Thoughts on Angel List, "Social Proof", "Spray & Pray", & The Network Effects of Large Scale Investing

(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).

 

Comments

[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.

[Dquiec]

love it

[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.