Seed Capital From Angel Investors: AngelList Founder Naval Ravikant (Part 7)

Sramana Mitra: How are you viewing the other funding exchanges? I saw that CapLinked got funded.

Naval Ravikant: I don’t know if anybody uses it!

SM: Why did it get funded? And it got funded by people you know quite well, right?

NR: Yes, I know them quite well; their investors are very active on AngelList.

SM: So, why? Can you give me an analysis of this? These people are smart investors.

NR: Ex-PayPal guys. It’s all PayPal people funding other PayPal people.

SM: So they fund them for the heck of it?

NR: I don’t want to badmouth CapLinked. I know the people who invested, and they called me up and told me why [they did]. I have nothing against CapLinked, and I am sure they are fine. Or any of these other exchanges, for that matter. But about how we compete – first of all, we are free and we plan to stay free forever, so how do you compete with that? Second, we have critical mass. Third, name anyone who has raised money from them.

SM: OK. How do you anticipate the Securities and Exchange Commission (SEC) viewing you?

NR: Well, that is part of the reason why we are not taking a cut. We don’t want to be a broker-dealer or an advisor or middleman of any kind. So far I think it is good because we are just creating jobs and helping small businesses. They say what keeps the engine of the economy going is small businesses, so we are creating small business and helping to get them funded. I actually had a great meeting with Aneesh Chopra, the United States CTO, and he is a big fan of what we are doing. I think as long as we steer clear of being in the middle or taking a transaction fee, we shouldn’t have an issue.

We do respect a company’s blue-sky coverage, so we never announce if it is fundraising, and we don’t let people other than accredited investors see that it is fundraising. We also go out of our way to make sure that new investors who join the site can’t see existing companies, can’t get an introduction to a company that was there before they joined.  So, we respect that we have to have a pre-existing relationship with the investors before we can introduce them to a company. Other than that, there is not that much to do; it is really the people who in this space are ones who basically come in with the business model of “we are in charge we are going to take a cut” and then they have to worry about all these issues.

SM: OK, fair enough.

NR: There are disclaimers all over the site and the investors are vetted; they are vetted a lot more thoroughly than at SecondMarket or SharePost. It is not as though we let all accredited investors sign on. So, I think we actually try to accomplish the goals of why the SEC sets these bars as opposed to just following the letter of it. In fact, if you go through our site and create an application, it is not that easy. On SecondMarket or SharePost, you insert your name, phone number, address, accreditation number, and you are in and approved right there.

So, let’s go ahead and try to create an application on AngelList. When investors want to join, we ask for a bit of information on them, such as markets they are interested in – consider Internet, cleantech. Now, which locations are you interested in? We are not making it easier on purpose. Next, tell me about a couple of investments you have made. You have to enter at least two prior investments.

SM: So, you don’t want people to play here first; you want them to first invest outside and know something about angel investment before they come in here.

NR: Exactly. Now we need to get some references, so give us at least three investors, their names and email address, and they are going to get emails from us to confirm. You can even be connected to a Twitter account where any three real investors have to be following you on Twitter.

SM: OK, got it.

NR: And after you do that, then you go to the accreditation stuff. So, it is a very high bar.

SM: That is very good because one of my concerns … you were talking about creative destruction and lots of companies failing in the interim. We had this public conversation on infant entrepreneur mortality. The idea is that if you put dumb investors with first-time entrepreneurs, it is a dangerous formula. It is a very dangerous formula.

This segment is part 7 in the series : Seed Capital From Angel Investors: AngelList Founder Naval Ravikant
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