Seed Capital From Angel Investors: AngelList Founder Naval Ravikant (Part 6)

Sramana Mitra: What percentage of your entrepreneurs are first-time entrepreneurs?

Naval Ravikant: That’s a good question. Probably 80% or even 90%.

SM: On the investor side, I understand they are accredited investors. But then there are experienced angel investors, and then there are accredited but not very experienced investors, who are tantamount to dumb money, in my opinion.

NR: Our current criterion is that you obviously have to be an accredited investor. You also have to have made at least two angel investments that are bona fide investments – that is, you didn’t get advisory shares, you didn’t start the company, and you are not their banker – those kinds of things, you have to have references from three people on AngelList already who have to verify that you are someone that they would invest with and then you have to agree not to try and sell services to startups. We will toss you out if you do. That is the current criteria.

SM: OK. That makes sense.

NR: It is a bit of a floating target. Earlier on, it was even harsher than that. We got a lot of unhappy people who really wanted to be on the other side, and we were saying no.

SM: Well, I think there is a danger in having a lot of not very experienced angel investors working with these entrepreneurs, 90% of whom are first-time entrepreneurs. Dumb money plus an inexperienced entrepreneur is a lethal combination.

NR: Yes, absolutely.

SM: So, I guess the bottom line is you screen the investors somewhat so that the investors have some level of experience.

NR: Right, we are not letting in the dentists and doctors crowd. In fact, those are the ones from whom you get the biggest issues and fights, no?

SM: And that is where you are different from the traditional crowd funding exchanges.

NR: That is right. You know, there are some startups that come in that say, Hey I will take anyone’s money.

SM: We advise people against that.

NR: Right.

SM: And I constantly see deals that never should have been invested in; the people involved make the most basic investments mistakes and they still come in.

NR: Right, it is tricky space. That is for sure.

SM: Let’s about valuation. You said a few things about higher valuations, I think, in that article.

NR: Yes, valuation is hard to figure out. There is no question that we will bounce up valuations at the seed stage.

SM: I guess where I am going with the question is, if you artificially bloat up your seed-stage valuation or series A valuation, you get fired! Right? The next round is going to be a down round; all the investors are going to be pissed off, and you are the one who is going to be held accountable.

NR: Right. In other words, a lot of these consumer startups either hit or they don’t. And if they don’t, they are not fundable for any valuation, and if they hit it is not an issue. It is a power-law distribution, and the outcome is this: a few of them are quite successful and the rest of them are like wreckage? So it has become a hits business. This is why we see VCs buying at late stages, at multi-billion-dollar valuations.

SM: But it took time for LinkedIn, for instance, to find its stride.

NR: LinkedIn was funded all the way though; they were growing pretty fast from fairly early on. You are right that doesn’t always catch, but these days, the thinking is if you are at seed round, you have 18 months to build it out. If it hasn’t caught in 18 months, it’s easier to start over again than to keep funding the same old thing because these products are not that hard to build. It depends on the company. I mean, there are companies some companies where it’s harder. Two examples are if you are building a more classic software company or building something that just takes a long time to build, like Yelp, because you have to go region by region, market by market. You are right that there is higher valuation early on, it is going to be painful getting funded later.

SM: Groupon is an example of a company that [started over].

NR: That’s right, they pivoted. They aren’t doing anything like what they ended up doing.

This segment is part 6 in the series : Seed Capital From Angel Investors: AngelList Founder Naval Ravikant
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