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Micah February 27th

Is AngelList Creating False Hope?

Watching The Blue Angels at Moffitt Field

Image by micahb37 via Flickr

Yesterday, there was an explosion on twitter and some investor blogs about AngelList. It all started with Bryce Roberts of OATV writing a post about why he deleted his AngelList account, which was quickly followed by tweets and posts by folks like Shervin Pishevar (Angel), Mark Suster (Angel/VC), Jason Calacanis (Angel) and others (I hesitate to include Robert Scoble, who is someone I consider a friend. I consider Robert to be a self-contained hype machine. As someone who has been part of the Silicon Valley startup scene as a reporter rather than operator, his personal lens has become skewed in a way that many times is just not helpful to the discussion. Sorry Robert, I still love you.)

What I didnt see was a post from any founder or startup that is currently listed on AngelList.

The fact that there wasnt one is exactly why I think AngelList needs a bit of rethinking.

Quick background:

My startup, Graphicly, is on AngelList. We came on after our initial round of financing, mostly because AngelList didnt exist when we first went out. According to our profile page, we have had 15 intros and currently are exposed to ~750 investors. We have received at least one investment due to AngelList and have met many awesome folks, some of which I continue to interact with outside of the financing paradigm. (Go David Shen and 4HB!). In total, we have raised $4.2mm, of which 99% have come from folks I know or have been directly introduced to (no unsolicited calls turning into investment.)

When we first were nominated to AngelList by one of our angel investors, I was stoked. I saw AngelList as a great resource to connect to angels (not VCs) in an interesting new way. I was vetted by the AngelList team, where they helped me craft my description and asked all the right questions. To be fair, because we had already raised $1.2mm, I had low expectations in terms of interest. AngelList seemed to be (and in many ways still is), for extremely early startups and for new(er) angels looking to increase their deal flow.

Over the course of the next week or so, we were introduced to several angels, and had many great conversations. Frankly, if any startup gets to talk to David Shen, Ludlow Ventures, Ash Patel or Hussein Kanji via AngelList and you get them to invest, you will be extremely stoked. Trust me. (Of that list, only Ludlow Ventures is currently an investor in Graphicly – and I listed only the angels we met through AngelList, there is a huge list of others that are equally as awesome, I just met them in other ways.)

Now the question is, if I was starting a new company TODAY would I list it on AngelList?

I dont know.

My biggest issue is that its no longer just qualified angels [UPDATE: I spoke to Nivi and I want to make sure I am clear, I am not questioning if the angels are accredited, I imagine they are. To me, a qualified angel is one that is BOTH accredited and active.]. I follow the AngelList twitter account, there are 3-5 new folks being added daily. Some are my friends, and I know their backgrounds as investors (zero to less than zero) and some are associates at VCs trolling for deals (Im sorry, tracking startups). The noise on AngelList has become deafening. I couldnt imagine the influx of introduction emails I would get if I launched a location, gamification, group messaging startup right now.

Its what I like about the Open Angel Forum. You have to be 1) an accredited angel AND 2) an active one.

On AngelList it seems that you just have to say you have money to invest. (Sorry, investing $10-25k in 1-2 startups a year does not an angel make.) [UPDATE: See my comment above around having to be accredited]

Why is that bad for entrepreneurs? Especially young ones?

False hope.

Imagine, you are a founder. Its your first startup. You have been working 20hrs a day for weeks and weeks to push out the next great thing. You get into AngelList, your deal goes out. Emails start flooding your inbox.

Whats the first thing you do?

You start focusing on the money, rather than the product.

Its not uncommon – shoot, I did the same thing in this last raise. Every founder does it at some point.

But for a service built to help young entrepreneurs connect with experienced angels, AngelList fails at this one thing. Its now connecting anyone who is interested in being an investor with semi-vetted startups. (Sorry, I do know for some like Jason, he views angel investing as a hobby, much like his poker playing. I have no interest in a hobby angel. I want folks that can add support, not just money.)

In many ways, this is what happens when any venture starts to grow. I have seen it with Techstars. It started as a great program to help startups and in an innovative way, allow potential investors see a company grow and work over an intense 3 months. Now 4 years later, there is a book, 3 more locations and a Techstars Network. I have been impressed that David Cohen hasnt allowed the program to lose its initial mentor driven focus – but now everyone wants to be a Techstars mentor. If David allowed everyone to be a Techstars mentor that wanted to be, the companies would get an enormous amount of conflicting advice some which would be quite harmful.

I like that Shervin views AngelList as another information channel. But what happens when that channel is overloaded? Or that there is a false sense of urgency to invest in startups. Mark filters his AngelList email and then ignores most of it. As a founder, who would I rather invest? Neither Shervin or Mark are investors. I dont know Shervin at all – although, I would love to, and expect to some day. I truly respect his world philosopy, and given our similar family backgrounds, I think we would enjoy each other. Mark I do know and consider a friend. He once told me he has 10 mistakes that founders make, and I was making 8 of them. While that is a solid B, it did force me to think through what I was doing and make significant changes.

As a complete aside, I have been saying for the past six months that 2011 would be the “Year of Intimacy” where smaller more private networks will reign supreme. My friend Dave Morin‘s startup is the first of these to appear in scale, but it certainly wont be the last. Since my days at Lijit, I have strongly believed and advocated that trust has to enter the online conversation at some point, and in many ways, Dave has done a great job exploring trust relationships with Path.

AngelList has the ability to be another trusted resource for entrepreneurs. If the angels that are accepted to it are truly vetted for accreditation (I believe its pretty simple, just a net worth north of $1mm — UPDATE: According to Nivi, they are vetted for accreditation, which is awesome) and activity; and the startups are vetted for quality (In essence AngelList becomes their first “investor” by providing resource) then AngelList has the ability to become that trusted resource. Its goal should be to reduce noise and allow founders to focus less on the fundraising process and more on building amazing products. AngelList should allow angels to increase their deal flow and connect with founders that they can really help and support.

As it is now, it is becoming a hype machine that is driving undue pressure and creating a potentially toxic relationship between investors and entrepreneurs.

Nivi and Naval: I am happy to discuss this directly if its helpful: 720-248-8499 | micah@graphicly.com GTALK/email | micahb37 skype/AIM

[UPDATE: I am getting some personal emails asking if I would recommend AngelList to a new founder. The answer is yes, I would and do. I also make sure that they are educated to the noise, and give them some tips on how to handle it. Research, dont take all intros, and research some more. I also highly recommend Open Angel Forum to all founders.]

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  • http://venturehacks.com nivi

    Hi Micah, Thanks for the feedback.

    You can’t get on AngelList as an investor if you don’t explicitly tell us you’re accredited. An investor could lie but we generally do additional research to figure out if they’re real or not. But it’s up to the startup and their lawyer to do the final diligence. That’s the same whether you use AngelList or not.

    The investors on the site have generally made several investments and indicate how many more they want to do this year and how much they want to invest per startup. It’s on every investor profile on the site. There are exceptions, usually for good reason, and we need to figure out the right criteria for accepting investors. Like all products, it’s a work in progress.

    Startups can select which investors should see their profile http://venturehacks.com/articles/angel-picker and can research investors beforehand and sort them by intros, investments, followers, fund type… here http://angel.co/investors

    Improving the “investor picker” is on the roadmap. We need a better tool for startups to figure out which investors they should meet.

  • http://learntoduck.com/ micah

    Thank you for the clarification. I should have added that I think the associates at ventures firms are almost worse for young founders than novice angels in driving false hope. I hope I didnt come across as too negative, because my intent was to indicate that while AngelList has a bunch of positives, its success might inadvertently be creating a negative.

    I would rather than AngelList was ~300 (moderate- to highly-exclusive) of the top investors (maybe angels, “super” angels, and small VCs – <$100mm funds) and that as a founder, I got on to AngelList because 1) you guys looked at the company's pitch and would invest your own money; 2) at least one AngelList investor had already committed (maybe thats too narrow); 3) my company matched to at least 10 AngelList investors. (maybe too broad).

    Then, I was limited to receive ~5-7 intros, and I couldnt receive any more unless someone from the first 5-7 invested (maybe too directional). That way, I would get interested and motivated angels, and I would spend less time on the phone or in meetings.

    Remember, I really am focused on the novice founder – who is not going to limit the investors that can see my profile (who dont know who most of these folks are) or do a ton of research prior to taking the meetings.

    A random thought – how many folks on the list are pure angels versus VC-ish (might be doing angel investments, but are really smaller VCs or associates at firms? It might be interesting to have two different "lists."

    Also – happy to email you directly the couple of angels that are examples of my concern.

    Finally – love the concept of an investor picker tool.

  • http://twitter.com/Timberry Tim Berry

    Nivi, Micah, how do you feel about AngelList vs. angelsoft.net. Specific list vs. platform? Coexist? Competition?

    Just FYI, I’ve been a member investor of several local Oregon angel groups using angelsoft.net as a platform, it seems to be inviting prospective deals, individual accredited investors, and serious investor groups to list themselves and use the platform. I’ve also been following the angelist threads, rooting for coexistence not competition. And I’m a user, not directly connected to angelsoft.net nor listed on angelist, just curious about how they sort it out.

  • http://learntoduck.com/ micah

    I dont know much about angelsoft. I have a friend that works there, and I like him. David Rose the founder is part of NY Angels, and an investor in a competitor, so I havent really done much with it. Sorry, wish I could provide more feedback.

    Angelsoft seems to be software that is used to help an individual angel, vc or angel group manage deal flow. AngelList is really about introductions and connections.

  • http://www.facebook.com/Thormuller Thor Muller

    Hey Micah,
    I think you’re right about the value and trend towards trust networks. This post on the the AssetMap blog did a nice job of touching on how powerful they can be:
    http://blog.assetmap.com/2011/.....-networks/

  • http://learntoduck.com/ micah

    Interesting. One day we should discuss how entertainment choices are indicative of the self. :)

  • http://twitter.com/carlostobin Carlos Tobin

    I think Nivi & Naval should go the opposite route and open it up to all accredited investors in the country. There are plenty of doctors in Ohio, and every other state, that would love the opportunity & deal flow. I’m sure they get tired of looking at “Oil & Gas” deals all the time, if ya know what I mean. Which is true because right now for every 50 investors that look at an Oil & Gas deal only 1 will write a check. These investors need access to better deal flow.

    If they open it up, Nivi has the opportunity to make Angellist the winner take all investment bank of the future, with warrants being the revenue source.

    As McClure pointed out today, founders need investors with expertise. I will add to that, for a $1m round with 40 investors, they don’t need 40 “smart” money investors. Probably only 4 -8 ($100k-$200k). The rest can come from anywhere in the country.

    By opening it up to investors around the country, by geography, they also open to all start-ups, not just SV, Boulder, Boston, etc. Through Angellist, local private equity investors can invest in the chef that needs $250k for a new food truck or the local entrepreneur that wants to open up a local mortgage bank.

    Just my opinion. I could be wrong.

  • http://www.facebook.com/Thormuller Thor Muller

    Most def. I’ve been thinking about the idea of a public “media map” that acts as graphical view into the media choices that I make. It would make my biases and inputs transparent, but also–perhaps–apply some social subtle pressure to be broader in my inputs. It would also just be a userful conversation starter.

  • http://learntoduck.com/ micah

    40 investors in a $1mm round is insane. If you can’t get one person to believe and pony up, your startup has long term issues.

    And AngelList is geographically diverse, but, yes focused on tech startups vs. Restaurants.

  • http://learntoduck.com/ micah

    I have been doing a bunch of informal study around the concept (given where
    we are with Graphicly), and I find it really interesting how people view
    good friends with competing entertainment choices/tastes. Its impossible to
    be as good of friends with someone who hates your music and vice versa.

  • http://deprecated.com tempo

    Let’s talk about this in Austin in a few weeks!

  • http://www.facebook.com/people/Mark-Rose/504711218 Mark Rose

    Also please remember that Angllist is a new approach to angel investing which serves to bring entrepreneurs and investors together.

    Is it perfect. No. Can you waste time? Sure. Does it raise false hopes? Is this really a question? Any startup can be perceived as a false hope, or blind optimism, or genius. Is it novel and useful? Absolutely.

  • http://www.metamorphblog.com Matt Mireles

    Micah,

    Dude, you’re wrong. We just raised $700k in an angel round led by Mitch Kapor, who found us on AngelList. Mitch is awesome. Our investors are awesome. AngelList is awesome.

    http://www.metamorphblog.com/2.....ernet.html

    AngelList only creates false hope if you’re hopelessly naive. In which case you’re going to have lots of false hopes deflated by reality.

    -Matt Mireles
    CEO, SpeakerText

  • http://learntoduck.com/ micah

    Matt, congrats on your raise and getting Mitch. An investor of that caliber definately makes raising easier. My point was that for young founders getting 30+ intros it can be overwhelming if you 1) don’t understand the experience of the angel; 2) their activity level and 3) their potential value to your deal.

    Before AngelList, did you know who Mitch Kapor was? Did you have any traction with investors prior to AngelList?

    I’m a big fan of AngelList, but also believe that young founders need education. AngelList is too much of a free-for-all right now.

  • http://learntoduck.com/ micah

    Matt, congrats on your raise and getting Mitch. An investor of that caliber definately makes raising easier. My point was that for young founders getting 30+ intros it can be overwhelming if you 1) don’t understand the experience of the angel; 2) their activity level and 3) their potential value to your deal.

    Before AngelList, did you know who Mitch Kapor was? Did you have any traction with investors prior to AngelList?

    I’m a big fan of AngelList, but also believe that young founders need education. AngelList is too much of a free-for-all right now.

  • http://www.metamorphblog.com Matt Mireles

    Before AL, yes, we did know who Mitch was. The story of our prior traction with investors is, well, complicated, but let’s just say the round didn’t come together until AL.

    The thing I’m hearing from you and that bothers me is encapsulated in your last line: “…young founders need education. AngelList is too much of a free-for-all right now.”

    What kind of education would that be, precisely? The only entrepreneurial education I am familiar with involves either reading blogs like this one, talking to elder statesmen like yourself, or taking a trip to the school of hard knocks.

    It sounds like you want to shield the young uns’ from the latter, which makes no sense to me. The hard knocks will come, from AngelList or otherwise. Being an entrepreneur means learning to take the hits and to see through the free-for-all and the chaos. That’s just what it takes to win.

  • Daniel

    How do you avoid having other entrepreneurs steal your idea when you’re on angel list?

  • http://learntoduck.com/ micah

    VentureHacks is a great educational resource. It feels strange to me that AL
    is a bit of “hey, we connected you guys, beyond that we’re out” mentality.
    In talking with Nivi, they are working to integrate some best practices and
    education into the process, which I think is awesome.

  • http://learntoduck.com/ micah

    Most of the indepth data around your idea is hidden to other startups. And
    you can control which (even down to the specific investor) sees your pitch.

  • Snow

    I really liked this post Micah, and want to thank you for bringing up this discussion. When I look at some of the investor on AngelList I have no idea who they are and what they do, and when they list “1-3 startups at 10-30k” then I don’t really want to know them. In the past I have dealt with investors that were way over their head. They wanted to play a bigger game than they could handle and I feel that it is exactly what some of these smaller investors do when they join AngelList.
    Another side of this which you didn’t touch on is the startups. With the popularity of the site it is bound to hurt some startups as they won’t get the exposure they deserve. Personally I have a startup on AngelList that has attracted no interest after 1 week of constant tweaking. Obviously it could just be a bad idea (I don’t think so) or it is because it didn’t get verified by AngelList itself. In contrast I saw what I considered a mediocre idea in a minimalistic market getting support by AngelList and several others within 2 hours of posting. I know this has to do with friends of friends and networking in general, but I also believe it is an example of a bigger problem that you hinted on.
    If the startup needed to be “Accredited” too I think it would create a more useful site. Granted that might mean that my own startup would get the boot, but I think it would be better to be rejected at the door rather than accepted to the party as the ugly kid. I will likely have to delete my profile and give AngelList a break while I work on improving on whatever it is I need to improve on (honestly have no clue as there is no feedback on a “bad” profile).
    Finally you mentioned that entrepreneurs needed education before getting thrown in front of the investor-wolves. I don’t think that is a bad idea at all. I think what is needed is a mentoring program where you can get support for both what to expect from investors, but also an honest talk about whether your idea is worth it. Maybe a side program could be created for small time investors to educate them in why they shouldn’t join AngelList.