The Good, The Bad, The Scary: How The New 400M AngelList Fund Can Pop the Market

Over the past several years, AngelList has done a remarkable job scaling the syndicate investing model and helping startups raise early stage funding. Fresh VC has also benefited as we often syndicate investor capital for our investments. Yesterday, the company announced some big news that a new $400M VC fund has been created to help fund startups on the platform.

This will no doubt enable easier access to faster and larger checks from AngelList. Syndicate leads will have greater access to funds and more flexibility in operating without a formal fund structure. It paves the way for exceptional syndicate leads to offer investment opportunities to smaller investors.

While this is significant on many levels, the most interesting things to me are that:

• This fund is the largest dedicated seed fund ever
• This endeavor is mostly funded by Chinese investor money

The new fund seems like a calculated move by a professional LP. The team is led by partners with technology and investment experience and is looking at deals that have led to valuable companies (there has been no big exits from AngelList startups but multiple companies are valued in the hundreds of millions). The investment pace will also slowly ramp up to better understand how this initiative can best play out.

However, the fact that it is the largest ever seed dedicated fund is startling and raises some questions. As the CSC group said that they’re interested in expanding to all stages of venture investing, part of their motivation is having early visibility into companies or funds they can eventually deploy larger capital into.

Doing a quick calculation, AngelList has so far deployed $205M across 650 startups averaging ~315k per investment.

Depending on how much the fund plans to deploy per deal, it will still be investing into hundreds, or even upwards of 1000+ investments. This is a big bet on an asset class that has shown to be an unscalable and a strategy that major U.S institutions have shied away from. Another cause for concern is that padding an investment round with an AngelList syndicate has become a fundraising strategy. This could once again raise the average size of seed deals / valuation as the amount that can be raised via AL becomes bigger.

The real scary part is that this could have lead to further injections of Chinese investor capital. With $12B under management, China CSC is one of the largest private equity funds in the country but a far cry from other non-traditional players. More and more investors such as mutual funds, state pension funds, insurance funds, banks, state asset management firms have immense capital reserves with nowhere to deploy. Just earlier this summer, China’s GSR Ventures launched a $5 billion fund for global technology deals.

The past few months have been crippling for the Chinese stock market. The Shanghai Stock Exchange crashed back in June and suffered major aftershocks in both July and late August. Between June and August, the exchange lost nearly 42% and other exchanges in China suffered similarly.

Combine that with an extremely frothy real estate market, sophisticated and unsophisticated capital alike are increasingly looking abroad to diversify their investments away from traditional asset classes and geographies. What results is a growing appetite for technology investments, combined with an eagerness to pay a significant premium to gain access.

I’ve spoken to many Chinese investors in the past 6 months and here’s some things they have said about their interest in U.S VC deals.

“I’ll invest anywhere from $1M to $100M in [Startup X]”- Asset management firm

“I’m interested in investing $15M in any of these consumer unicorns. I don’t care how it’s done” — individual

“Is there anyway I can put $10M in [Top VC X]?”- individual with no prior tech investing experience

“Over half of DST’s latest raise was through Asian investors”

A Few Years Down The Line

If this were to become a trend, there are far reaching implications. In high times like now, Chinese capital can continue to invest in startups and back funds. As soon as the market turns south, Chinese capital will renege on capital calls like no other.

Asian LPs and investors typically have a much lower risk profile and shorter time horizon. 100x return is attractive to anyone, but most would rather have safety and liquidity. Venture capital is a long game. The typical fund has an eight to ten year life span and it’s a largely illiquid investment.

This occurs in other industries such as entertainment and real estate as well. Chinese investors take interest, and then default for various reasons. Investors often are over leveraged and don’t have the right expectations. We’ve already seen major Chinese investors and developers face trouble from defaults such as mega-developer Kaisa earlier this year. Just last month, China’s largest commercial property developer Wanda group closed up its New York City office.

According to CBInsights, 2014 was already a record year for the number of VC and Growth funds raised. 2015 is on pace for even more new funds as entrepreneurs, VCs and angels alike are raising bigger or spin-out funds.

With $400M, there will be effects on the early stage landscape but it’s still small compared to the amount of capital that can potentially flood from China. I agree with Naval that the $400M is only the tip of the iceberg and not taking the $1 billion was a great move. It’s one thing to provide capital to a firm with a discipline strategy and an experienced team. It’s another for investors to frantically search for ways to deploy capital.

With later stage valuations frothy and heated up by global investor demand, flooding other segments of the market with capital will cause the market to pop. Manu Kumar of K9 Ventures termed it #PeakVC

yesterday and does a great job explaining the further economics of how this will affect the venture industry. As companies become valued higher and higher not due to its merits but due to an abundance of capital, returns become lower and tremendous amounts of capital will be lost. This new platform fund is a great initiative and a tremendous effort by the AngelList team. I am cautious about what this means for more Chinese capital, but am excited for the future of investment syndicates.