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Sunday, February 27, 2011

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idocare

I believe your rants, read posts, will be required reading in any "history of silicon valley" class worth its salt. :)

Bottom line is that Angel list fills a need that has been around for over 10 years. Both entrepreneurs and Angels needed a means to connect. Naval and Nivi, not only solved that but they made it simple and very democratic.

Great idea guys and truly fine execution.

Ray Solnik

The VC community and industry is among the least transparent on the globe. A wonderful way to support this debate and see what approach works best is to publish results.

It is not yet clear if "spray and pray" quantitative portfolio selection and management will yield returns greater than and index fund. Hopefully, Dave will figure out a model that does better. I wonder if it will be some hybrid of broad portfolio company investment acquisition (spray) with focused analytics to support the inevitable narrowing down of companies that receive follow-on investments over time (focused investing).

Of course, praying never hurts either !

Dave, good luck and thanks for the engaging, colorful dialog.

Fred T

amen.

it's funny why they solely associate "pray and pray" with dmac; but like everyone else's isolated opinion posts; everything you read doesn't tell all about the person in one sitting.

disqus it is.

LucretiaPruitt

I think what I love best about conversations like this is that they happen all over the web.
I'd never see it on AngelList (not in a startup, not an investor) and I might see it on Quora - but I suspect there'd be a lot of bizarre attempts at editing on your behalf.

Instead, Twitter told me that Robert, Bryce, and now you had all blogged about AngelList. What I really got out of it was 4 things.
1) People are passionate about AngelList no matter which side of it they land on. That means it's effective in its disruptive efforts.
2) There's still no tool that quite catches all of the threads of any one conversation. I have to listen quite carefully to figure out who all is putting in their 2 cents and where. Hopefully you'll help fund a startup that fixes that.
3) I learn more about investment funding by following VCs on Twitter & Quora than I ever did prior to their existence. It brings the Investment world out of the Valley for the rest of us.
4) You are totally still wordy when you're passionate - rock on.

HealyHoops

#3 is harder than it sounds, because you need to STAY IN THE GAME to still be able to add value. In 5 years SEO will probably be different, and the programming languages may have changed. Staying current is hard to do when you are a full time investor. I like your strategy of bringing a people onto your team who are focused at staying cutting edge in these different startup competencies.

Gculliss

Fred Wilson noted: "spray and pray is going to give you a index fund like return" and this would be true if one continued to invest in *all* companies in subsequent rounds. But, when you factor in the ability for the investor to be selective in subsequent rounds of investing, spray and pray gives you access to invest in the winners, and the value of that access right is worth more than what's lost on the losers in the first round.

Sethaelliott

Dave,

I'm delighted that you've moved the generalized debate about AngelList (a bit of a tempest in a teacup) to a more substantive discussion about focused quantitative strategies ("spray and pay") vs. low-volume "traditional" venture investing. As you've noted, the data suggest focused quantitative strategies will (with rare exceptions) outperform low-volume investing strategies (I've been espousing this viewpoint with some colleagues at the Miami Innovation Fund).

It seems clear that AngelList (and other tools) support and accelerate movement in this direction. However, my devil's advocate position / concern:

Will It Happen Quickly Enough?

I ask this in reference to the (growing) influx of newer angel investors (a generally good thing). Part of the implications of a quantitative investment strategy includes the acceptance that many of the investments will fail. In order achieve success, the fewer winners will need to (significantly?) outperform the total invested capital to balance out the large number of losers. An element of danger, therefore, will be an overheated market for angel investing that couples with a general malaise in follow-on investment and exit possibilities sometime in the next 3-5 years.

So an important consideration seems to be will AngelList and other tools/platforms assist in outrunning (or perhaps even staving off) those market conditions rather than accelerating an entrance into such conditions. Curious as to your (and others') thoughts.

Justinmwhite1

Great post, Dave. I've been following the related debates on AL, and this definitely was the most entertaining and, I think, one of the most informative/correct.

I think I split the difference b/w you and Fred on a couple of points and don't think either one of you are necessarily right.

Fred's quote,"and btw, you can't [support and provide sound advice to start-ups] well when you have 500 portfolio companies" is, to me, a false choice. Star Wars taught me that only Siths deal in absolutes, and since I'm not a Sith, I, therefore, reject that logic.

Fred's point has merit inasmuch as most start-ups (not to mention, people) benefit mightily from focused mentorship from their investors and advisors, and if your investment portfolio is super-sized, then you run the risk of being half-assed in your dealings with your portfolio companies and actually reducing their odds of success.

The counterpoint to that logic, however, is that 1) you and your team are getting many more repetitions with your numerous investments and are learning lessons through witnessing all of their best-practices/points of failure. This allows you to get smarter faster and pass your accrued wisdom on to your portfolio. 2) your portfolio is now a community both by design and by virtue of size, and that community should benefit from their built-in network and share their experiences with each other to collectively get better.

If this is not happening (i.e. if you are not accumulating and passing on wisdom and your portfolio is not self-teaching, then Fred's point carries more weight. If you are doing those things, then each of your portfolio companies should increase their odds of success. That's one hypothesis, anyway.

The other item that caught my attention in your post was that future investors will need specific domain experience to be relevant. I see your point, but I am somewhat skeptical. I am skeptical because I don't think that being a good programmer, for example, will make you a good investor any more than it will make you a good CEO.

MBAs and bankers will continue to be relevant--although, perhaps not as dominant in the investment space--because they (ideally) combine excellent technical business skills with a broader-based business acumen that leverages the expertise of the domain gurus you refer to without getting stuck in the weeds. ...Although, I admit, as a former MBA, I may be biased. :-)

I will say that my MBA is proving to be very useful in my role with SpeakerText in terms of implementing process and minimizing fire-drills.

Anyway, thanks again for the very engaging post.

Nelson3748

Dave, love this. i have been 'lecturing' people for years that if you want to be an angel, pick ten projects or just buy MSFT (now CRM, whatever), nothing in between. however, your final idea was heard loud and often in 1999, was right for about a year, then back to normal. same thing will happen in this cycle, guaranteed, would bet a kidney. why is simple: people who are in the industry ALWAYS suck at investing in it. always been true, always will be

Seankelly

Brilliant post Dave.
To use the gold rush metaphor - more money was made selling the picks and shovels than from the mining. 500 startups has the biggest hardware store. Plus tips on where to dig! Sounds like a money maker to me.

FAKEGRIMLOCK

ME, GRIMLOCK, GIVE THIS 6 OUT OF 10 ON RANT SCALE.

USE PURPOSELY MISLEADING STATEMENTS FOR ATTRACT ATTENTION, THEN PIVOT TO "BUT I REALLY MEAN" IN BODY TO GOTCHA SKIMMERS?
+7 PTS.

MORE WRITE INSTEAD OF MORE RIGHT?
-2 PTS.

ARTFULLY BURY TRUTH UNDER LAYERS OF HYPERBOLE?
+8 PTS.

SYMPATHY PLAY WITH KIDS TO DEFLECT CRITICISM?
+3 PT.

NOT USE DISQUS AND REAL BLOG?
-10 PTS.

THAT LAST ONE BIG DEAL. IF DISQUS USED, THIS TURN INTO USEFUL CONVERSATION, INSTEAD OF STATIC 1.0 BROADCAST OF OPINION.

Youscoopit

Dude, seriously there are A LOT of haters out there right now and I really don't get the beef over AngelList. This is a great tool and an even better communication gateway into SV for startup's that otherwise wouldn't have a chance.

Not everyone knows someone in SV, that's just not realistic and it's unfair for VC's to expect every single founder of a startup to know someone to get an intro. Whatever happened to making a kick ass product and letting your work speak for itself?

Bottom line, it sucks being a founder of a startup these days because there's so much room for improvement in SV in regards to funding or even getting an intro. AngelList is the light at the end of the tunnel.

BTW, Dave can my team get an intro to you or your team at 500 Startups? HA.

Daniel Odio-Paez

Dave, as an entrepreneur new to the Bay area from DC, our fundraising would've easily taken 2x as long w/o AngelList.

I did a fundraising manifesto on how 54.5% of our raise came from AngelList, and how other entrepreneurs can do it in less than the 14 weeks it took us: http://go.danielodio.com/manifesto

What's next for AngelList? Can they make the Series A fundraising process as efficient as they've made angel fundraising? I'd love not to have to trek down to Sand Hill road 20 times -- very distracting from running & growing the business.

DROdio
Daniel R. Odio
CEO, AppMakr.com

Thomascornelius

I agree that Angel list is a positive game changer and a disrupter. Naval and Nivi are democratizing the matchmaking and have created a phenomenal option for entrepreneurs.

Though as an entrepreneur I think you guys are all totally wrong when it comes to social proof.

"Spray and Pray" is partially responsible that social proof plays such an important role.

Humans have not really changed - social proof is part of life.

BUT....for any sophisticated investor or entrepreneur.....

Socialproof simply KILLS Innovation.

thinkers, doers and contrarians change society, disrupt and build the foundation of the future.

Making decisions is never easy, but referring them to others via social proof is not a solution. Neither for the Entrepreneur nor the Investor. I would like to argue it is REALLY bad for the entrepreneur that receives the investment, as the sheep mentality will continue during the ups and downs building his business and if you simply have followers, the whole concept of smart money is out the window.

Disruption comes from Innovation. The smartest guys I have meet don't give a damn about social proof. They have a toolset of experience, knowledge and gut in a specific sector, they are not generalists and they use their instincts and understanding to vet an idea.

Thanks for the sunday amusement VC's & Angels.

I understand now why social proof plays such a big role in your life's (-;

Fastmikie

"Angel List is like Dangerous Sex with Super Models for Virgin Nerds"?

Whether or not that's accurate, it's a great line!

And, yes, "spray and pray" is the haters' well-spun expression for "diversification". Why can't we just call it like it is?

Ericingram

Really fantastic post! AngeList is revolutionizing funding for hackers like me. Looking forward to adding value with @betacandy (check us out at www.angel.co/betacandy)

Dave

yeah, sorry fred the commenting system sucks here... overdue for Disqus upgrade.


(and blog overhaul as well, however i'm more focused on http://blog.500startups.com which is using Disqus)

Dave

@Fred & others:


to clarify, i am not blindly espousing "spray & pray".


what i am saying is that a quantitative, high-volume investment strategy filtered based on reasonable assessment of team, product, market, customer & revenue along with domain-specific expertise, and selective follow-on investment with incremental knowledge of company metrics and progress CAN result in good outcomes.

Dave

yeah, sorry about that... someday i'll upgrade to Wordpress / Disqus.

Thomas Ilk

Fred Wilson is right with his point that the comment system is awful ;)

Thomas Ilk

When you invest in a lot of startups like dave and you offer them help and domain expertise, you will definitely have better results as the market. The market consists of companies without any help, companies with money of VC's who make entrepreneurs lives even harder and companies with help. So I bet everything that I have that companies who get help perform better.

Danmunro

Definitely "no holds barred" - and what we've come to expect/respect about the Master of 500 Hats. Timely too - lot's of stories just this week about the death of VC Firms. This one says over half of VC firms have shut down - or are dying - http://read.bi/f55Izm The real unknown (and hard to identify) are the "zombie" firms that are still around - but not investing.

Dave

seriously Fred, did you read anything in point #3?


we are NOT just spray & pray.


i'm open to criticism, but i'd appreciate if you actually read my post first.

Fred

and one other thing, please get a real comment system on this blog. typepad's native comment system is god awful

Fred

that was not brief Dave

as one of the few VCs you are willing to hear an argument from, i feel compelled to provide it

spray and pray is going to give you a index fund like return. it will perform as well, but no better or worse, than the entire sector you are investing in (web/mobile web/etc)

and i suspect that the returns on that index fund will be poor because the sector is overheated and valuations are at historically high levels.

a focused investment strategy can perform a lot worse but it can also perform a lot better. if you choose wisely, purchase large positions in the investments you choose, and then support them over a long haul, particularly the best performing ones, you can and will do better.

as for investors needing specific experience to provide value, i beg to differ. i have never had a real job since i stopped writing software for a living in 1985. and yet i suspect the entrepreneurs i work with would give me good marks for adding value.

being a great investor has very little to do with domain expertise. it has to with being someone you like, trust, who will give you honest and constructive feedback, who will support you when others won't, and who will do whatever it takes to help you succeed.

and btw, you can't do any of those things well when you have 500 portfolio companies.

Genero_city

Great post. As an east coast, Mid-Atlantic entrepreneur, the rap is that there is not a lot of love, airtime for companies outside the venture hubs. Where do we turn to benefit from the revolution?

Nathan Beckord

My favorite line (I'm turning this into a t-shirt):

"Angel List is like Dangerous Sex with Super Models for Virgin Nerds."

I've got two startups I'm advising gearing up to hit Angellist in the next two weeks, and one on there now that's starting to heat up. It's a fascinating process to watch-- it's peer feedback loops in action, in real-time. It's a bit like stepping into a hurricane.

AL is a brilliant concept-- not so much in the idea (which has been tried many times before), but in the execution. N&N have done a good job of curating the dealflow, and in general bringing transparency to the process of raising capital. Most of the other online sites for raising money are either outright scams, or they have the "adverse selection" problem, in that they attract only the startups that can't raise funding anywhere else (and thus end up full of junk).

While it's a little scary how much influence or "kingmaker" status N&N have with startups that go through the AL system, they also seem to do a good job of being pretty fair about it, and picking out winners while filtering some of the riffraff.

Will be fun to watch it play out...

Nathan Beckord
www.venturearchetypes.com

Dave

@David DiCillo: my mother was italian.  Saluto, paisan.

Dave

while i appreciate & respect David Rose and AngelSoft, there is a substantial difference between AngelSoft and Angel List.  and for those who haven't seen it yet, also http://CapLinked.com

(disclosure: i'm an investor)

Dave

Sramana: obviously you didn't read point #3 in my post. Spray & Pray isn't all that we do.  But regardless, the assumption that "Focused" investing is better is arguably false.

Let's consider doctors who do knee surgeries or lasik.... would you like to have one who performs 1, 10 or 100 such surgeries per year?

sometimes the network effects of large-scale investing are non-intuitive in the other direction.

to each their own, but i'm comfortable with my approach... we'll see in a few years if i'm right.

Geoffw8

I can't believe you just put Quora in as an innovation alongside those guys!

Paramendra

The Angel List Controversy, Fred's Marketing Controversy http://goo.gl/fb/SqwLV

Sramana Mitra

Dave,

As an investor, "spray and pray" may be a great strategy for you. But entrepreneurs who have choices may not be interested in working with you if they realize that you are a 'spray and pray' investor. [Right now, you are making such a bold statement that you ARE a spray and pray investor, that there is no ambiguity on the issue at all, of course.]

So, by definition, you'd get second and third tier deals.

Have you considered this as a factor in your analysis?

Best wishes,

Sramana
http://1m1m.sramanamitra.com

Bobbylox

Seems like this same thing has existed for years. Have you guys never heard of AngelSoft? http://angelsoft.net/

Robert Shedd

Great post, Dave. I agree that AngelList is the most disruptive innovation to come to the venture funding space since Y Combinator pioneered the accelerator model. After seeing 80+ responses by entrepreneurs in the AngelList thread (http://www.quora.com/AngelList/What-do-people-think-of-AngelList) on Quora, it's clear that AngelList is transforming the venture investment space, making it faster and easier, which translates into fundraising being less therefore distracting, so that entrepreneurs can get back to building better companies. As a result, I'm glad to see the vast majority of the venture funding community embracing AngelList.

twitter.com/davehod

Quantitative Investment Strategy (QIS) vs "traditional" VC - easy to put this argument to rest: publish your IRR. If you beat folks, you win.

Daryn

Dave - you've got a lot more aim with your sprayer than most. I guess it comes from keeping it in your hand at all times and lots of practice.

DavideDiCillo

Great post, as usually.

Kinda freaky that the expression:
"then please have a big cup of Shut The Fuck Up"
has been used by my mother many times in the past (to be fair she was used to say that in Italian).

Jason Oliver

dave, i've been waiting to read your commentary on this AngelList debate, and this DOES NOT disappoint. as someone who will be very new to angel investing, I definitely understand the danger that a tool like AngelList can bring to uninformed/inexperienced investors. but I LOVE your commentary on spray & pray (especially since I saw on the selective VC side previously) and on the future of value added investing and what type of backgrounds those investors will come from. again, love the (literally) colorful commentary and hope that a lot of people read this one! look forward to catching up sometime soon sir.

Harknesslabs

Great post.

Bottom line is that 'haters gonna hate' and naval is definitely disrupting some haters right now. (Bryce, et al.)

To be honest, I dont care if VC's like angellist or not. Its not built for them, its built for us (entrepreneurs). Navals very obvious and stated goal is to help startups from getting fucked and market choice always does that.


Reading posts like Bryce's on angellist has about as much bearing on reality and open mindedness as taxi cab drivers talking about uber.

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