Naval Ravikant and AngelList: The Match.com of Funding [Interview]

Last week I had the chance to talk to Naval Ravikant; founder of AngelList, serial entrepreneur and top global angel investor. We talked in great detail about AngelList and his life as an investor. The conversation lasted over an hour, and I have split it into two halves.

Part One: Introduction and AngelList

Ravikant was in a relaxed and jovial mood, which is great because it meant he would be open to all my questions, and he was. To start the conversation I asked him to introduce himself. He told me that he studied Computer Science and Economics at University and then moved to Silicon Valley in 1996. After his move here he started a number of companies. The best known company that he has  founded was Epinions.com, which later IPO’ed as part of Shopping.com.

Other than building his own company, he has been an angel investor since 2007 and companies in his portfolio include, Twitter, Foursquare, Heyzap, Disqus, Plancast, SnapLogic, and Stack Overflow to name but a few.

He is also a co-author of Venture Hacks, a venture blog that advises startups on how to raise funding that he co-authored with Babak Nivi. This blog is the second most popular venture blog, beaten only by Fred Wilson from Union Square Ventures‘ blog AVC.

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AngelList is one of the more disruptive startup funding ideas to come to market. Thanks to AngelList funding is not just about who-you-know, anyone regardless of location could potentially get their startup funded. Ravikant has creating a marketplace that allows the buyers (investors) and sellers (startups) to come together.

I asked Ravikant how he started AngelList. He saw it as a continuation of Venture Hacks:

“People were not content with the fund raising education we were providing on Venture Hacks, they wanted us to get directly involved. So we decided to do that. We curated a high quality list of investors and then started screening startups as they applied. We then took the best startups and sent them to the list and got them funded.”

“Over time we have turned it into a closed private social network. Where startups and angels can get matched up together. One analogy would be a Match.com for investors and startups. Another would be a Github for founders, where you post your founding information online.

“Since we launched, it has done really well. A few thousands investors have applied as have a few thousand companies. Currently, we have 1170 investors on the list including 400 VCs and Seed Funds. The list is packed with great investors such as Jeff Clavier, Dave McClure, Rob Hayes, Aaron Patzer and Brad Feld.”

Essentially AngelList is automating the fundraising process. He went on further to explain:

“The current method of fundraising is very broken. It’s offline, it’s inefficient, it can takes 12 weeks or longer to raise a round. Why are we in 2011 still raising money offline? You market through Facebook or Twitter, get customer service through Get Satisfaction and host your servers on Amazon, why shouldn’t getting funding for your company be serviced through the web? The whole process has to move online. It has to get simpler and more efficient. And AngelList is a way to do that.”

Ravikant told me that the list has matched-up and helped over 200 companies get funding, all in one year. We then went to talk about the qualities that he favors in startups for AngelList.

“In AngelList I am not looking for a company I would invest in, so I do not apply my personal investing thesis. I am looking for a company worthy of investment by some investor out there. Different investors have different criteria, on AngelList.

“We have Angels divide themselves by location, stage they invest in, and markets that they are interested in. Angels can then say something, like ‘I’m a VC in Boston. I want to invest in Series A rounds, and I specialize in Healthcare’ and then we send suitable startups to them.”

“I measure four dimensions; Traction, Team, Social Proof and Product. For Traction, if they have launched, I look at what kind of customer growth they have and what their customers are saying. With regard to Product, I think about how it looks, if it’s innovative and how well it’s executed. For Team, I look at what their pedigree is [e.g ex-Googler], their background [work and university], how well they are referenced and do they have good character.”

“Finally, Social Proof refers to who else is involved right now as an investor and/or advisor. Which person has already given them the thumbs up is really important. If any one of those people who is associated to the company is phenomenal it [the startup] passes the filter [selection criteria] or if some balance of them is good, it passes the filter.

The concept of social proof is a powerful one. Something that startups should focus on. Get one great person to commit to your startup and you will have more control in raising your round. This is a tactic I have seen many startups use to start a bidding war or get the funding process rolling”. We talked about social proof in more detail and Ravikant said:

“In the public markets social proof doesn’t work so well. He went onto talk more about social proof and the advantages it brings with investing privately.

“I was waiting to invest in a stock and was holding out for a lower price. Then Warren Buffett invested – he validated it, that’s social proof. However the shares shot up as a consequence and the price was too high for me to invest. I couldn’t take advantage of his social proof. His investment had moved the market.

“In the private markets if Fred Wilson or Albert Wenger invests in a company, very often the round is held open at the same price for the next 30, 60 90 days as more investors come into the round. So I can use their social proof and get in at the same price. There is so little information on these companies that every investor is a specialist in their own way. One person might know the team members, another might have a deep understanding of the market, another might specialize in reference checks and customer feedback. Each individual is bringing information to the table without moving the price. So, in that sense herd mentality is rational. It would be an irrational investor that didn’t do it.”

We then went on to talk about some of the companies funded by AngelList. Ravikant told me that there was an extensive list on Quora. However he did go on to name a few recent investments; Uber, BranchOut, Postling, LearnBoost, GroundCrew, SpeakerText, and Udemy.”

I wanted to know if AngelList was suitable for every company looking to get funding, because it sounds like an ideal solution for someone who isn’t in a Tech Hub (almost everyone outside of Silicon Valley). He said that it was open to all but there was a trend to what types of companies got funding:

“There are a lot of different types of companies that we are helping get funded. We had a shoe company funded, we are helping a beverage company at the moment. We also helped a greeting card company. But those are pretty rare.

“The average company we help get funding would be a tech startup that has built a prototype, and has a credible team, with a little bit of customer traction. They would have to be ready to raise a round of $500,000 to million. That being said we have gotten nearly half a dozen Series A and Series B funded on AngelList. Taulia was an early success case for a Series A on AngelList. There are a couple of companies going through Series A/B now. Even though it is called AngelList, we have 400 VCs on the list too.”

AngelList is a serious platform to raise money from, so did Ravikant have any advice for someone looking to apply to the list?

“Yes I do, treat it seriously. Don’t just come in and hammer out something in 5 minutes. Treat it with the same amount of care you would put in to a good meeting with an investor or into a deck. You are basically presenting online to hundreds or thousands of investors, all at once.

“Focus on Team, Traction, Social Proof and Product, write one killer paragraph on each. Put up some good screenshots and a one-click demo if you have it. Definitely show your traction as much as possible. We will do the rest. The best thing about AngelList is that we get you introductions to people who are genuinely interested. For the investors it is a passive channel. They see your startup in a feed like Twitter. If they are not interested they are under no social pressure to take the meeting. So if they do take an introduction that means they are looking for reasons to say yes, not reasons to say no.

“You can choose exactly who your startup is visible to. You can mark it invisible to VCs if you think you are too early. You can mark it invisible to angels if you think they aren’t going to invest enough money. You can hide it from people who might be investors in competitors. You can hide it from people outside your geography. So you have a lot of control.”

AngelList sounds like a lot of hard work, I wanted to know how it monetized and if there were plans to introduce monetization in the future.

“It doesn’t. We are funded by the Kauffman Foundation, the largest non-profit supporter of entrepreneurship program on the planet. They have been generous enough to fund us. There are also a lot of issues with trying to monetize. There are a lot of SEC regulations in this space. We don’t want to be a broker dealer like Second Market and get into those kinds of issues. And fundamentally: you know Venture Hacks the blog was free. AngelList the service is free, and if we started charging, we would basically scare off the people that we care about the most. So we try and invite everyone, and we don’t want to leave anyone out.”

AngelList is certainly helping many people – it must feel great to be part of something great and positive. Ravikant said it was the most rewarding thing he has done. He went on to say:

“The biggest reward is that every single day, someone on Quora or Twitter or somewhere thanks us for having helped them get funded. And it’s a great feeling. So I finally get to unite doing something that is socially redeeming with building a product people use. Of course it has a good outcome for me too. Now I can get into many more companies as an investor than I would have otherwise. And I get to see everything. So I get the lay of the land, and I get a better perspective. No matter how hard I worked before I was screening, 2 or 3 companies a day. Whereas now on a good day I see 20-40 companies.”

Clearly this sounds very exciting, I wanted to know what to expect next.

“We recently opened up the site a lot more. Now you can see something without being logged in. or as an entrepreneur. You can get the full depth and breadth of AngelList. Except that the startups are hidden from you. They are anonymized. But you can see what markets are hot, and you can see what investors are watching which market. We have rolled out a lot of market matching features, and visibility/privacy. We have a lot more coming. We are trying to build tools for the investors to provide quick easy feedback to startups.

“We are building tools to help investors see startups only from people that they trust. We are building tools to help with price discovery. We are going to put the funding documents online and make them part of AngelList, so that the process becomes more standardized. Right now every startup is asking, “where do I get convertible note documents, what are good terms for me? Which term sheet should I use?”

“We want to get to a one click process some day. Ten years from now when you are buying shares in a startup you will just swipe a credit card and as an entrepreneur when you are raising money you would just point people to your URL and your social proof. You shouldn’t have to go and take too many meetings.”

Read the second part of the interview tomorrow. When I talk to Ravikant about how he started investing, what he personally looks for in companies, Twitter, Start Fund, the growing New York startup scene and more