(ok folks, i've gotta take the kids to basketball practice in a few hours, so will try to power through this -- that means limited crazy fonts, profanity, wild pix... sorry little monsters, next time ;)
3 major points i plan to cover in this post:
1) Angel List Fucking Rocks. Period. it's the single greatest innovation in our industry in the last 5 years (aside from LinkedIn, Facebook, Twitter, & Quora) and it's great for almost all participants. and while social proof can be abused / misused, so can gasoline... doesn't mean you shouldn't fill up your gas tank and go back to riding horses. if you want to effect change, either Engage Fully, or Compete. inaction/boycotts are rarely useful & should be largely be ignored.
2) on average, "Spray & Pray" investing -- aka a High-Volume, Diversified & Quantitative Investment Strategy -- is not just "ok", it's actually BETTER than "Focused" investing (at least w/o insider or hidden knowledge). in fact, it is incredibly hypocritical and patently FALSE for the VC industry -- which has NEGATIVE IRR over the past 10 years, and historically poor performance -- to criticize high-volume strategies as being somehow crazy. if anything, their inaction and lack of innovation in the face of poor performance is the Insanity, and most of them (& their LPs) should be ashamed for lack of stewardship.
3) in the future, "Value-Added" investing will come more & more from domain-specific knowledge (engineering, product, design, marketing, customers) and less & less from investors with large networks & rolodexes who make "introductions", as their value is disrupted & marginalized by social platforms like LinkedIn, Quora, and Angel List. specifically, regarding Consumer Internet & Web Infrastructure investing -- people who DO NOT have skills in programming, design (visual or other), scalability, SEO/SEM, design, social platforms, viral marketing, affiliate marketing, mobile devices, etc -- will begin to fail out of the investing industry, and will be of limited value other than writing checks quickly... perhaps at higher-than-market valuations in order to compete. which is much worse strategy than "spray & pray".
UPDATE: to clarify further for Fred Wilson & others -- i am NOT espousing a PURELY "spray & pray" philosophy... rather the full story on what i'm 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.
or at least i hope so, because that's what i'm doing.
alright, let's get started.
#1: Angel List is the Single Most Important Innovation in Venture Capital in the Past 5 Years
background -- links to a bunch of previous posts about Angel List that have been written by Scoble, Bryce, Jason, & Suster which i will summarize below:
Scoble: wow, Angel List is a pretty amazing hype machine for startups, and a great way for entrepreneurs to raise capital. had no idea how much impact it has... pretty cool.
Bryce: i don't like the social proof aspect / herd mentality generated by Angel List, and i've got plenty of quality dealflow. taking my ball and going home.
Jason: gee Bryce, that's small-minded. Venture Capital is/has changed, and you risk becoming irrelevant w/o participation. [+typical Jason no-holds-barred criticism, perhaps unfair perhaps not]
Suster: i like Angel List mostly, altho some parts of it give me pause. mostly good for investors and startups, altho some n00b angels are gonna get fucked.. and in meantime their lack of financial discipline could also fuck up the rest of us. caution: keep using but tread carefully.
other folks also weighed in via twitter; notably Naval, Shervin, Peter Chane (& Percival did nice funny ;)
so arguably i'm the most active current user of Angel List -- i've done ~20 deals there, either that i've listed and/or invested in. maybe George Zachary is more active but we're 1 & 2 i think. (funny how the biggest users of Angel List are actually VCs, eh?). it's not a majority of my activity, but it's significant -- 500 Startups has invested in ~100 deals since we got started last year, mostly at seed stage (altho we recently started our incubator / accelerator program in the past few months). we plan to continue doing ~100 deals a year, and i'm sure Angel List will be a significant part of those (maybe 20+% ?)... altho even *i* can't possibly keep up with the deal pace that's currently happening on Angel List. but that's not a bad thing.
so here's my take:
1) i'm an unabashed fanboi, and i think Angel List is awesome -- for both startups and (most) investors. it is likely the single greatest innovation in the venture capital industry since Paul Graham started Y Combinator 5 years ago. period. Nivi & Naval deserve high praise, both for AL & for VentureHacks.
2) there is perhaps a little too much emphasis on Social Proof, however Naval is not creating the herd mentality, rather he is simply recognizing its value and attempting to harness it.
3) without question, Angel List provides greater visibility for a lot of startups raising capital who would otherwise not have as much access to investors. this is very good for entrepreneurs. and while Start Fund and Yuri/Ron investing in YC was a brilliant move w/ huge PR impact, BY FAR, Angel List is/will have 100x more impact on the industry than the Start Fund (which currently only focuses on YC companies).
4) for most investors, Angel List is helpful -- either to get access to dealflow they would not previously have seen, to supplement their existing dealflow, or to see what is happening at earlier stages and inform later stage decisions. it's also helpful to connect investors to other investors (ex: i follow several hundred other investors on AL & i'm learning about them as much as startups).
5) for a few (mostly new, mostly angel, investors -- but not only them), Angel List accelerates herd mentality, and the emphasis on social proof can perhaps crowd out / overwhelm other useful signals (product, market, customers, revenue, team, etc). for these investors, Angel List is kind of like Crack for Nerds... actually that's not it; it's more like Sex for Virgins. wait, here it is: Angel List is like Dangerous Sex with Super Models for Virgin Nerds.
yeah that's it -- imagine if you're Urkel and all of a sudden you get to find out who the newest Sports Illustrated hotties are, who they're screwing, and then SOMEHOW you discover an opportunity to SCREW THEM YOURSELF TOO! (omg, where do i sign?!?) ok, so you get the picture. this is probably why Bryce left the party. or maybe it's because he's a Mormon with 5 kids, and doesn't need to do any more screwing around... doh! (sorry i know that will offend some folks, but i couldn't resist... and Bryce is a friend even if i disagree with his stance. Bryce: sorry if your kids are reading this.)
Now before i get into any real criticism of Angel List, let me again restate -- it's the single greatest innovation in Venture Capital since PG started YC 5 years ago. it's awesome, and it has dramatic benefits for entrepreneurs... AND investors too. it is likely the FIRST online system to have a material impact on the startup investing world (aside from valuation databases like VentureOne / VentureXpert / etc). Nivi & Naval also created VentureHacks, which (before Quora anyway) is the single most valuable resource for entrepreneurs in understanding venture capital & angel investors.
So, what don't i like about Angel List? not much. i don't like the fact that the voting arrows have a crappy UX, and it's a little hard to scroll through all the deals & investors sometimes... in fact, i'd even like a little MORE social signal, by figuring out a way to rate influence / reputation on Angel List, so that some investors count more than others (because they DO, not because i don't like a level playing field). but really, that's about it right now... and it's getting better all the time.
but to the extent Social Proof is a "problem" -- and i don't think it is, just its perception in weighting on Angel List relative to other items -- i CERTAINLY don't think you fix it by leaving.
as with most issues, Change happens either through VIOLENT participation, or VIOLENT competition. in other words, most boycotts suck in terms of impact.
either you engage fully and attempt to make change happen from within, or else you should go create a competitive alternative and attempt to make change by offering a better solution. either of these are rational perspectives, but non-participation is simply lame, & largely why i take Bryce to task for doing so (or at least, once he blogged about it publicly). silent non-participation is anyone's right, but vocal non-participation is like Cursing Darkness rather than Lighting a Candle.
#2: On Average "Spray & Pray" Beats the Shit Out of "Focused" Investing (btw it's called "Diversification")
i'd also like to clarify my investment philosophy and pace, and criticisms of "spray and pray" investing, as well as differences between me & other high-volume investors like Ron Conway (whom i still respect tremendously even if he thinks i'm an ass), First Round Capital, Y-Combinator, Tech Stars, and others.
Mark Suster was surprised when i took mild offense to his left-handed compliment about me being a "higher-volume investor who did well in spite of that behavior". damned by faint praise, i will fully OWN the fact that i've called my fund 500 Startups and will probably always be known as a high-volume investor first, value-added investor second.
in time, perhaps our fund will also be known for Design, Data, & Distribution, but for now i'm happy to be labeled as your Canonical Clueless Carefree Spray & Pray Bitch. i will now EMBRACE and REINFORCE the "Spray & Pray" label until i ABSOLUTELY DESTROY its relevance thru repetition and ridicule -- and furthermore i think it's the rest of you "focused investors" who think you add so much goddamn value that are full of it. BRING IT, mofos. (for the record, it's almost always 95% entrepreneur, 5% investor. "focused investing" is perhaps more accurately "focused selection" -- it's rarely the case that the investor adds much value after the investment, other than check... and if they do, it's mostly just introductions... more on that below.)
"Spray & Pray" is usually a disparaging term used by those who don't about those who do. in almost every case where i hear it, it's biased commentary by large VCs who do later stage investing at a much lower volume. or else, it's by bloggers/press who can't think for themselves, and like to start interviews off with me in adversarial fashion... that is, before they realize i've gone toe-to-toe with Arrington for years, and 99% of them can't hold a candle to his masterful psychological warfare otherwise known as a "briefing". (once you've been through the trenches with Mike, everyone else seems like a walk in the park. there is a reason he's the best in the business, and most of you are no Mike Arrington).
so anyway, let's consider that most of the folks in the traditional venture business who are criticizing spray and pray HAVE HAD NEGATIVE IRRs OVER THE PAST TEN YEARS, and if you remove the top-performing 10-20 VCs from the #'s, the overall industry as a whole probably hasn't beaten the market for decades aside from a few years in the late 90's when the retail market would buy any bullshit that the investment bankers put on the market. and this from an illiquid asset class with high risk. you better be at least getting 15-20% returns on average, or you shouldn't be opening your piehole.
seriously now, i've been saying this for years -- it's sort of like someone who's had sequential disastrous monogamous marriages criticizing someone else who's single and dating the field. in other words -- you're just jealous because my job is more FUN than yours, and in general you SUCK at yours, whereas i actually have been both a programmer and a marketer for more than 10 years each, and sort of know what the hell i'm doing. or at the very least, i'm new enough to the investing field that we don't know for sure yet whether *I* suck, but we have PLENTY of evidence that *YOU* sure as hell do.
for the last time -- with VERY few exceptions, traditional VC investment practices have resulted in EXTREMELY POOR financial returns, and disparaging & biased remarks against high-volume investing are the height of hypocrisy. i will be happy to listen to criticism from folks like Benchmark, Sequoia, Greylock, Accel, Union Square, and others who have consistently out-performed on low-volume pace of investment for decades. they at least can speak from authority (and to be fair, Mark Suster's GRP has done quite well in the past decade). however, if you are ANYONE ELSE then please have a big cup of Shut The Eff Up because you don't have the 1st clue what the hell yer talking about.
to be more specific: if we look at the #'s, on average it's more likely that high-volume, spray & pray investing -- which i will going forward refer to as "a quantitative investment strategy" -- is likely to be successful than a "focused, low-volume" investing strategy. in fact, it's hilarious that people like to refer to what i do as playing roulette or gambling, when it's exactly the case that the fools playing a low-volume strategy are the ones who are gambling -- they're betting on exactly ONE roulette square, when they know the odds of getting billion-dollar wins are astromonically higher than 40-1.
whereas i'm basically trying to be the Billy Beane of Silicon Valley, betting on a bunch of short, fat first-basemen who consistently get on base. I'm going after all the Ichiros, and i'm willing to do an incredible amount of scouting and early investment to figure that out, when most investors are lazy, want to bet on Barry Bonds and souped-up #'s, hoping they can hit a homerun when the fence is actually more like a mile away than just 300 yards. good luck with that folks. i'll stick to technical hitting, thank you.
again, it is tantamount to conspiracy that people who are failing miserably at venture capital investment with ridiculously poor IRRs are disparaging anyone else with a quantitative invesment strategy. kettle, black.
#3: Social Networks & Reputation Systems like LinkedIn, Quora, Angel List are Destroying & Marginalizing the Value of "Rolodex" & "Finance/MBA" Investors. Domain-Specific, Expert Investors are the New Black. Get Used To It.
now, let's talk about what VALUE-added investment is REALLY all about.
first: while value-added does include introductions & reputations, if this is all you are currently trading on, then prepare to get disrupted by things like LinkedIn, Quora, Facebook, Twitter, Angel List, etc. most big name VCs over the years have PRIMARILY been trading on reputation and connections which are now MUCH less necessary due to the advent of social networks and other high-visibility communication platforms which are dramatically more transparent than they were 10 years ago. this is likely to continue to accelerate rapidly, and in the future i will wager that investors with these backgrounds will be a hell of lot more valuable:
- Engineering & Programming
- Visual Design & Interaction Design
- Back-End Infrastructure & Scalability
- Large DB Systems Integration
- Front-End Scripting & Dynamic Content Integration / Rich Media
- Analytical Marketing & Metrics
- Behavioral Psychology & Customer Development
- Paid & Organic Search (SEO/SEM)
- Social Networks, Social Media, Mobile Development & Marketing
- Affiliate Marketing & Direct Marketing
- Business Development, w/ Strong Engineering or Product bkgrd
- Enterprise Sales, w/ Strong Engineering or Product bkgrd
- Ad Copy Creation & Consumer Marketing
- Customer Service & Support
- Payments & E-Commerce
- Other forms of Online Marketing (Video, Blogs, Social, Mobile, Etc)
The list goes on, including many other specific skills in building & creating product, and in marketing & distributing to customers. these are the 2 key areas of expertise: building product & distributing to customers. making or selling. creating or hustling.
On the other hand, skills i bet won't be important as much in the future:
- having (only) a big rolodex or (offline) network
- having a traditional MBA or investment banking background
Both of these are still important, but will become commoditized and marginalized by the availability of such information from online systems for social networks & reputation, and by the relentless advance of access to capital from a variety of channels.
To the extent these areas ARE still relevant, they will be dominated by those who are most visible and most relevant on Facebook, Twitter, LinkedIn, Quora... and Angel List. most VCs barely blog, and have no idea what it means to engage on any of these systems, much less build them or market them. (most angels too, but they seem to be a little more savvy).
and while most people think of me & 500 Startups as Crazy Spray-and-Pray, what we are REALLY all about is value-added investing based on domain-specific knowledge from the first group.
our team includes engineers, marketers, designers who have worked at companies like PayPal & Google & Mint & YouTube, and our mentor network currently does many of the jobs in the first group at companies like Facebook, LinkedIn, Twitter, Groupon, LivingSocial, Zynga, Twilio, SlideShare, Zong, etc.
we also are quite unique in that we run domain-specific conferences on social platforms & marketing (Smash Summit), on design & user experience (Warm Gun), on startup metrics (Lean Startup w/ Eric Ries, another 500 advisor), on messaging & communications (Inbox Love), and we reach a global network of 100+ companies across 3 continents and over 10 countries (and visit them via trips like GeeksOnaPlane). we webcast our accelerator talks live to anyone in the world who wants to tune in. and yes, i am bragging, because i'm sick & tired of people thinking we are anything as simple as "spray & pray" investors.
i challenge ANYONE or ANY firm on the planet to show me the list of "value-added" resources they can bring to the table compared to us, even though we are barely one year old. we are NOT simply spray-and-pray investors -- we are The Next Generation. we are What's Coming. and we Got Next.
We Are Legion. Expect Us.
gotta take the kids to basketball, so i'm leaving it right here for now.
(drops mike on floor, walks off stage, raises 2 fingers to audience... in RubberBandits style).
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