• AngelList Deals Will Soon Be Private (and Other Updates You’ll Want to Know)

    Screen Shot 2016-08-25 at 10.08.31 AMEarlier this week, we sat down with Naval Ravikant, cofounder of five-year-old AngelList, a popular platform that matches startups with early-stage investors. Three million people, including 50,000 accredited investors, have created profiles on AngelList since its founding, and AngelList now uses that information to pair startups with capital, pair startup employees with employers and, more newly, pair startups with customers.

    It’s become a big business, as well as a confusing one, Ravikant readily admits. And while we can’t report on one interesting new, performance-related wrinkle that’s coming soon, he walked us through many other stats and initiatives. Our chat has been edited for length and clarity.

    TC: A few years ago, AngelList introduced Syndicates, essentially pop-up funds that allow angel investors to syndicate their investments in exchange for some upside. It was fairly transparent at the outset, but that’s been changing. Why?

    NR: Seventy-five percent of the deals are now private, up from 45 percent a year ago. It’ll be default private soon because a lot of the hot deals tend to be private. Also, that public-private dichotomy is always really hard for entrepreneurs [in fundraising mode] to figure out, so they start associating our brand [with a place to share information publicly to accredited investors], which is a negative, so they don’t want to go on here. We might take a hit on liquidity by making the default private, but at the end of the day, it’s all about getting the high-quality companies.

    TC: An investor, Gil Penchina, has built a big business on the platform. Are more leads starting to see a kind of of network effect?

    NR: Gil is a unique case. He’s the one who’s always breaking the system. We’re more catering to operator-angels, meaning people who have operating jobs, or VPs at big companies or who’ve started their own startups. It’s people who aren’t professional VCs but who do four to six deals a year, investing in alumni and people they know.

    TC: How many of them close a deal each month? And are the investors on the platform mostly based in Silicon Valley?

    NR: We had 55 deals led by 41 leads close in June; we had 44 deals led by 38 leads close in July. The average for most leads on the platform is a couple of deals per year. As for demographics, I’d say over half [the people who lead deals on the platform] are in Silicon Valley.

    TC: You’d said publicly somewhere that you were getting into special purpose vehicles, which come together quickly to invest in a single, later-stage company. Why would someone create an SPV on the platform?

    More here.

    Connie

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  • Naval Ravikant on China Money into Silicon Valley: This Trickle Could Become a Tsunami

    Screen Shot 2016-08-25 at 10.08.31 AMAngelList, the online platform that matches startups with early-stage investors, has grown by leaps and bounds since its 2010 founding — and so have its ambitions. In fact, the company, which already bills itself as both the biggest seed-stage firm in the world, and the world’s largest hiring platform for startups, also aims to become the biggest venture fund in the world.

    Earlier this week, we sat down with cofounder Naval Ravikant at the firm’s swanky new, three-story digs in San Francisco’s Jackson Square, and as workmen shifted planks around the nearly completed ground-floor level, Ravikant caught us up to speed on a many aspects of what’s happening at AngelList.

    We’ll have more on his overarching vision tomorrow. Today, we’re publishing a part of our conversation that centered one of the biggest drivers of AngelList’s current growth: the $400 million that CSC Group — one of the biggest private equity funds in China — committed to invest through AngelList roughly 10 months ago. (The WSJ billed it as the “largest single pool of funds devoted to early-stage startups—ever.”)

    Ravikant shared how that relationship is evolving, and why he thinks CSC’s money is just the tip of the iceberg for both AngelList and Silicon Valley more broadly. Our chat has been edited for length and clarity.

    TC: Let’s start at the beginning. Who is managing this $400 million from CSC?

    NR: It’s a fund called CSC Upshot that’s managed by CSC’s Veronica Wu, who used to be a VP at Tesla Motors in Beijing; Ming Yeh, who’d spent the previous six years or so as a managing director at [Silicon Valley Bank] in Shanghai; and Tom Cole, a former partner at Trinity Ventures.

    TC: How much have they invested in startups on AngelList so far?

    NR: They’re on track to invest between $25 million and $40 million this year, with an average check size of $100,000.

    TC: Wow, that’s quite a pace. How does the decision-making process work?

    NR: We’ve built a dashboard for fund management, and all these managers [have signed nondisclosure agreements] so they get to see literally hundreds and hundreds of deals on AngelList. And they chat with each other and [with the lead investor’s approval], if enough people vote yes, the deal gets done.

    Much more here.

    Connie

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  • StrictlyVC: February 20, 2015

    It’s Friday! [Does backflips, cartwheels, jumping jacks, lunges.]

    —–

    Top News in the A.M.

    Britain’s electronic spying agency, in cooperation with the NSA, reportedly hacked into the networks of the world’s largest SIM card maker in order to eavesdrop on mobile phones worldwide. The Intercept has a bombshell report about what’s gone on here.

    —–

    Naval Ravikant on AngelList’s 2015 Game Plan

    Last week, at StrictlyVC’s inaugural event, AngelList cofounder Naval Ravikant joked about the trials and tribulations of entrepreneurship. He also gave those gathered a comprehensive look at the near-term future of AngelList, a fast-moving, 22-person, San Francisco-based company that’s perhaps become best-known for its pop-up venture funds called Syndicates that allow angel investors to syndicate investments themselves. Indeed, according to Ravikant, more than 243 companies raised $104 million through the platform last year, making AngelList the “largest seed fund in the world.” And AngelList is hoping to double or triple those numbers this year.

    More from our chat that evening, edited for length, here.

    You say of the $104 million that your 15-month-old Syndicates program funneled toward startups last year, $7 million, or just less than 7 percent, was from institutions. Are you happy with that number?

    No. [Laughs.] Obviously, institutional investors come later to the game. They need more certainty, more diligence. It takes more time.

    A few venture firms now actively use Syndicates, including Foundry Group, which did something like 40 deals last year on your platform. Have you also talked with big mutual funds that now make big bets on later-stage startups and that might diversify even more by getting into earlier-stage investing?

    They have no idea what this is. I’ve tried to explain it to them and it’s too bleeding edge for them. Sometimes we’re too far out ahead of the curve.

    Where are these angels coming from – the Bay Area primarily?

    A lot of them are [from the] Bay Area. A lot are entrepreneurs, angels, or maybe individual VC partners who are backing each other. We also have hedge fund managers, oil traders, people in the finance industry who have made some money but aren’t in Silicon Valley. There are definitely the dentists and radiologists, who the finance industry seems to hate – I don’t know why. And they do try and come on and we either reject them or we put them into [a new series of index funds] that are managed by us so they can invest in 100 startups at a time [and hedge their bets].

    You have Syndicates. You have these index funds and other products. What do people use the most at AngelList?

    Actually, [they mostly use] the recruiting site, which we started on a lark in early 2012 when we noticed that people were raiding failed companies on AngelList for employees. That’s by far the highest activity thing on the site, because everyone is looking to hire. We have around 7,000 companies recruiting on AngelList, of whom more than 3,000 log-in every single week and go through . . . 120,000 candidate profiles that are active.

    Are you ever going to make money off those listings?

    That’s the obvious source of cash. But it works because it’s free for the startups. If we do monetize that — and we’re running some experiments — it will be at the high end for people who have more money than time.

    Last year, angel investor Gil Penchina raised $2.8 million via Syndicates to invest in Beepi, a used car marketplace, alongside DST Global. Was that the biggest syndicate to date by far?

    We’ve had a couple of others that were over a million bucks. It’s relatively constrained because you’re gathering checks from individuals, so when you collect $2.8 million, that’s 90 different checks and wire transfers and so on, and we’re limited because we form a special purpose vehicle to invest in each company, and that SPV is limited to 99 unit holders by law. So I would not extrapolate and say, okay, $2.8 million today; tomorrow, it will be $10 million, then $20 million. It’s fun to think it could go to that range, but I don’t think so, not yet.

    Penchina recently told the WSJ that he has poured his entire life savings into AngelList. Does that concern you? What if things go south for him?

    That might have been an exaggeration. [Laughs.] But sure, it’s never good when someone loses their shirt, that’s true of any startup.

    Has anyone come after you over a deal that didn’t go as expected?

    No. In the entire history of AngelList, we’ve never had a single related case of fraud or a lawsuit threat. We follow the rules, we have a no-action letterfrom the SEC, we have disclaimers, we’re trying to deal only with sophisticated people. This is America, and anyone can sue you and someone eventually will. But so far so good.

    How do you keep people from getting in over their heads?

    We look at what angel investments they’ve done before, and if they don’t have a history of doing them, then we’ll run them through a questionnaire that asks them: What percentage of your net worth are you putting in, what kind of return do you expect, how liquid do you think these investments are, how big a basket of these do you think you need to assemble? And based on their responses, we’ll either reject them, we’ll cap the amount they can invest, or we’ll move them into one of the index funds and say, “You can put a small amount in here.” Or we’ll say, “Go offline, go to your local angel association and lose some money there, then come back to us.” The test we’re looking for is: have you lost money before.

    How much of someone’s net worth would you advise investing in nascent startups? Up to 10 percent?

    No, I would say anything more than 5 percent is probably silly. Obviously, I’m personally far more leveraged than that – I’m “all in” on startups — but that’s because I’m living in Silicon Valley and I’ve bought into the dream.

    For much more on AngelList, and its next moves (including, potentially, into secondaries), click here.

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    New Fundings

    17hats, a six-month-old, L.A.-based maker of business management software for micro businesses, has raised $1.25 million in seed funding led by Wavemaker Partners, with participation from unnamed angel investors. VentureBeat has more here.

    AgileCraft, an eight-year-old, Georgetown, Tx.-based software management suite built to support scaled agile software development, has raised $10 million in Series A funding led by the Houston private equity firm Crane Nelson, with participation from angel investors.

    ArmorText, a 4.5-year-old, Reston, Va.-based secure messaging app for businesses, has raised $2 million in funding led by Cervin Ventures.

    ContaAzul, a four-year-old, Joinville, Brazil-based maker of SaaS accounting and invoicing software for small and mid-size businesses, has raised an undisclosed amount of Series C round of funding from earlier backer Ribbit Capital, with participation from Tiger Global Management and other previous investors, including 500 Startups, Monashees Capital, and Valar Ventures. ContaAzul hasn’t disclosed the amount of any of its rounds.

    DealDey, a four-year-old, Lagos, Nigeria-based e-commerce platform that aggregates discounted goods and services, has raised $5 million from earlier backer Kinnevik, the Swedish investment firm. TechCabal has more here.

    Helijia, a nearly two-year-old, China-based company whose app helps users browse for and book beautify appointments across numerous cities in China, has raised $50 million in Series C funding led by an undisclosed “first-rate” VC firm, with participation from earlier backers IDG Capital Partners and CBC Capital. Tech in Asia has more here.

    Lifecode, a four-year-old, Foster City, Ca.-based next-generation molecular diagnostics company, has announced a previously undisclosed $20.5 million Series A round led by Sequoia Capital, with the The Mayo Clinic and Mayo Ventures participating. More here.

    LiveFyre, a five-year-old, San Francisco-based company that makes social-media and other content-management tools for large enterprise customers, has raised $47 million in funding from new investors Adobe Ventures and Salesforce Ventures, along with earlier backers Cue Ball Capital, Greycroft Partners, Hillsven Capital and U.S. Venture Partners. The company has raised $67.3 million to date, shows Crunchbase.

    Practo, a nearly seven-year-old, Bangalore, India-based platform used to find and book doctors’ appointments, has raised $30 million in Series B funding from Matrix Partners and earlier backer Sequoia Capital, which had provided the company with $4 million in Series A funding in 2012.

    Sqrrl Data, a 2.5-year-old, Cambridge, Ma.-based company whose database detects and responds to cybersecurity threats, has raised $7 million in Series B funding led by Rally Ventures, with participation from earlier backers Atlas Venture and Matrix Partners. The company has now raised $14.2 million to date, shows Crunchbase.

    Synack, a two-year-old, Redwood City, Ca.-based security startup that takes the concept of bug bounty programs at big companies and makes them more widely accessible via a network of freelance security researchers, has raised $25 million in Series B funding from GGV Capital and Icon Ventures, bringing the two-year-old company’s total funding to $34 million. Forbes has more here.

    —–

    New Funds

    Moneta Ventures, a Folsom, Ca.-based venture fund, has closed its debut fund at $25 million, with help “in the low millions” from entrepreneur Kevin Nagle, part owner of the NBA team the Sacramento Kings. Moneta, which focuses on Sacramento-area startups, was founded by Lokesh Sikaria, a technology entrepreneur who’d earlier cofounded Sparta Consulting. That company sold for $38 million in 2009 to India-based KPIT Cummins Infosystems. The Sacramento Bee has more here.

    —–

    IPOs

    SolarEdge, a nearly nine-year-old, Freemont, Ca.-based company whose electronics improve the performance of solar panels, has filed to raise up to $125 million in an IPO. The company has raised $85 million from investors over the years. According to its S-1, its biggest shareholders include the development firm ORR Partners, which owns 5.8 percent of the company; Opus Capital, which owns 14.64 percent; Genesis Partners, which owns 14.64; PacVen Walden Ventures, which owns 14.64 percent; Vertex, which owns 5.94 percent; Norwest Venture Partners, which owns 10.56 percent; and Lightspeed Venture Partners, which owns 11.52 percent.

    Twilio hasn’t set a date for an IPO yet, but the eight-year-old company — which sells an API to developers who want to add call, voice, text and picture messaging to their apps and that logged $100 million in revenue last year — tells Venture Capital Dispatch that it’s putting the necessarily internal processes in place. Twilio has raised $104 million from investors, including Bessemer Venture Partners, Redpoint Ventures, and Union Square Ventures. It was valued around $500 million during its last funding round in July 2013.

    —–

    Exits

    ActoGeniX, a venture-backed, Belgium-based biopharmaceutical company, has sold for $30 million in cash and another $30 million in common stock to publicly traded Intrexon Corp. ActoGenix had raised at least 35.5 million euros in two financing rounds from Aescap Venture,Baekeland Fund, Biotech Fund Flanders, Biovest, Gimv Life Sciences Partners and Ventech, according to VentureWire.

    Exclusively.com, an India-based online luxury fashion business, has been acquired by the e-commerce giant Snapdeal for an undisclosed amount. Exclusively was originally acquired by Snapdeal’s rival Myntra in 2012 but Myntra reportedly sold back its entire stake in the company to its founder, Sunjay Guleria, the following year. Under the partnership with Snapdeal, Exclusively will continue to function as an independent site. MediaNama has more here.

    GoPop, an eight-month-old, San Francisco-based startup whose app stitches together media into animations, has been acquired by BuzzFeed for undisclosed terms.

    —–

    People

    Rene Alegria has joined the Burlington, Vt-based social network Ello as its first chief marketing officer. Alegria was previously CEO of Mamiverse, a digital entertainment and news platform devoted to Latina moms and their families. Ello, founded in 2013, raised $5.5 million from investors last October, including Foundry Group, Bullet Time Ventures and FreshTracks Capital.

    —–

    Data

    CB Insights has just published an extensive review of 2014’s financing activity to venture-backed European tech companies. You can check it out here.

    —–

    Essential Reads

    Exploding Kittens, a simple card game that sees players draw cards until someone draws an exploding kitten card, sought $10,000 on Kickstarter. Instead, it has raised $8,782,571, breaking every record on the platform to date.

    —–

    Detours

    Like coffee? Drink up.

    The incredible shrinking Wall Street population.

    Why men often think women are flirting with them.

    —–

    Retail Therapy

    Game of Thrones action figures. For the kids, of course.

    Connie

    ,

  • Naval Ravikant on AngelList’s 2015 Game Plan

    IMG_9776Last week, at StrictlyVC’s inaugural event, investor and founder Naval Ravikant joked about the trials and tribulations of entrepreneurship. He also gave those gathered a comprehensive look at the near-term future of AngelList, his fast-moving, 22-person, San Francisco-based company that’s perhaps become best-known for its pop-up venture funds called Syndicates that allow angel investors to syndicate investments themselves. Indeed, according to Ravikant, more than 243 companies raised $104 million through the platform last year, making AngelList the “largest seed fund in the world.” And AngelList is hoping to double or triple those numbers this year.

    More from our chat that evening, edited for length, here.

    You say of the $104 million that your 15-month-old Syndicates program funneled toward startups last year, $7 million, or just less than 7 percent, was from institutions. Are you happy with that number?

    No. [Laughs.] Obviously, institutional investors come later to the game. They need more certainty, more diligence. It takes more time.

    A few venture firms now actively use Syndicates, including Foundry Group, which did something like 40 deals last year on your platform. Have you also talked with big mutual funds that now make big bets on later-stage startups and that might diversify even more by getting into earlier-stage investing?

    They have no idea what this is. I’ve tried to explain it to them and it’s too bleeding edge for them. Sometimes we’re too far out ahead of the curve.

    Where are these angels coming from – the Bay Area primarily?

    A lot of them are [from the] Bay Area. A lot are entrepreneurs, angels, or maybe individual VC partners who are backing each other. We also have hedge fund managers, oil traders, people in the finance industry who have made some money but aren’t in Silicon Valley. There are definitely the dentists and radiologists, who the finance industry seems to hate – I don’t know why. And they do try and come on and we either reject them or we put them into [a new series of index funds] that are managed by us so they can invest in 100 startups at a time [and hedge their bets].

    You have Syndicates. You have these index funds and other products. What do people use the most at AngelList?

    Actually, [they mostly use] the recruiting site, which we started on a lark in early 2012 when we noticed that people were raiding failed companies on AngelList for employees. That’s by far the highest activity thing on the site, because everyone is looking to hire. We have around 7,000 companies recruiting on AngelList, of whom more than 3,000 log-in every single week and go through . . . 120,000 candidate profiles that are active.

    Are you ever going to make money off those listings?

    That’s the obvious source of cash. But it works because it’s free for the startups. If we do monetize that — and we’re running some experiments — it will be at the high end for people who have more money than time.

    Last year, angel investor Gil Penchina raised $2.8 million via Syndicates to invest in Beepi, a used car marketplace, alongside DST Global. Was that the biggest syndicate to date by far?

    We’ve had a couple of others that were over a million bucks. It’s relatively constrained because you’re gathering checks from individuals, so when you collect $2.8 million, that’s 90 different checks and wire transfers and so on, and we’re limited because we form a special purpose vehicle to invest in each company, and that SPV is limited to 99 unit holders by law. So I would not extrapolate and say, okay, $2.8 million today; tomorrow, it will be $10 million, then $20 million. It’s fun to think it could go to that range, but I don’t think so, not yet.

    Penchina recently told the WSJ that he has poured his entire life savings into AngelList. Does that concern you? What if things go south for him?

    That might have been an exaggeration. [Laughs.] But sure, it’s never good when someone loses their shirt, that’s true of any startup.

    Has anyone come after you over a deal that didn’t go as expected?

    No. In the entire history of AngelList, we’ve never had a single related case of fraud or a lawsuit threat. We follow the rules, we have a no-action letter from the SEC, we have disclaimers, we’re trying to deal only with sophisticated people. This is America, and anyone can sue you and someone eventually will. But so far so good.

    How do you keep people from getting in over their heads?

    We look at what angel investments they’ve done before, and if they don’t have a history of doing them, then we’ll run them through a questionnaire that asks them: What percentage of your net worth are you putting in, what kind of return do you expect, how liquid do you think these investments are, how big a basket of these do you think you need to assemble? And based on their responses, we’ll either reject them, we’ll cap the amount they can invest, or we’ll move them into one of the index funds and say, “You can put a small amount in here.” Or we’ll say, “Go offline, go to your local angel association and lose some money there, then come back to us.” The test we’re looking for is: have you lost money before.

    How much of someone’s net worth would you advise investing in nascent startups? Up to 10 percent?

    No, I would say anything more than 5 percent is probably silly. Obviously, I’m personally far more leveraged than that – I’m “all in” on startups — but that’s because I’m living in Silicon Valley and I’ve bought into the dream.

    —–

    You talk a lot about the advantage of moving investing online.

    People like to think that it doesn’t create that much value, but we forget that when you move online, there are all kinds of things you cannot do offline. An example: By the end of this year, you’ll be able to go into Syndicates and say, “This person sourced the deal for me so I’m going to give this person carry. This is passive capital, so they’ll pay full freight. The pro rata will get gobbled up by following entities.” You can even start doing differential pricing. You can establish that the first $250,000 into a deal gets a 20 percent discount and the next $250,000 gets a 15 percent discount. It breaks that logjam of: Why should I be the first one to write a check into the company.

    Online would also seem to play into this notion of continuous fundraising or rolling closes. Do you think that’s a sustainable trend?

    We’re going to see a lot more of it. Companies are getting much better at raising money whenever it’s available and they’ll raise it in dribs and drabs until they get to the scale or product-market fit where a VC will come in and write a $10 million check. I think it’s a natural trend and I do think it’s easier online than offline. We already enable it to an extent in that Syndicated deals can stay open for months and keep collecting capital if you want it to . . . My guess is that by the end of next year, it’ll be a common thing.

    In the past, entrepreneurs had gotten a lot of advice from the venture side, which was kind of talking their own book, which was, “Get your ducks in a row and raise money once and get a good board member.” It’s all good advice, but it’s a little self-serving, whereas accelerators give almost the opposite advice, which is: “Go get the money right now, get it from anyone who will write you a check within reason, and keep taking money as long as you can and just don’t run out of cash.”

    I’ve also seen you mention getting into secondaries. How serious were you?

    Yes, they’re becoming very popular now because household names like Uber and Airbnb and Dropbox are staying private longer and people are running around trading in the companies’ stock on the side. But it’s very tricky because [secondaries are] regulated in a very different way. Insider trading laws apply to secondaries; the companies often don’t want there to be secondary trades, so they have a right of first refusal. A lot of the secondary trades that are going on are in violation of the companies’ bylaws. A lot of them have counterparty risk, where you don’t actually run it through the company; you just get an IOU from someone who could skip town.

    A lot of this going on right now. It’s possible that the amount of secondary trading going on in Silicon Valley under the covers is going to match the amount of primary financing soon. And if you look at the public markets like the Nasdaq or the NYSE, it’s almost all secondary. The IPOs are a tiny piece of the trades, and then it’s all secondary trading going back and forth. So it’s something that we’re looking at, but it’s very difficult, and because we’re so large and so watched, we have to do it by the book. We’re looking into it, but it’s a hard problem.

    [Update: The original version of this story was titled: “In Silicon Valley, Secondary Deals Quietly Reaching ‘Primary’ Funding Levels.” Ravikant asked that we change it, given that our choice in wording was more predictive and certain than his original comments or intent. Our apologies to Ravikant and to readers.]

    Connie

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  • The Rolling Close: Here to Stay or Gone Tomorrow?

    restricted_area_-_authorized_personnel_only_sign_lVenture capital was long a clubby, opaque industry, but AngelList and crowdfunding are two intertwined innovations that have since knocked that model onto its side. Now, another related twist looks poised to roil it again: the rolling close.

    You’ve probably heard the term in recent years. A rolling close is what happens when a management team raises money within a certain window of time with no predetermined size for the “round.” Every amount invested is closed immediately at a set valuation, versus a traditional funding where a round isn’t closed until a predetermined minimum is raised.

    The messaging service Snapchat is the highest-profile company to employ the model, closing $485 million from 23 investors over the course of nine months last year.

    Last week, as TechCrunch reported, an eight-year-old, London-based film streaming service called MUBI closed on $15 million in similar fashion, raising the money from 49 investors over many months.

    StrictlyVC is aware of two startups in San Francisco that are currently employing the same tactic.

    You might think of it like crowdsourcing, without the middleman. “Whoever wires the money is in, and when you reach your target, you ‘close’ the round,” MUBI founder Efe Cakarel told TechCrunch.

    Ramana Nanda, an associate professor at Harvard Business School, characterizes rolling closes as a product of a frothy market – full stop. It’s an “effective strategy for entrepreneurs in industries and at times when capital for startups is abundant and financing risk is low.”

    As long as firms and investors can reasonably expect to continue raising money on good terms, Nanda says, they’re “less concerned about having a cash cushion in the event that things don’t go as well as expected, or because investors will not show up when the cash reserve runs low.”

    Rolling closes are also tactical, argues Todd Chaffee, a managing director at Institutional Venture Partners, a Snapchat investor that wrote its first check to the company in 2013. “The formality of, ‘Let’s close this round, get back to business, and then raise another round’” isn’t always ideal for a fast-moving company, Chaffee says, calling rolling closes a “more fluid and dynamic approach.”

    Still, there are downsides, including — presumably — managing investor relations. According to TechCrunch sources, Snapchat CEO Evan Spiegel has been known to invite different parties to invest in Snapchat at different pre-money valuations. (TechCrunch says some investors funded Snapchat last year at a $10 billion valuation while others participated at a pre-money valuation that was closer to $20 billion.)

    MUBI’s backers invested at the same pre-money valuation, but all while the company’s post-money valuation was rising, meaning that every subsequent investor in MUBI’s newest fundraise was getting less of the company for his or her money.

    It was a “very transparent and fair process,” says Cakarel, who tells StrictlyVC that “new investors weighed [MUBI’s] increased ‘pre-money’ valuation against a company that was becoming better capitalized [and] that continued to grow its subscriber base significantly throughout the funding period.”

    Little wonder that investors who are accustomed to traditional rounds — where everyone receives the same terms — aren’t sure what to make of the trend. “We haven’t seen this sort of financing/closing structure in the late stage,” says Paul Madera of the late-stage investment firm Meritech Capital, but we “generally wouldn’t be very comfortable with it,” he adds.

    Hunter Walk, cofounder of the seed-stage firm Homebrew, says his firm has “occasionally participated” in rolling closes — in cases where the entrepreneurs are “herding cats a bit and want to put money to work right away from committed investors.” At the same time, he says, “It would give me pause at the seed stage to see a founder who tried to mark up the company several times during a round.”

    The big question, of course, is whether rolling closes are here to stay. Only time will tell, but our guess is that they are — that they’re indicative of how private financings are moving toward a more market-based approach. After all, if there’s more demand for an issue, doesn’t it make sense to raise the price? Why should founders be forever bound to the artificial constraints of “rounds”?

    As Cakarel puts it, “It was unimaginable, even eight years ago when I started MUBI, to do a round of $15 million from a bunch of individuals, each coming in with somewhere between $50,000 and $1 million in Silicon Valley.”

    Cakarel isn’t saying he’s closing the door on VCs. “Raising institutional capital is also very attractive, and VCs can add a lot of value.” But he notes that “VCs are no longer the only option you have for this kind of capital. And this is good for entrepreneurs. Out of options come good decisions.”

    Sign up for our morning missive, StrictlyVC, featuring all the venture-related news you need to start you day.

    Connie

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  • At Six Months, Syndicates is Maturing, Without Some Big Names

    AngelList.logoWhen AngelList launched its “syndicates” program last September, AllThingsD anointed one investor, Kevin Rose, as its “million dollar man.” The reason: within a week of AngelList making it possible for backers to put their money behind one individual, Rose collected more than $1.1 million in commitments.

    Rose, a Google Ventures partner, told his 245 backers that he planned to participate in five seed investments per year on the platform. But six months later, he hasn’t invested in any. Both MG Siegler of Google Ventures and Path cofounder Dave Morin, who also quickly attracted hundreds of thousands of dollars to syndicate deals, haven’t pulled the trigger on anything, either.

    Neither Google Ventures nor Morin responded to a request for comment. But AngelList cofounder Naval Ravikant has a theory based on his own investing experience. “I think some [investors] assembled syndicates but didn’t know what to do with them. I think some are scared because the platform is very transparent. [An investment] is going to be tracked. People will see the deal in detail. There’s no hiding anything, and it causes people to freeze up a bit.”

    Some have painted another picture of why Rose may not be syndicating deals on the platform. One source cites a low volume of high-quality deals, while another says that if there’s enough demand for a startup’s seed round, there’s no reason to include a syndicate.

    It seems entirely possible, too, that it’s harder for full-time VCs to justify their involvement with the platform until it’s better understood. Google Ventures, as a single LP fund, might also be struggling with whether to essentially create a separate management company around one of its partners.

    Perhaps unsurprisingly, Ravikant rejects each one of these ideas, noting that both venture firms and LPs are showing increased interest in syndicates, including Maiden Lane, a new fund backed institutional investors that will invest both directly in syndicates and in direct investment opportunities found elsewhere on AngelList’s platform.

    Ravikant further insists the quality of the deals being syndicated is “actually quite good.” He points to AltSchool, a year-old, San Francisco-based company that’s creating a brand-new network of schools. On Tuesday, the company announced that it has raised $33 million in Series A funding led by Founders Fund and Andreessen Horowitz. Among AltSchool’s other, earlier investors is former Wikia CEO Gil Penchina, who syndicated the investment on AngelList.

    Ravikant also notes that syndicate leads can choose whether information about a deal will be made available to the general AngelList investor community or to specific backers only, suggesting that some of the program’s best startups are being funded under the radar. He highlights Ben Davenport, whose mobile messaging startup, Beluga, was acquired by Facebook and turned into Facebook Messenger. Davenport recently syndicated an investment in NYBX, a New York-based company focused on cryptocurrencies. By design, his backers are serious Bitcoin investors only, and “unless you were one of Ben’s LPs,” says Ravikant, you didn’t see it.

    I ask Hunter Walk of the venture firm Homebrew about his experience with the platform. Last September, his firm led a $2.1 million investment in the shipping startup Shyp, some of which came from a syndicate led by entrepreneur-author Tim Ferriss. It created a lot of press at the time for Shyp, but in retrospect, was it worth it? Walk says it was. “Tim was able to assemble a great set of angels – some known, some new to investing – but we saw his participation as strategic.”

    AngelList’s syndicates program is “still very much in beta, so going slow,” says Ravikant. “I don’t think [the program] will be hitting its stride until next year.”

    In the meantime, he says, there’s “a lot more demand than we can run. Fundamentally, something is working.”

    Connie

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  • With Little Notice, Seed-Stage Valuations Begin Falling

    mo moneyA widely held belief in Silicon Valley is that valuations are still on a one-way trajectory toward the sky, with founders firmly in the driver’s seat.

    But the reality for seed-stage companies may be a bit more dire than that — and getting worse by the month.

    According to the research firm CB Insights, both average and median seed-stage valuations have fallen since last year, with the average valuation dropping from $2.2 million to $1.7 million and median valuation falling even more precipitously, from $1.7 million to just .6 million.

    Data from AngelList, a matchmaking service for investors and seed-stage entrepreneurs, also shows declining valuations. According to AngelList, which tracks thousands of startups in its system, the average seed-funded company’s valuation dropped from $3.9 million in the third quarter of 2012 to $3.6 million in the third quarter of this year. That isn’t a massive dip, but AngelList founder Naval Ravikant tells me that “by the time [a shift in one direction] shows up in the averages, it’s pretty pronounced.”

    A recent quarterly venture capital report out of Pitchbook, which operates a subscription-only database of private equity and VC deals paints a rosier picture. Pitchbook found that median pre-money valuations for seed-stage, VC-funded companies have nearly doubled over the last three years — from $3.2 million in 2010 to $5.2 million through the first three quarters of 2013.

    Still, this same report observed that lofty valuations are only making it harder for companies to raise Series A rounds. Pitchbook further noted that the rise of valuations can’t go on endlessly, suggesting there will likely be more flat and down rounds in coming years.

    Ravikant — noting that “everyone’s dataset is incomplete” — suggests the future is now. Though he can’t pinpoint exactly when things began trending downward, he thinks valuations “kind of peaked around the Facebook IPO, when it turned out to be less than people thought it would be.”

    According to Ravikant, there “hasn’t been a mass exodus out” out of the seed-stage investing market, mainly because “people still believe some percentage of your portfolio should be early-stage. But there’s increased recognition” that it’s a tough racket, with many angels suffering from investor fatigue and suddenly becoming more realistic about the chances of their portfolio companies receiving follow-on investments.

    There will always be a market for the most promising seed-stage startups, in other words. But evidence from CB Insights and AngelList suggests that for entrepreneurs just setting out, the road ahead looks bumpy.

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    Connie

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  • AngelList’s Naval Ravikant on His Syndicates Program, Two Months In

    navalEntrepreneurs Naval Ravikant and Babak Nivi have already done much to reshape the startup investing landscape with AngelList, their now four-year-old networking site that has largely replaced coffee meetings with Internet-based matchmaking. 

    In September, AngelList introduced another game-changer — its Syndicates program, which allows angel investors to syndicate investments themselves, work for which they receive carry. (An angel who syndicates a deal earns 15 percent of any upside, while AngelList collects 5 percent.)

    Though Syndicates is still nascent, I caught up with Ravikant yesterday afternoon to see who has begun using it and how it’s doing generally. Our chat has been edited for length.

    Can you give us a sense of the activity you’re seeing on Syndicates?

    I’d estimate that something like $5 million has moved through the platform already, with several million more dollars [committed but not yet closed]. About 24 deals have closed, and others are in various stages of closing.

    Do the deals involve many of the same people or are you seeing fairly disparate groups?

    A bit of both. Some people are using it more promiscuously to diversify their portfolio. Others are doing deals because the know the lead backer well and it’s a trust relationship. For example, you see [Path CEO and former Facebook exec] Dave Morin and other Facebook alums co-investing together and backing each other.

    Is anyone using the platform who you didn’t anticipate would?

    The biggest surprise has been VC interest. The response has been the highest from angels, but we’re in advanced stages of talking about how to do syndicates with four firms, and numerous others are using the platform as a way to scout out deals. As with their scout programs, they’re backing their portfolio CEOs when those CEOs go and find and fund great companies.

    Will we see a day when a person can raise $20 million via Syndicates to invest across numerous startups?

    The way it’s set up right now, you can [invest] deal by deal…So we’ll hold funds in escrow for one deal. What we’re not doing is [managing a] 10-year commitment. If [Google Ventures partner] Kevin Rose has $2 million in backing, that’s $2 million [for one] deal. But he can drop people, or they can drop out of the syndicate, any time.

    Has Kevin Rose made an investment through the platform yet? 

    There are three Google Ventures partners who have a lot of syndicate backing but haven’t done a deal yet.

    This whole thing seems like a great financial proposition for everyone but you. Is that true?

    The idea isn’t to make money in the short term. But yes, today, it’s a money loser. We take 5 percent of [any upside] so if a lead invests $100,000 personally in a company, then raises another $1 million off Syndicates, we get carry off that $1 million, or $50,000 [if the company sells for $10 million]. But most Syndicates are in the $250,000 or $300,000 to $750,000, so at the lower end, that’s about $10,000 for us. Meanwhile, our out-of-pocket fees – to set up the funds, handle customer accounting [and so forth] are $12,000. So we’re basically paying $12,000 for $10,000 in future profit.

    Why do it then?

    Because longer term, we think we can bring LLC costs down to $5,000. And as syndicate sizes grow, it starts to become marginally profitable.

    In the meantime, are you quietly investing a fund for anyone right now? At one point, you were talking about doing that after you’d invested a $20 million angel fund, Hit Forge.

    I’ve been offered to raise another; [Hit Forge included stakes in] Uber, Twitter and Stack Overflow. But investing is [just a side hobby] now, and I’m making all my investments through Syndicates. I get to follow my best friends into deals, and I don’t mind paying them for carry if it means I don’t have [as many] coffee meetings.

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  • The Case for More Transparency on AngelList

    angellist-logoLast week, AngelList, the hugely popular platform that connects entrepreneurs with accredited investors, introduced what many have heralded as a game-changing new twist to its business. Called its Syndicate program, AngelList now allows angel investors to syndicate investments themselves, work for which they will receive carry. (An angel who syndicates a deal will earn 15 percent of any upside, while AngelList will collect 5 percent.) 

    If some of these syndicates involve the same groups of investors, and those groups morph into venture funds, don’t be surprised. As some angels have said on social media since AngelList announced its new program, it might allow many of the “best” angels to strengthen their brands and, potentially, move up the investing food chain.

    And there’s no reason why angels shouldn’t be able to extract more leverage from their investments, particularly if they’re willing to manage a big syndicate or serve on a company’s board.

    Still, while the syndicate program seems like a well-considered start, AngelList might think about providing some public accounting of the track records of its various syndicate leaders. As the gossip site Valleywag pointed out in its inimitable way yesterday, without a structure that manages to disclose something about the investors’ IRRs, the program seems likely to degenerate into a popularity contest. Much of AngelList’s matchmaking still rests on “social proof,” which isn’t quite the same thing as cash on cash returns.

    Last week, for example, author and entrepreneur Tim Ferriss raised $350,000 for a logistics startup called Shyp in 53 minutes. Ferriss’ fundraising prowess is impressive, and nobody is prejudging Shyp, but it’s hard not to be skeptical about investments that are closed in less than an hour.

    Most VCs wouldn’t wish their fundraising process on their worst enemy, but it does help them demonstrate their qualifications and commitment to the investment process to both their investors and their fellow partners. Through vetting their PPMs with Cambridge Associates, undergoing lengthy and arduous roadshows with family offices and pension funds, and sacrificing a large amount of their own capital – typically 3 percent – in order to launch their funds, venture investors let it all hang out. (Yes, there are top-tier funds that are able to raise funds by picking up the phone a few times, but that’s the exception not the norm.) By the time a firm has raised a fund, they have left a trail of evidence testifying to the work they will put into an investment. Can the same be said of Ferriss?

    Obviously, AngelList doesn’t need to replicate the venture business – it’s large enough as it is. But in the interests of both entrepreneurs and the syndicates themselves, it might be time for AngelList to adopt an objective ratings process, one that would provide everyone with more insight into an investor’s qualifications than just his or her Klout score. No doubt it would make an already promising initiative even better.

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