Published on Wall Street Journal:
Naval Ravikant is attempting to do to early-stage venture capital what technology firmshave done to every other industry: disrupt it. His instrument is a website called AngelList that allows for a kind of crowdfunding of young startups.
Thanks to a deal set to be announced Monday, he has a powerful new tool at his disposal, handed to him by one of the largest private-equity firms in China: $400 million.
That might not sound like a lot for a venture-capital firm, but it is the largest single pool of funds devoted to early-stage startups—ever. And it might be the largest-ever single investment by a Chinese private-equity firm in a U.S. fund.
When it comes to investing in early stage companies, $400 million gets you into a lot of them: more than a thousand, by Mr. Ravikant’s reckoning. And any one of them could be the next Uber Technologies. Indeed, one of the first companies on AngelList, in its earliest days, was Uber.
Nearly everything about the latest deal is pretty remarkable—both for AngelList and CSC Venture Capital, the U.S. arm of China Science & Merchants Investment Management Group, also known as CSC Group.
Previously, AngelList had raised $205 million from all sources, including $43 million from institutional investors.
CSC has more than 80 billion yuan, or more than $12 billion, under management, says Veronica Wu, president of its U.S. arm.
CSC founder Xiangshuang Shan aims to turn his firm into the largest private-equity firm in the world, says Ms. Wu. The firm went public in March on the Chinese stock market, where it raised almost $2 billion.
According to Ms. Wu, CSC’s investment into AngelList is just the start. What is coming, eventually, are large flows of capital into every stage of venture investing—from seed to immediately pre-IPO.
The bottom line? China is slowly—but surely—liberalizing its rules about investing overseas, giving investors in China’s overheated stock market the chance to diversify into startups in the U.S. more directly than ever before. What those investors lacked was the expertise to make smart investments.
With AngelList as the vehicle for this money, a tsunami of overseas cash is headed for U.S. startups.
That money will be doled out slowly, however, says Mr. Ravikant, so as not to overwhelm the market. In the first year, AngelList will disperse about $20 million of the money, ramping up to $50 million a year in subsequent years.
Of course, this is just the beginning. “$400 million is just the tip of the spear,” says Mr. Ravikant. “Unlike a normal venture fund, we never stop.”
Indeed, Mr. Ravikant said that on a recent trip to China, two different limited partners each offered him $500 million, but “we’re limited in how much capital we can absorb,” he says.
To understand why a single seed-stage investment entity can contemplate absorbing even $400 million, much less what’s coming next, you have to understand how AngelList works.
Imagine some combination of the crowdfunding website Kickstarter and the social-networking site Linkedin, only everyone on the site has to be an accredited investor. Early-stage startups show up, hat in hand, and 165 different angel investors, called "leads", evaluate them.
If an investor likes what he sees, he can put in some of his own money, while encouraging other investors, who are part of what is known as his syndicate, to fill out the investment with their own funds. These first investments average around $315,000 per startup.
With all this institutional capital from CSC, AngelList will be able to do deals faster, because CSC will be able to participate in any investment syndicate, writing relatively large checks and making the site’s angel-investor leads less reliant on the individuals in their syndicate.
For AngelList, this will mean a significant expansion. “As we add more limited-partner capital we’re going to add more syndicate leads, who are voting with their own dollars,” says Mr. Ravikant. “We’re going to deploy an army of leads.”
The syndicate structure of AngelList is what makes it so powerful, says Semil Shah,another venture capitalist. The company has come up with a novel solution to the information problem of “deal flow,” which involves finding and evaluating startups. Like Facebook or Reddit, AngelList relies on its thousands of members, as well as startups seeking investment, to create its deal flow, rather than a few dozen venture capitalists and their associates, as at a traditional fund.
Some in the more-traditional funding world view the growing incursion of syndicates as evidence of “dumb money” entering the system. But AngelList has won hard-earned respect from former skeptics. I do think, however, that Mr. Ravikant may be too optimistic when he says that funds on the order of what he is proposing to add to the early stage market won’t ultimately distort it.
We are, as ever, either at the dawn of a golden age of startups and innovation, as technology’s boosters claim, or soon we’ll be shaking our heads that investors ever believed the market for startups was as big or fast-growing as they thought it was.