Creating a Startup Index Fund using AngelList Syndicates
Leveraging AngelList Syndicates for Deal Flow and Diligence
For the first time ever, many investors have access to a whole new class of asset available to invest in. A lot of people have wanted to invest in startups but haven’t had the expertise, access to deal flow, or enough capital to get included in a funding round. Now there’s a way to access some of the hottest deals in the world of startups with comparatively smaller amounts than ever before. To balance risk, one can invest in many companies and attempt to win or lose with the entire ecosystem, not just an individual company.
Disclaimer: This is not investment advice. Understand that an investment in any startup should be considered high risk and you generally only want to use money you don’t need or really even want. That being said, for investors that desire a high-risk percentage of their portfolio (5-10% recommended), I prefer startups to a dart-on-the-map emerging economy fund or penny stock.
With AngelList’s great new Syndicates program, accredited investors can invest as little as $1,000 in the coolest new startups. Syndicates work like mini venture capital funds. You start by deciding which Super-Angel you want to back, and then you can participate in the deals that they make. As an investor, you gain access to the Angel’s expertise in selecting a deal as well as their due diligence. As a bonus, there’s a great chance that the angel will help the company by way of a board seat or by becoming an advisor. In return for these services, the angel earns a “carry” or percentage of the gain. These percentages vary, but you can expect to pay about 20% total including AngelList’s 5% for facilitating the deal. When you decide to back a Syndicate, you don’t have to invest in every deal. However, AngelList rightly warns that if you skip out on too many, you may get dropped from the list.
So how does one go about choosing which angels to back? If you regularly follow the startup scene, you’re most likely familiar with some of the larger than life personalities on the list. Basically, you’ll want to trust your lead, and feel that they have access to more deal flow than a regular AngelList user. You should also trust their judgement and opinions, which is essential because they may be the ones sitting on the board, helping to guide the company you’ve just invested in. I’ve been through the startup process, and trust me, the board is key. You should do some research into their past successes or investment strategy to see if you feel comfortable with their style and the choices they’ve previously made. A true index fund would invest in every single qualified startup available but most individuals don’t have access to that much capital. Finally, there’s an open question about whether or not market forces are an indication of success in this new world of Syndicates. Do other AngelList investors know something you don’t? Are the Syndicate leads with the most backing the most qualified? Time will tell…
The Syndicates
Valley Visionaries
Silicon Valley is where all the action happens. An overwhelming majority of great startup success stories happen here, and these are some of the guys that seem to be in the middle of the madness.
Naval Ravikant
Expected deals per year: 5, Minimum Investment: $10K min per deal
Naval, the CEO of AngelList is the most natural place to start with Syndicates. He would be my first choice, but the point of an index fund would be to invest in as many credible deals as possible and he has a minimum of $10,000 per deal. I have no doubt these will be of the highest quality, but it would limit the scope of the fund. Unless you plan on investing over $100,000 per year into this concept, I would recommend skipping Naval.
Kevin Rose
Expected deals per year: 5, Minimum Investment: $1K min per deal
Widely known as the founder of digg, his career has grown to include a great investment history. He’s currently a partner at Google Ventures and must be seeing great dealflow there. Kevin managed to invest in Twitter, Facebook, Square, AngelList, Zynga, etc. He’s currently the highest backed syndicate in the system. Interestingly enough, he’s the only one on the list that’s not taking any carry percentage. I highly recommend joining his group.
Dave Morin
Expected deals per year: 12, Minimum Investment: $1K min per deal
Dave’s worked at Facebook and Apple and is now the CEO of Path. At Path, he was rumored to have turned down $100M+ for his young startup. He’s got guts, experience and has access to great deals. He’s invested in Quora, Pinterest, Evernote, Nest, etc. I can’t wait to see what’s next.
Elad Gil
Expected deals per year: 4, Minimum Investment: $1K min per deal
Elad has a PhD from MIT, experience as a founder and has worked at both Google and Twitter. I hadn’t come across him before AngelList, but he definitely has the confidence of the market. He has a great investment history including Pinterest, Square, AirBnb and Stripe. He clearly states that there’s no penalty for skipping deals in his syndicate so there’s nothing to lose by joining in.
SoCal Syndicates
As a SoCal resident, I’ve had the pleasure of meeting these fine gentleman and they’re all exceedingly brilliant. I believe that combined, they’ll see the best deals in the LA/OC area and each of them have unique takes on markets and sectors. There’s clearly no shortage of deals in the Valley, but I think there are some less competitive hidden gems out in Southern California.
Mike Jones
Expected deals per year: 5, Minimum Investment: $1K min per deal
Mike has a long history with startups and now runs a startup factory called Science Inc. out in Santa Monica. He’s been a founder and has carried a company through to an exit, and has also come in at the top as CEO of MySpace. I expect him to have a great eye for lifestyle companies and anything cool in the e-commerce space.
Jason Calacanis
Expected deals per year: 7, Minimum Investment: $1K min per deal
Jason’s a legend. He can be controversial, polarizing and outspoken but he definitely knows what he’s doing. He’s been in the game a long time and is always in close proximity to big success stories. His next startup, inside.com, is currently in stealth mode but has attracted all-star investors. He’s been charitable with his space and time out in Culver City so I’m banking on something interesting coming out of his group.
Mark Suster
Minimum Investment: $1K min per deal
Mark has been leading a new wave of VC transparency with his blog Both Sides of the Table. He’s recently helped to rebrand his fund as Upfront Ventures and is relocating to Santa Monica. He was first into Maker Studios and seems to be a big believer in the future of entertainment moving online. I’m hoping for some great digital media plays from his syndicate.
Note: His syndicate doesn’t seem very active, but hopefully he is interested and starts to do deals in 2014.
The Other Guys
Betaworks
Expected deals per year: 12, Minimum Investment: $1K min per deal
The CEO of Betaworks, John Borthwick has made some bold moves lately. Betaworks bought digg for $500K to leverage the brand into a new frontpage for the web. They put out a free iOS game, Dots, that proved to be simple and highly addictive. By now, they’ve demonstrated their formula of useful utility on a clean design and it works. Their investment portfolio includes Kickstarter, Tumblr and Twitter.
What happens now?
In this article we’ve covered the ins and outs of AngelList Syndicates, and how they can be an effective, albeit risky, means of seeking a return in the startup arena. If you want to proceed, the first step is to apply to join a selection of syndicates. After acceptance, when a deal is announced, you should evaluate it for market segment, pre-money valuation, company stage and a few other factors. Remember, you should avoid investing in anything you don’t understand or are not completely comfortable with.
Also, note that these types of investments have unusually long holding times. Any startup portfolio most likely won’t be fully liquid for 5-7 years. Of course there are options to sell private stock like SecondMarket, but traditionally investors hold equity until a liquidity event.
Are we in the golden era of startups or are we in a bubble? Nobody knows, but I’m willing to bet that the party’s not quite over.
If you would rather watch someone else play with their money instead, read on.
The Startup Index Fund Project
On the finance side, I’ve been buying and selling stocks for over fifteen years. As for startups, I’ve built and sold one, and I’m currently on my second, a venture backed company. Now seems to be a great time to combine my interests and invest in the ecosystem. Please allow me to introduce the Startup Index Fund.
For at least the next year, I plan on executing the strategy outlined above and test the portfolio theory behind the index fund as it relates to small tech companies. For the syndicates I’ve selected, there is an estimated 45 deals per year. Ideally, I’d love to invest in 25-30 of those if I can get the allocation.
I’ll do my best to keep this completely transparent and will regularly post progress when there are updates available. You can either follow me on Twitter or check out the project website at www.startupIF.com for updates.
More information
- This is a great guide to investing on AngelList. Point a: “Expect to lose your money” :)
- On AngelList, startups can opt-in to their Invest Online program. This allows investors to get into deals with as little as $1K and pay AngelList a 10% carry. If I come across deals that I’m extremely comfortable with, I may decide to add these to the index fund.
For those that prefer traditional market investments, I recommend Wealthfront (note: referral link). They provide a cheap and easy way to balance your portfolio using standard market index funds.
