AngelList braces for rainy days as startup seed funding falls
AngelList typically takes a 5% cut of the profit from each investment made through its platform, which it collects once a startup gets bought or goes public.
AngelList is preparing for winter. The company, which runs an online portal connecting entrepreneurs with private investors, is assembling a "rainy day" fund and exploring new businesses as the market for investing in young startups slows.
Naval Ravikant, the chief executive officer and co-founder of the San Francisco startup, said he is looking outside Silicon Valley to keep the money flowing in a downturn. He aims to secure commitments from sovereign-wealth funds, endowments and other investors around the world to invest $1 billion through AngelList in the coming years. Last year, China's CSC Venture Capital, the US arm of private-equity firm China Science & Merchants Investment Management Group, committed $400 million, he said.
"If there's a cash crunch and valuations come down drastically, then that's when you want to be investing," said Ravikant, a prolific seed investor who made early bets on Uber Technologies Inc. and Twitter Inc. "That's what raising this institutional money is about. It's our rainy day money."
Storm clouds may already be forming. Seed funding totaled $2 billion last year as growth slowed to 5 percent, according to research firm CB Insights. The number of seed deals declined for the first time since at least when AngelList went online five years ago. At the current pace, both the number of deals and total amount invested in seed-stage companies will likely decline this year.
The rapid rise of AngelList coincided with a startup boom. The website has facilitated seed investments by mainly wealthy Americans in more than 1,000 startups, as well as funding for some later-stage companies, including Cruise Automation and Dollar Shave Club, which were each acquired this year. AngelList typically takes a 5% cut of the profit from each investment made through its platform, which it collects once a startup gets bought or goes public. It also plays the role of investor—through a $20 million fund, which it recently exhausted, and a newer $35 million fund.
But AngelList has been placing more emphasis on recruiting to go beyond startup investing. The company said its job board reaches 3.1 million people and includes 370,000 companies. AngelList said it makes about 78,000 job matches a month. The company is stepping up its role as a technology recruiter with a white-glove service called A-List. Businesses can pay AngelList $10,000 to curate a list of candidates and help set up interviews. Customers include Asana Inc., Box Inc. and Uber. Bloomberg LP is also listed as a customer.
Still, startup investing is what AngelList is known for, and the company is touting its achievements in that area. Of 61 companies funded through its platform in 2013, AngelList said the investments yielded an unrealized internal rate of return of 46 percent. The list includes Shyp, a package-shipping service, and Philz Coffee, a fast-growing chain of cafés.
The eye-popping number comes with a big caveat: It’s not cash. AngelList calculates its returns using valuations assigned by investors in subsequent funding rounds, which can drop if the startup stumbles. Venture capitalists and other private investors use different accounting methods to report returns, which makes them difficult to compare. Scott Kupor, a partner at Andreessen Horowitz, wrote a blog post this month admonishing internal rate of returns, saying it shouldn't be viewed as an important metric. Ravikant acknowledged that actual returns for the 2013 investments will likely be less and that he would provide updates annually.
Meanwhile, AngelList is adding new ways for people to get into private-company investing. With some 600 startups expected to raise money through the website next year, AngelList said it’s creating a sort of index fund for young companies that will hold shares in 100 to 200 startups. Investors can buy a share of the fund, called the Access Fund, for $100,000 or more.