Angellist Syndicates: An Associate's Perspective

Lost in much of the discussion over the emergence of Angellist syndicates and the likely effect on traditional early stage VCs, has been the process required to select, analyze & fund great startups. While Mark Suster and Fred Wilson both made a point of noting that the newly minted, overnight super angels/Micro VCs will have to learn how to lead – sitting on boards, negotiating terms, etc – I didn’t see an exposition of what that really entails.

As background, I love my job as a Senior Associate at Chicago Ventures. And here’s why: I’m involved in literally every aspect of making an investment from sourcing to analysis to process to friendship to selling to closing.

Great investors are busy. But great investors are also experienced managers – and they surround themselves with competent, capable junior level guys who they expect to provide a lot of value in funneling only the best opportunities upwards. Given we’ve made 20 investments in the 20 months since launching our fund, roughly comparable to active angels, I think I can speak to the difficulties in process.

The processes that Suster & Wilson note take a lot of time. Negotiating terms is more onerous than a discussion of a $3M or $3.5M valuation. For example, cap tables can be complex – especially when a company was incubated and is only 20-40% owned by the founders, a situation we see somewhat regularly in the Midwest (and likely common in other less mature markets). In those situations, traditional VCs need to get creative – demanding the initial investors forfeit shares, or artificially inflating the options pool. These discussions take a lot of time and analysis, soothing tensions, etc.

With the arguable commoditization of capital, institutions spend a lot of time managing their networks. Founders regularly ask us who we’ll be able to make intros to, whether in the hospitality industry, retail, entertainment, or any number of fields. While I have no doubt that angels have impressive networks, we spend hours weekly brainstorming who the right people would be, who we really trust, and potentially who’s on the fence of looking for a new job. These new angels will either need photographic memory or extraordinary network management tools. In addition, 2 partners at a firm with different backgrounds are likely to have a wider network than a single individual – making them more likely to win a sales contest.

Many angels rely on inbound dealflow to make their investments. The referrals come from an institutional investor they’ve worked with, a friend, a co-worker, etc. The benefit to inbound referrals (assuming one has a competent network) is that the quality of leads tends to be a lot higher. But if these new angels are viewed as competing with the same institutions who used to invite them into syndicates, they will need to fundamentally change the way they pursue deals and focus foremost on outbound sourcing.

And, as I’ve seen, sourcing is more than a full-time job. The level of activity on Angellist is extraordinary – dozens of startups create profiles daily, numerous others will switch on their fundraising status. At Chicago Ventures, I’ve developed my own process for researching and processing all the new additions – but I still spend a lot of time doing it. Even as a junior guy, I receive a lot of requests for introduction. Even our interns are responsible for much of our research.

Though I’ve never met Jason Calacanis, Dave Morin, or Kevin Rose in person, I get that they are exceptional, if not legendary. But in my opinion, exceptional won’t cut it, because as the early stage environment continues to mature, infrastructure and speed will be vital. Angels will need to expand their infrastructure (difficult without fees), or potentially merge.

Another option still are more 500 Startup/Dave McClure like models.  While Dave does leverage traditional management fees for his infrastructure, he has built a large team of individuals who are minimally paid but care deeply about their brand, the entrepreneurs they fund, and are willing to invest sweat equity.  Jason, Dave, Kevin & others do have 15 points of carry to assign, which if done thoughtfully, could enable them to build a more full service organization.

Angellist syndicates are exciting. And I recognize that I haven’t been in the industry long enough to comprehend the true, long-term effect. But I have seen how much work goes into leading an investment. When you couple my thoughts with the more partner level thoughts of Suster and Wilson, the shift towards individual angels disrupting the current process does appear downright daunting, although, of course, not impossible.