At most Silicon Valley startups, the entrepreneur takes the role of the hero in stories about a company’s founding. Arguably, though, the venture capitalist that funds the business from the beginning also plays a huge role in its success. After all, an entrepreneur can have a million dollar idea but still lack the $1 million investment she’d need to start the company. This dependence on seed capital can become a source of great frustration for entrepreneurs. While someone can spend years coming up with a foolproof business plan, it only takes a few bad meetings with angel investors to see all that hard work result in nothing.
Since many venture capital firms are driven by their owner’s wealth, that single person usually makes all of the big decisions. In the eyes of some industry insiders, this creates an inefficient environment that places too much trust in the economic vision of one individual. That’s why venture capitalist Naval Ravikant founded AngelList in 2010. Originally designed to educate entrepreneurs about angel investing, the website eventually grew into a kind of social network for VCs to hook up with startups. For years AngelList specialized in awarding small loans rather than the big chunks of investment like many VCs provide. Now, though, Ravikant is looking to take on Silicon Valley’s biggest angel firms through a feature that allows individuals to pool their money together into investment “syndicates.”
For instance, say that a startup makes a profile on AngelList looking for VC interest. A few years ago the entrepreneur may have received just a couple of small investments from individuals who had no working relationship together. With AngelList’s syndicates, however, groups of investors can now gauge each other’s interest on the startup and provide a larger investment together. For their effort, they receive the standard 20 percent of investment profits that most VC firms command while AngelList takes on a further 5 percent. With an annual investment rate of $127 million, Ravikant’s innovative company is quickly becoming one of the top VC operations in the country.
Questions:
- What’s the major difference between venture capitalists and angel investors?
- What key advantage does AngelList offer aspiring entrepreneurs?
Source: Dan Primack, “A Disruptor Shakes up Angel Investing,” Fortune, November 13, 2014. Photo by: 401(K)2012.