Seed Capital From Angel Investors: AngelList Founder Naval Ravikant (Part 9)

Sramana Mitra: These are interesting analogies, using the different schools. You know, even at these schools, the rejection numbers are very high.

Naval Ravikant: They have to be.

SM: Of 500 deals, maybe five or 10 get accepted.

NR: Yes, I heard Y Combinator had 3,000 applications.

SM: If you look at the Google search for the term Y Combinator, every month 33,000 people are searching for it.

NR: It is definitely a hit.

SM: So, what I am trying to do with One Million by One Million is to give that kind of basic level of entrepreneurship education and incubation support to a lot of people so that then they can apply to the incubators. Or they can apply straight to angels. I want to make it a scalable first level of education and incubation online.

NR: Yes, I think what is going on at a broader level, if you look at everything from what we are doing with funding to what you are doing with education and incubation, to what Y Combinator is doing, we are living in an age where we have almost the mechanized the creation of small companies, and there are going to be a lot of small companies. Anyone who is used to the old venture model where each small company takes $10 million or $20 million in five to 10 years before it gets anywhere is going to [be] dead. VCs can look and say, this is crazy – you can’t have all these small companies. But you have to think about them slightly differently. These are not all going to be Googles and eBays; a lot of them are going to be like the hundreds of companies that make games for the iPhone – profitable and employing about 10 people.

SM: Yes.

NR: And they do fine

SM: Yes. Whether it’s a $1 million, $5 million, $10 million, or $20 million company, that is fine. Just fine. The [important thing is that they are] profitable, sustainable companies.

NR: Right! The mistake is expecting that they are going to raise venture capital. That is the error, because they are not all going to raise venture capital, they are all not going to have exits. The average company size in the United States and in the world is shrinking. The age of gigantic 60,000-employee company is coming to an end.

SM: That is a good thing.

NR: It is a good thing. I hope some day that 7 billion people and 7 billion companies will each be kind of interfacing with each other as consultants through APIs.

SM: I don’t know if you have read my Capitalism 2.0 series.

NR: I have not.

SM: You will enjoy it.

NR: Yes, I would love to. I will take a look.

SM: It’s exactly what you are talking about. You know, we are at a point where the speculators are hijacking the system. The world that we envision, a world with of a large number of democratized entrepreneurship-oriented people, is going to be far removed from public markets and the reach of speculators.

NR: Yes.

SM: These are going to be private, owner-owned and -operated companies, or they are going to be having maybe two or three investors, and they are going to be compensated through dividends. There is not going to be as much of an exit market. This is going to be a much more stable economic system.

NR: I agree with that, lots and lots of little companies just kind of colliding up against each other.

SM: And they can work on various niches.

NR: Coordination costs have gone down a lot thanks to information technology. Before it used to be really hard for these companies to coordinate with each other, so it made sense to put them all under one roof, but now they are getting business APIs essentially to communicate and work with other companies.

SM: In some industries, there are going to be economies of scale problems, and it will make sense to do it in a more centralized, more scalable fashion, but there are lots of others [that will not have this problem]. Niche e-commerce is a classic category in which it is really not necessary to pile up 1,000 people in one place.

NR: Yes, and all these tiny suppliers in China now can be connected through Alibaba to all the eBay sellers. You know, the eBay sellers are probably the first wave of this; that was not really recognized. Now you have Etsy sellers, and it is getting really niche.

SM: It is all very cool, and I would like to keep in touch with you about it.

NR: Absolutely! I am going to look at your Capitalism 2.0 series. And we will be sending some deals your way, too.

SM: Great. Thanks for your time.

NR: Thank you.

This segment is part 9 in the series : Seed Capital From Angel Investors: AngelList Founder Naval Ravikant
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