Why AngelList is Awesome for Small Funds

TL;DR — If you’d like to be part of Notation, and work with us and our portfolio companies, you can now back our syndicate.

A couple of weeks ago, AngelList announced CSC Upshot, a $400 million dollar seed fund to back syndicates and other deals on the platform. This is their latest announcement in a slow, steady, and wildly ambitious mission to dramatically change how startups raise capital (or how startups hire or how VCs raise funds…you get the idea). Most everyone is familiar with how AngelList makes investing in startups accessible to individuals, but it’s quickly becoming a powerful platform for funds as well. What follows is a brief look into how we’ve begun to scale our fund using AngelList and how other small funds might do the same.

Earlier this year, we announced an $8M fund focused on pre-seed investing in NYC. Our mission is to be the absolute best partner to technical founding teams that are at the very infancy of a new project. This is the first of a series of funds we’ll deploy focused squarely on this stage over the next decade.

Given the relatively small size of our first fund, we hadn’t planned to reserve much capital for pro-rata investments, and we expected to be largely limited to pre-seed rounds that are $500k or less in size.

AngelList, for us, has the potential to dramatically change how we think about capital allocation and portfolio construction. Our strategy remains the same — but overnight we have more capital to pursue our mission and support the founders of our portfolio companies.

Over the course of the past six months, we’ve found a few really interesting ways to scale our capital allocation strategy on AngelList while also making sure we remain fully aligned with our core LPs (some of which happen to be large institutions). We think this provides a strategy and roadmap for other very small nano funds like ours.

• We’ve started to privately syndicate our pro-rata opportunities on AngelList in our portfolio companies that raise additional capital from partners we trust. We offer these opportunities first to our core LPs, and then to our AngelList backers if there’s additional room. We’ll likely continue to follow-on until the company reaches a specific valuation, likely $50M or less.
• We generally charge a 15% carry (of which 5% goes to AngelList) for these pro-rata opportunities on a deal by deal basis, which is roughly equivalent to 20% carry on a portfolio.
• We assign the carry on every single pro-rata investment back to the core fund and our LPs. We don’t take this carry separately as individuals or GPs. We can’t stress the importance of this enough. It seems to us a misalignment that VCs would manage a core fund for LPs while taking GP carry on a deal by deal basis in separate SPVs. For our LPs, this affords them the opportunity to put relatively small amounts of additional pro-rata capital to work while earning additional economics into the core fund from each SPV regardless of whether or not they choose to participate in the deal.
• On one occasion we used AngelList to increase the size of an initial investment in a round that was larger than our typical pre-seed check, although squarely in our thesis in regards to stage and team composition. We structured this privately in the same way as we do our pro-rata. This type of investment will be rare for us, likely only once or twice per year…and we’ll be able to discuss in greater detail when we can announce the company.

Charlie O’Donnell wrote an interesting post a few weeks ago about leaving money on the table, in which he addresses syndicating pro-rata opportunities — every small fund manager should read it. We’re very careful to scale Notation on AngelList in a way that fits with our strengths, fully aligns us with our LPs, and doesn’t try to over-optimize by squeezing every last potential penny out of our strategy. We personally left a lot of money on the table over the past year to get Notation up and running, and continue to do so by assigning carry earned on SPVs back to our fund and our LPs. But leaving money on the table, in our view, doesn’t mean we don’t have a responsibility to maximize returns for our investors, and AngelList helps us do just this.

In ten years, few of today’s micro funds will be left standing. We think AngelList will still be here. Our bet is that the small funds who use this platform wisely, primarily for scale and marketing in the early days, will have a better shot of being around in a decade. There are more ways than ever to build a venture capital firm today, in fact, the ones that seem to perform best do things differently — YC, First Round Capital, among others. For a firm as new as Notation, we know we must be creative to survive, ask lots of questions, explore new platforms, and then come to conclusions as we figure out what fits best for us and our model. As with most other things we do, we’ll likely do most of this learning in public so that others can learn alongside us.

In the meantime, if you’d like to be part of Notation, if you believe in what we do and believe you can be helpful to our portfolio companies, you can now invest alongside us by backing us on AngelList.