually different than what makes it a great syndicate and obviously I’m trying converse it true but one of them is reality. The other one is perception of reality. Reality, what makes a great company these are great founders who can build the great product that are going after an open market. That is your judgment call. That’s why syndicates exist. That’s why we don’t believe in this concept that you can just have a giant list of companies in the Cloud and you can somehow pick the winners and the losers without ever meeting them.

Someone has to go in there with judgment and access and do the homework and spend time with the company and figure out if the founders know what they’re doing. 

Jason: Great founders, great execution, great market.

Naval: Right, that what’s makes a great company. What makes a great syndicate is you have to convey that to people somehow. The way you convey those will be just use a catch all term signal. It has to be a high signal deal. Are the founders accomplished? Have they done something in the past that would indicate their capable of things in the future? Is the syndicate lead a good judge? Do they have a good track record? Do they have early traction? Do they have any indication that the dogs, [or eating the 00:33:53] the dog food so to speak? 

Is the product visually appealing? Or is the space not too crowded? Is it novel? Is it new? That matters too because on AngelList people see everything. By the time you see the third, or fourth or something, it almost is a matter how well-executed. These people are sort of already made up their mind with the space and probably invested in something. That’s what we call signal.

The backers and the syndicate case, right now, today most of them are actually pretty high value angels. For example, just this morning I’m looking at my dashboard, and one of the syndicate deals that’s out there right now, Jeremy Stoppelman and Charlie Cheever just committed CT, one of the founders of Quora and the CEO of VL. 

Those people really shouldn’t be backers. I mean they are backing because they don’t necessarily want to do coffee meetings but they’re interested in this company. They believe in the lead but they don’t necessarily spent a lot of time in the company, this money economic state.

But the real backers are going to be limited partners, funds, people who are out of market, wealthy individuals who are not professional investors. Those people, you need to also send them a high signal but also show them there’s not a lot of access in this deal because otherwise someone is going to say, “Why am I paying you the carriages? Why am I following behind you? Why not I just go direct in the deal?” We call it high signal low access. That’s kind of our balance. 

Jason: I was thinking if I did a video with the founders talking about the plan, and maybe showing it in me preparing with questions, would you think it would add value to the people where they want to … the backers want to see me interviewing? Could that be an advantage as a backer?

Naval: It might. My experience so far is that most investors don’t watch videos just statistically speaking. That said we have Q&A function on the profiles now, so you could ask questions and they give that answers. I think you get the same effect but in the more easily digestible format. 

Jason: I got it.

Naval: You could add a video too. I don’t think it hurts, so just thinking on a ROI basis you [crosstalk 00:35:41].

Jason: What if I wrote a blog post about why I’m jazzed up about the company in the team? Would that be …?

Naval: That would be helpful. 

Jason: That would be helpful. Okay.

Naval: But I think one of the very important things here is that the backers really need to understand. You need to convey to them things like what deals am I showing you so that if they know that there’s no adverse selection, you’re not just keeping the best deals for yourself and then send at the [inaudible 00:36:00]. 

They have to also understand that this is extremely high risk investing and that they should spread their bets over a long period of time. Be very careful and go slowly. It’s not gambling because gambling is a negative expected value in the house. It’s working against you actively. Hopefully it’s a positive expected value and it’s good for society. But the distribution curve of outcome looks a lot like gambling. 

Jason: I got you.

Naval: People have to understand that and be comfortable with the risk and the fact as no liquidity.

Jason: What should an investor do in terms of number of deals? Ten deals? Thirty deals? Fifty deals? If they were going to optimize for a number, if it was your cousin and they said, “I have a hundred thousand dollars, should I do a thousand dollars into a hundred if I’m able to do that or should I do to two thousand into fifty?”

Naval: Yeah, I don’t think it’s a single right strategy there. It depends obviously in the conviction that you have around a given company. But just realize you can have enormous conviction on a given company and still you’re usually going to be wrong. That’s the nature of the business. 

I would think that to get a decent portfolio in the Angels space, you probably need to be at least 25, 30 companies if you might guess. You could certainly take the point of view that you should do a lot more. There are practitioners who do less. They’ll do 10. But for those people that are diligence using to hack on those companies or putting a lot of wood behind that, already spending a lot of time with the companies. These are classic early stage venture capital type approaches. Unless you want to put in that time in diligence, you cannot narrow your portfolio down that much.

One thing you could say is maybe a little unfair but diversification is a hedge against a lack of knowledge. But here no matter how much work you do, you’re probably still not going to have more than 30% knowledge. Seventy percent is still up to the market and out in the air and so many things can go wrong.

Jason: Sure, pivots yet to come. Let’s take three questions or four questions from the audience and then we’ll get back to work. If you have questions, raise your hand. I want to make sure people in the back of the room also. Scott you’re a runner. After you get this first person, I want you to run all the way at the back to the next person. I’m joking. You can do two in the front, two in the back.

Speaker 4: Hi! What’s your position on [inaudible 00:38:03]? Is AngelList plans on using Bitcoin or something?

Naval: I’m personally a fan of Bitcoin protocol. I think it’s very innovative and world changing. Anyone who is interested in http for example should understand Bitcoin because I think it’s a next generation kind of protocol for distributed contracts. I have a little blog post that I think that it’s put up recently, as far as Angel itself … except in Bitcoin that’s kind of just a gimmick at this point. Like no one really uses it is a currency at scale. Those days have not yet arrived and may never. 

Angels already operates in a highly regulated space with all kinds of mine fields. I don’t need to introduce Bitcoin in that I make my life a headache. That said, the moment it makes sense your bet, we’ll support it. I mean it’s a great thing. 

Jason: Do you think there’s a chance that Bitcoin could become a total … what are the chances big coin becomes total wipeout like somebody hack the system or something bad happens where people just loses complete trust or government intervention or something?

Naval: Extremely high. I think right now the value of Bitcoin is based on like a 1% chance of a huge positive outcome or a single digit percentage chance of a huge positive outcome. That’s why it fluctuates so much because when those odds change like 2.5%, 3% the evaluation goes up drastically or down. That’s why it’s so [bottom 00:39:22]. If there were a hundred lottery tickets to buy like Bitcoin, I buy more and diversify. Unfortunately there’s only one. 

Most people say Bitcoin is going to fail are probably right in the absolute sense like you may lose an investment but are they right in the sense that crept occurrence is going to go away? Or the proof of work function or the distributed ledgers is not going to make a huge impact in computing? They’re wrong about that. It is a fundamental technology melt.

Jason: The distributed ledger … the distributed ledger, explain that in plain English to somebody why that’s important?

Naval: Basically when you exchange money with other people electronically, you always go through a central authority and you need the central authority to keep track of who sent who money and so who’s got it and to prevent double spending. In other words, I get write you a check, I write somebody else a check, the way we know the check bounces, go to the central authority. The banks reconcile it and know that, “No, you can’t send that same money to two people at the same time.”

Bitcoin has the thought that probably decentralized way. It does that through a proof of work function which is way beyond the scope of this discussion but just go to my blog, look it up, and then through a distributed ledger to keep track of the transaction. Distributed ledger means that the record of all the transaction is stored in every wallet. Every user at all times has a record of every transaction, ever done in the history of Bitcoin. 

Jason: You get pretty big at some point.

Naval: It is. There are ways to prove it and to put it part of it in the Cloud and its security look up and make sure that you’re only growing on the right part that you’ve authenticated in the Cloud. It’s solvable, but the basic idea is that you should not have to rely in anybody else to authenticate that a transaction happen. You can look inside your own wallet and say, “Oh yeah, that transaction happen in an absolutely, verifiable, irreversible way.

Jason: Next question. 

Speaker 5: First, I just wanted to say, thank you guys for creating up a platform and a space for us to be creative and just do some great things. Secondly, I just wanted to ask especially with the AngelList you and the syndication model that you’re using, you’ve really kind of gone out of the box about how to come up with different ways in solving problems. I just wanted to know … because you were talking earlier about the issue with series A funding, is there anything that you were aware of with regard to flexible purpose corporations in California and the models that those might make for different types of investing in the future as well as your social startups as well?

Naval: Yeah, there’re definitely investors who focus on social startups and dual purpose startups and started submitting but it’s not a lot of investors. They’re solely not on the venture side. They tend to be much more in the Angel side. I know for example Tony Hsieh at Zappos and Tabreez Vergee and Mitch Kapor, and Johnny when people like maybe want to look at Startups that have a social mission with them but they’re not getting the huge amounts of LP dollars. These tend to be people investing their own money or raise small amounts of purpose driven money.

There is more of becoming but it’s still difficult. I would say you absolutely have to make it viable in every respect as a for profit business. Then if you happen to get one of these social interest investors consider that gravy but don’t count on it. Don’t think it’s going to give you any advantage.

Jason: It might actually give you disadvantage, would it not?

Naval: I think it does give you some slight perceived disadvantages with most investors. Yeah.

Jason: When a pitch starts out with, we’re going to give this amount of our profits to charity, the first thing I think is what is the business that’s going to enable you to do that or one just make a really great business and go be Bill Gates, [inaudible 00:43:06] away after you build the great business. 

Naval: That’s one good point of you. Some of it is you have to believe that every company that we’re building here, these are not hurting people. Hopefully we’re not launching drawing the tax or whatever torching people. We are helping the system. We’re creating advancing forward at creating jobs, creating very great products. Look at how the iPhone has just improved the lives of people all around the planet. I would argue Steve Jobs is the greatest humanitarian in the last century in that he empowered more human beings with the computer in their pocket than probably anybody else. 

Is AngelList socially conscious? I like to think what we’re doing is ethical and helpful and stands up for the underdog in a little person. But we can’t help everyone. We fail all day long and I don’t pitch that mission. I just pitch it as we’re building a great company in the business that we’re passionate about that allows us to recruit people and raise money and stayed focus and motivated. But of course we’re going to do it in ethical, socially, helpful kind of way.

Jason: Okay. Next question?

Speaker 6: Hi, I’m James Young for Telex Networks. Just curious on how long does it normally take traction, take to get some good traction on AngelList to get recognized each because [inaudible 00:44:19] on there for a while now but it just seems like many were not messaging it right or whatever.

Naval: Look, very few companies get funded as a percentage of the ones that are in the entire ecosystem, whether it’s here, whether it’s at AngelList, whether it’s wherever. It’s not a question of messaging necessarily. Basically right now companies get funded in one of two ways. One is … actually three ways … one is they have an investor offline who has a presence online and they bring the company in, other syndicate lead or send it to their followers and gets fund on that basis. 

Second is you can just get discovered which is there are investors to say, “Well, I want to invest in that parking metered company, smart parking metered company.” They go look at everything in the space and Angels may reach out to all of them and then they find one. 

Third is we feature it and we feature … we review for featuring every week. We review hundreds of companies and we look for which ones have tractions or novel interesting. In anytime of profile updates we go back to reviewing it. Unfortunately there really is no self-service reach out to investors for everybody because that turned into a giant spam fest. 

You just have to basically keep updating your profile, using it as a calling card with investors. Perhaps it will get picked up and they do all they long. I mean five, 10 companies a week get funded but hundreds apply every week or not even apply but list. I think you have to treat it a little bit more like a LinkedIn. It’s not necessarily going to be the only way you find a job but it helps to have a resume on LinkedIn if you want to get a job.

Jason: What are some of the hacks if you will things that work really well? I have a lot of people say like, “Oh, I’ll just give you free shares at my company to … let me put you down as a [inaudible 00:46:03] or not as I take it.”

Naval: That doesn’t do that much. Those hacks don’t work. We close those hacks whenever possible. Really, the hack the works the best is having a great company, having a really kick ass up to date profile and keeping it up to date. Every time you get an investor for example at each year round, you add them and we notify all that investor’s followers that Jason is now investing in the round. People pile in. 

People get the signals and notice and we’ll notice, “Oh, they put up three months of 30% growth. We should feature this company.” The data flows through the signals. Data are all structured and so it’s easy to track and there are lots of investors now using our API. We do probably five times of volume through our API that we do through the side browsing itself. 

Jason: So many can hit the API and say show me the company. Is that a report that this amount of growth?

Naval: Correct.

Jason: Fascinating. 

Naval: Yeah.

Jason: You’re a big fan of this rolling close on a convertible notes because it allows you to put, “Oh, Dave more invested this week and Jason Calacanis this week and whoever, Jeremy next week.”

Naval: I wouldn’t say this is to be a fun. I just think that it has certain advantages and one of those that you can keep fundraising all the time. The idea that you fundraise once then it’s closed up for 18 months, then suddenly somehow magically reopens and closes again, that is an artificial old model driven by the realities on how venture capital and fundraising used to work. The reality says now more of a blend. You can probably do your fundraising over six months where you can keep convertible note open. 

After that to keep it open, you probably have to show some real traction because the signal from the original investing will now sort of be dying down. 

Jason: I got it. One more question and final question. Two up here? Here comes Scott. He is running, get that real quick. Thanks God. 

Speaker 7: Hi! Given what you know about this space, do you think it’s possible for Startup that does crowd source knowledge similar to Wikipedia to succeed? What would it take?

Naval: That’s a specific question. Everything that’s great on the internet is crowd sources some level or another. It’s very rare to find a business that isn’t some variation and crowd sourcing. Uber is crowd sourcing the backend. [Limos 00:48:10] and resembling them together. Google is crowd sourcing the intelligence says in the backend. Even the companies that don’t look like their crowd source are fundamentally crowd source. 

With the internet … internet companies generally do that works really well is they aggregate huge amounts of desperate knowledge of individuals and pull them together. In that it says theoretically yes but the devil is so much in the details. 

Jason: One thing I would add to that is just people often look at the Wikipedia as like a roadmap and I think it’s kind of a black swan. It’s like it needed to exist in the world. It exists and now it no longer needs to be done. This idea that you could make a better Wikipedia or that that is some sort of a roadmap, I think [crosstalk 00:48:53] because there’s a lot of pitches.

Naval: Yeah. You have to do some fundamental orthogonal way, either something will have to change. Like for example, mobile came along and Wikipedia didn’t keep up which is not true but something would have [inaudible 00:49:02] a lot of change. Or you have to have a fundamentally different take on the problem. 

For example Quora you could argue is trying to augment or not replace but stand alongside. Wikipedia isn’t equally powerful and important entity but they’re basically saying is, “Oh, we’re going to crowd source knowledge for things where its specific knowledge and you need the answers from multiple individuals and there’s no single canonical factual answer.” Quora works much, much better for those kinds of things. 

I think you may have to look for an adjacent domain of knowledge that Wikipedia cannot address or doesn’t choose to address. 

Jason: There’s also a little bit of just one [inaudible 00:49:34], a little bit of fatigue in the crowd, so a lot of people think like you just started and then just a lot of people going to show up but when I started over the last decade of people doing crowd funding stuff is you build and nobody shows up or few people show up. You’d have to really have a long term slow build a fire from tinder and twigs and then build it up to a fire. 

Hey listen. This has been a fascinating discussion. Naval, as always you’ve been very insightful and honest which always makes you a great fire as I chat. Let’s give it up for Naval. 

Naval: Thank you everyone. 

Next up on the list: Book Recommendations from Dustin Moskovitz.

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