I recently invested in over 150 startups
Here’s what I’ve learned so far creating a Startup Index Fund using AngelList
Over the last 18 months, I’ve invested in over 150 startup companies. I’ve put money to work in areas such as online video, virtual reality, genome engineering, home automation, electric bicycles, bitcoin, insect protein, a new airline and of course a ton of apps. I invested alongside notable angels like Tim Ferriss, Jason Calacanis (jason), Naval Ravikant, Ev Williams, and Michael Arrington and venture capital firms such as Sequoia Capital, Google Ventures and Andreessen Horowitz. To be clear, I’m not a venture capitalist and I don’t live in Silicon Valley, I’m a serial entrepreneur with a fairly deep understanding of startups and I understand the potential of what’s happening in the ecosystem. I can only run one company at a time but I want to participate in the tremendous value being created in the current market.
Until recently, it was very difficult, if not impossible for an outsider to invest in a promising young company. Now anyone* can invest in the hottest new Silicon Valley startups without getting off their couch.
*As of writing, only accredited investors are allowed to invest in certain private stock placements. However, there is currently legislation slated for later this year, Title III of the Jobs Act, that would allow anyone to make these types of investments. A note to entrepreneurs: if you’ve raised money for your startup and your company’s stock has a registered valuation, you can use your share of that toward qualifying as an accredited investor, or toward the $5 million limit of being a qualified purchaser. If you are unsure whether your assets qualify, consult your lawyer, accountant or financial advisor.
Back in December 2013, I came up with the idea to create a Startup Index Fund. The concept was to be able to invest in startups as an asset class, and significantly de-risk the opportunity. I wanted to spread money across different companies at different stages in different industries by leveraging someone else’s access, experience and infrastructure. With access to new investment platforms like AngelList and new SEC regulations, it became possible to leverage notable investors concentrated in Silicon Valley and pull this off. The plan was to gain access to their valuable deal flow and expert due diligence without having to become a limited partner and write a check for millions of dollars to invest in their venture capital fund.
AngelList organized this concept into structured syndicates. Individuals can join a syndicate led by a well-known investor and get access to their upcoming deals. For the privilege of joining a syndicate, you have to pay a carry percentage to the lead investor. This is basically a percentage of the profits of any successful investment with the majority of fees falling between 10–20%. After writing the initial article, I applied to, and was accepted to back several syndicates on AngelList. I waited months but not a single deal was proposed from any of them. It took so long in fact, that I ended up doing my first investment through a different platform called Alphaworks, which is now Quire.
Finally, in April 2014, Jason Calacanis started pushing deals through his syndicate and I made my first investment through AngelList. I actually went on to fund three companies with him in the first three months. Two of my first five companies didn’t come through any of the syndicates I was involved with at the time, but they were great deals that I didn’t want to miss, namely AirHelp and Boostable.
Within the first few months, I started to have problems getting into competitive deals. SEC regulations state that investment syndicates can only have 99 investors in each deal. For the most obvious winners in the pack, there were a lot of people waiting in line. In an attempt to create order, AngelList gave priority to investment amount for each deal. However, my entire strategy was to invest smaller amounts in more deals so that didn’t help much.
The proposed answer to these problems was the AngelList Syndicates Fund. AngelList essentially created an investment product to do exactly what I was trying to do, except with access to all the deals and without any management bandwidth needed. You fundamentally act as a limited partner by writing the fund a check and then have no control over how the capital is deployed. On the surface, it sounded like a great idea but there were a lot of outstanding questions. What would be the criteria for their investments? What stage of company would they be primarily looking at? How large a fund would they be raising and how long would it take to deploy that much capital? The biggest question in my mind was who was ultimately deciding which checks to write and whether or not I would agree with their strategy.
I imagine there are at least two different types of investors that would buy into this concept. The first type would be looking solely at financial return and couldn’t care less what went on until the fund was spent and any capital and profits were returned. The second type, like myself, was interested in how the money was spent, how the decisions were made, and what I could learn from having an inside look at the fund operations. I was told information would be passed along soon after an investment was made in the beginning and that AngelList was working on a more structured way to monitor the portfolio in the future.
Thankfully, there is now a screen that I can access that shows the entire fund portfolio as well my personal contribution to the investment so that I have a good idea of where my money went. Unfortunately the data is quite limited and I feel that there is definitely some key data missing to properly assess the strength of the initial investment and the ongoing health of the portfolio. Again, nothing was promised and nothing more is owed, but for those that would like to understand current market value and monitor their progress, there is not enough raw data to make any deductions.
I can see the name of the company, the syndicate the fund invested alongside, the date of the investment and of course the amount. What I can’t see is the investment round (seed, series A, etc), the pre-money valuation of the investment or any further investments to the company. If I visit the company’s public AngelList page, sometimes I can see the date an investment round closed, and then I can cross-reference the syndicate investment date to try to determine how large the round was, but I’ve already made mistakes using this methodology. Also, many company pages don’t list their funding round dates or amounts so there’s literally no information except for when and how much money you’ve invested in a company. Hopefully AngelList can provide an update with more tools around this in the future.
Even with all that said, I still have a pretty good idea of what’s actually going on with the various investments. I’ve made several attempts at portfolio tracking including of course various spreadsheets and I even created an account with one of the portfolio companies, Mattermark, although I later abandoned it due to pricing. I would love it if Mattermark would collaborate with AngelList to create a mashup for their fund tracking. I’ve become fairly familiar with the list of startups and I recognize their names now when scanning funding headlines on TechCrunch and other industry news sources. AngelList has also put together some information regarding the status of the fund to help out the investors and to help market future funds.
The first thing I do when I see a headline with a company I know I’ve got money in is check to see exactly how much the fund invested. A maximum of 1% of the total fund was invested in any single startup with smaller rounds or more competitive investments getting less. Just like in real life, the best deals are crowded and sometimes it’s a win just to be included. With setups like this, the math can be amusing. The smallest deal I can see is that apparently I’ve got a whopping $3 into one particular company, I’m not sure it was worth the paperwork.
A few of my favorites in no particular order are:
- Shyp: The easiest way to ship your stuff
- Luxe: A Parking spot in your pocket
- Soothe: Massage delivered to you
- InDinero: Better accounting for small business
- Check out a larger list of featured investments
Of course along with the standouts come the opposite. There were definitely a few deals where I was left scratching my head trying to figure out what the fund manager was thinking. Most people look at the same criteria when analyzing the strength of an early stage startup: team, the problem being solved, market size and of course traction. My thesis for a syndicate fund would heavily weigh the investor leading the syndicate, which to me would indicate positive track record, potential deal-flow as well as the quality of the due diligence. There were a handful that I’ve yet to figure out why the investment was selected, although I’m sure there’s a story behind it. Why so many valet parking startups :)? After examining the portfolio, I realized that I would have passed on about a third of the deals that were selected by the fund.
As of today, at least 20 of the companies I’ve invested in have already gone on to receive follow-on funding rounds which is an excellent sign. The fund itself has participated in several follow-ons for their portfolio companies. Early stage funding will typically last between 1–2 years for a young company so it’s still much too early to determine overall success of the portfolio. Ideally, an investor would be looking for 1 in 10 companies to be standout investments and so far I’m on the right track.
I wouldn’t recommend anyone to put more than 5% of his or her investment assets into startups. It’s highly speculative and extremely risky. That being said, if you do want to put some capital to work, I would recommend looking at AngelList syndicates to get the job done instead of trying to source your own deals and find local companies to back. Keep in mind that the minimum buy-in for the general fund is currently $50,000 and the smaller more focused funds are at $10,000. If you’d like to back an individual syndicate, the price of admission is $1,000. If Title III of the JOBS Act passes soon, I’d expect there to be even more activity around this space and possibly new instruments to take advantage of.
I personally plan to keep leveraging syndicates for deal flow and diligence. If you do too, here are some tips. I think Jason Calacanis (jason) is in the running for best angel investor on the planet at this point. He seems to really get behind his companies and he’s been transparent, fair and best of all consistent with his deal flow. Naval Ravikant keeps on delivering great investments. His syndicate has a high price of entry at $10K but he’s selective and has so far picked winners. Tim Ferriss is also a great choice, and also fairly oversubscribed. If you manage to get into any of his deals you won’t be disappointed.
As with any class of investment, there are always macro economic factors to consider. Be sure to understand the Series A crunch and the amount of investment activity at different points in the startup lifecycle. Are we in a bubble? For later stage investments, and the so-called billion dollar unicorn companies, how will they find their exit? If you do participate in the later stage rounds with higher valuations, do the terms of the deal give you adequate liquidation preference? If something written here doesn’t make sense to you, be sure to do some more research before spending any money.
As for myself, I think I’ll skip the next structured AngelList fund and return to investing in individual deals for the time being. There are definitely a few all-star companies that I would have missed out on if I had been making all the calls up to this point, but I do miss being in control of my own destiny.
Follow me on twitter @adammosam and I’ll highlight one company a week from the startup index fund portfolio or check out the site for semi-regular updates at startupif.com
Note: This is the second article in the series. The first is available here:
