Investing Platforms
AngelList is an amazing platform for getting started investing in startups, and has no real competition for accredited investors interested in investing as little as $1,000. Thanks to its social network features, it operates as a double marketplace: between investors (LPs) and syndicate leads (GPs), and between syndicates and startups.
There are other excellent platforms that facilitate the paperwork and financial transactions for investment syndicates (my favorite is Assure - they powered the AngelList backend early on), but those platforms assume that the syndicate lead and investors are already connected, and don’t drive discovery of new syndicates and deals.
For non-accredited investors, there are a variety of sites that allow investing in startups under the regulations stemming from the JOBS Act, and in amounts as little as $100. I’ve dabbled a little with SeedInvest, and they have plenty of competitors (e.g. Republic, MicroVentures). I consider these sites to have slight adverse selection, because the companies are directly listing and promoting the opportunity and answering investor questions, which is very time consuming and most companies would prefer to avoid, whereas on AngelList the syndicate lead is writing the investment memo and fielding questions. Also, from what I’ve seen, AngelList deals are more likely to fill their allocation, and do it faster, perhaps based on the filtering process that AngelList employs to review and greenlight deals.
Benefits of AngelList
I can invest in smaller amounts than the minimum direct investment that most startups require at pre-Series-A rounds (often $20-$25K). Most AngelList deals have a minimum of $1K-$5K. In exchange, I pay a pro rata portion of the $8K setup fee to AngelList which covers all the legal/tax backend work, and a 20% carry (i.e. 20% of profits) to the syndicate lead for their work in sourcing and analyzing the deal. As I mentioned in my earlier post, this allows for more diversification. Because the minimum deal allocation size is $100K and many deals are bigger (technically, AngelList will run a deal for an $80K allocation but it’s very rare to see), that means at most my setup fee is 8%, which is far less than the 20% I’d pay to a closed VC fund over the 10 year life of the fund for the standard 2% annual management fee.
Free information! I’ve signed up for dozens of syndicates because it’s free, AngelList makes it easy for me to browse and discover syndicates matching my interests, and I get access to dozens of startup decks and well researched deal memos every month with no obligation to invest. I can’t overstate the educational value of this. And while you have to apply to join a syndicate, it’s pretty rare for a syndicate lead to decline an invitation, or to kick people out of the syndicate who aren’t investing. To give you an idea of the scale - today there were 160 active deals running from 73 syndicates, and there were over 1000 deals on the platform over the last year.
I can decide which deals to back, unlike investing in a closed fund (which is also possible on AngelList, by the way).
As part of AngelList’s standard deal form, I get information about co-investors and prior investors (and sometimes it includes info that isn’t on Crunchbase or Pitchbook). Networking with co-investors is an excellent opportunity to learn more about investing and get more deal flow in the future.
Drawbacks of AngelList
Carry is calculated deal by deal, even within the same syndicate. That means that a loss on Company X doesn’t offset the profit on Company Y for purposes of calculating the carry I pay on Company Y. This is worse than a closed VC fund, where carry is calculated on net gain across the portfolio.
Although the setup fee is reasonable, the exact amount is unpredictable because I won’t know until the deal is over whether the syndicate oversubscribed or undersubscribed the target allocation.
If the syndicate raises more than the target allocation, the syndicate lead can decide to either scale everybody back pro rata (and refund some of my commitment), or they can just shut the syndicate down early (i.e. first come first served). This means I have less precise control over how much I will end up investing, and I also can’t necessarily rely on the stated end date of the deal in planning when to review and make a decision.
SAFE Risks
Many pre-seed and seed stage deals use an investment document created by Y-Combinator called a SAFE (Simple Agreement for Future Equity). These notes convert to equity at the next priced round at a price determined by either a valuation cap (e.g. $10M), a percentage discount to the valuation of the next round (e.g. 20%), or the lower of both. I’m comfortable using SAFEs because they increase overall marketplace liquidity and speed. But there are some risks that it took me a little time to understand:
A SAFE with a discount but no valuation cap creates quite a lot of timing risk - if I’m not very certain that the company is going to raise a priced round inside of 90 days, I won’t do it. If the company ends up stuck doing a bunch of small bridge rounds over a year or two, I could be paying a much higher share price than expected when they finally make it to Series A.
The current SAFE form uses a post-money valuation cap, while the first version used a pre-money valuation cap. Both form are still widely used, and it’s important to understand the tradeoffs. In a pre-money SAFE, if the company ends up raising more than the target amount in the current round, then I’ll be diluted more than expected (whereas the post-money SAFE locks the future share valuation of this round at conversion). And any pre-money SAFEs from prior rounds will dilute each other and the investors in the current round (although this effect is often minor because the size of the prior rounds is usually much smaller than the current round). On the other hand, a pre-money SAFE takes into account any new employee options pool created at the Series A, but a post-money SAFE does not. This is not a trivial distinction - I was in one deal where the Series A investors required issuance of additional shares for the employee options pool that diluted the seed SAFE investors by 20%! There are many calculators online to better understand SAFE math - Carta has a good one.
For tax purposes, until my SAFE converts to stock, I cannot start the clock on long term capital gains. It’s unlikely to matter for most IPO situations given how long it usually takes to get from Series A to IPO, but could be relevant for early acquisitions.
A SAFE is not a debt instrument like a convertible note, so in the event of a bankruptcy prior to SAFE conversion, SAFE holders aren’t going to recover any value.
AngelList continues to innovate and lead the private investment market forward. In 2020 they launched rolling funds, which allow quarterly subscription - I think of them as halfway between a syndicate and a closed fund. Although AngelList enjoys tremendous network effects creating a big moat, I’m going to keep my eye out for a #2 competitor to emerge in the next decade.
If you’re an accredited investor, you’re welcome to join my syndicate on AngelList where you can see free deal flow with no obligation to invest.
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