My humble opinion: Angellist's syndicates and the CSC fund are great for startups, a bit of a negative for the long tail of angel investors and a net positive for traditional VCs.
We're seeing a glut of capital at the seed investment stage, which means higher prices for all and more competition for hotter deals. This means that a lot of angels are getting forced out of a lot of deals they might have been in before, or have to enter a deal through a syndicate and take a 20-30% haircut on the carry.
On the other hand, we're seeing good startups getting funded now because of the excess capital -- startups that might have had a hard time raising because they didn't have the right cachet with the investor network and didn't hit the right milestones to make investment an easy case. A $25k investment today is going to be more expensive or more risky than a $25k investment a year ago.
The increase in startups coming down the pipe is a good thing for traditional VCs. More startups are going to pass the series A hurdles and find their way into the VC pipeline. The VCs will end up with a larger crop to select winners from.
If you don't have good dealflow as an angel right now, I'd say that it's a good time to sit out from the startup scene and become an LP in a fund or two instead.
Alternatively -- I'm biased here, admittedly -- US angels should take advantage of the strength of the US dollar and find some early-stage deals north of the border up here in Canada before AngelList opens up Canadian syndicates and the seed valuations rise up to meet the US valuations.
> This means that a lot of angels are getting forced out of a lot of deals they might have been in before, or have to enter a deal through a syndicate and take a 20-30% haircut on the carry.
Or maybe the growth of these super-angel funds means "only" money isn't enough to get direct access to deals. "Only" money means you're going to pay the toll/carry. But money + advice/connections/intros/brand is your ticket to direct participation.
At a time when startups can start with relatively low capital requirements, the "strategic" part of "strategic investor" would seem to be the valuable part.
But, I wouldn't worry too much about angels getting cut out entirely. If "their margin is [your] opportunity" (Jeff Bezos), then founders should be able to get better terms from a direct angel investment. Or, maybe more accurately, an angel investing directly should be willing to pay a higher price given that there is no carry.
What about syndicates becoming big enough to replace Series A (and maybe even Series B) rounds? An old angel investment was ~$300k, now it's $3m, and Series As have become $6-10m. It seems likely that more angel money means larger rounds, and that they could reach $6m regularly soon!
"Second, there is a potentially perverse incentive in how Syndicates are currently structured with deal-by-deal carry (versus the pooled risk in a fund) that could lead to more syndicates being formed because there’s no natural governor to modulate it."
Yea, normally in a fund with 10 investments you pay carry on the net performance of the fund. So let's say the fund is $100 and 10 investments of $10 each. One ends up being worth $110 and everything else goes broke. Normally the carry would be 20% of $10 (the profit), but on a deal by deal, the carry is 20% of the profit on each investment (there was only one) so you pay it on the $100 (110 - 10) for the one deal that made money.
This is obviously a particularly bad case, but I think if you looked at the "normal" distribution of fund returns, it's quite a bit worse as an investor (although unclear what the means since they're investing in different companies potentially).
I not sure this really creates a perverse incentive, the distribution already looked pretty close the the worst case from the investor's point of view. It's just generally going to be quite a bit more expensive than the quoted rate in practice.
For the YC fund it will be interesting to know how much of the new influx of funds will be diverted to the YC Research Lab initiative, which I suspect might have a lot of upfront costs (and possibly require continuous future injection as well). And if it really eats into this fund (assuming this fund is not ring fenced for later stage investments only), then the concerns outlined in this article are not really substantiated IMHO.
We're seeing a glut of capital at the seed investment stage, which means higher prices for all and more competition for hotter deals. This means that a lot of angels are getting forced out of a lot of deals they might have been in before, or have to enter a deal through a syndicate and take a 20-30% haircut on the carry.
On the other hand, we're seeing good startups getting funded now because of the excess capital -- startups that might have had a hard time raising because they didn't have the right cachet with the investor network and didn't hit the right milestones to make investment an easy case. A $25k investment today is going to be more expensive or more risky than a $25k investment a year ago.
The increase in startups coming down the pipe is a good thing for traditional VCs. More startups are going to pass the series A hurdles and find their way into the VC pipeline. The VCs will end up with a larger crop to select winners from.
If you don't have good dealflow as an angel right now, I'd say that it's a good time to sit out from the startup scene and become an LP in a fund or two instead.
Alternatively -- I'm biased here, admittedly -- US angels should take advantage of the strength of the US dollar and find some early-stage deals north of the border up here in Canada before AngelList opens up Canadian syndicates and the seed valuations rise up to meet the US valuations.