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AngelList is funding the minor leagues of venture capital (and giving founders $500,000 to start)

AngelList, a startup-funding website, announced today it was launching Angel Funds to let “founders back founders.” The $35 million initiative will arm startup veterans with millions of dollars to invest in early-stage startups. AngelList co-founder Naval Ravikant envisions creating the infrastructure to power a massive new class of venture capital (VC) investors: “Operator Angels”

“We’re creating hundreds of new VCs,” says Ravikant, who argues the venture space is anything but overcrowded. “Every time I hear someone say there are too many VC funds, it is always a venture capitalist saying it, not entrepreneurs. Entrepreneurs want to raise money from other entrepreneurs.”

Angel investors have been a force in Silicon Valley for decades, but they often lack the capital to make bigger investments. Angel Funds are designed connect money with insiders to pick early winners. The new financing from AngelList’s Maiden Lane and other venture firms will give dozens of startup operators on the AngelList platform between $500,000 to a $1 million (a few will be larger) to make their first investments, with additional funds from their own backers. The funds are due to be invested within one year. Operators are drawn from successful syndicate leads, as well as startup founders selected by AngelList. Angel Fund leads earn 15% of profits from any deal, with 5% going to AngelList.

Maiden Lane and AngelList have been testing the approach since 2014 with 35 funds that have put $15 million behind 220 startups. Early returns are promising, says Navikant, and he plans to create at least 100 “founders-backing-founders” funds within the year. Ultimately, he wants to see hundreds of new operator funds, some topping $20 million per angel lead.

AngelList has proved to be the most successful way for angel investors to easily place money in multiple startups without screening them one by one. Since its founding in 2010, it has evolved from serving individual accredited investors to syndicates (groups of angel investors pooling money) investing more than $540 million in at least 1,200 companies. Angel Funds are the next step in giving angels the ability to make more investments.

AngelList is turning the tables on an industry that likes to think of itself as safer from the technology-enabled turmoil that it unleashes on other sectors. Online networks like AngelList and flexible investing criteria under the JOBS Act has opened the door to new entrants to challenge venture incumbents who have relied on handshakes and relationships and large funds to source deals. As “cash, customers, and talent” move online, AngelList is betting that anyone who has the right mix of savvy, connections and operating experience can make venture capital work, regardless of personal wealth or profession. “A full disaggregation of venture is happening,” says Ravikant. “Venture is not a niche business that has to be protected and sheltered.”

AngelList wants to eliminate the two biggest hurdles facing would-be VCs: time and easy access to capital. To raise a venture fund, investors must typically assume enormous overhead: legal expenses, management teams and back-office services. Founders wishing to be serious investors also face a long road: years working up the ladder at venture firms before earning real profits from portfolio companies. Angel Funds essentially skips these steps by connecting capital directly to promising startup operators with access to deals. Founders can then apply their knowledge, and earn a piece of the upside, even if they don’t invest full-time or manage a fund. “Our real innovation is the ability to scale down,” says Ravikant.

That’s worked for people like Zach Coelius, who never invested in a company before making his first syndicate investment on AngelList in 2015. Now among the platforms most successful angels, he’s invested about $8 million in 17 companies, including self-driving car company Cruise Automation, led by a former colleague, which sold to GM for $1 billion in 2016. Coelius now runs his own Angel Fund.

“It’s an opportunity for insiders like me who don’t have access to liquid capital to invest in companies that I’m excited about,” says Coelius. After 10 years in the ad-tech space, he has a front row seat to multiple sectors and the best talent in Silicon Valley. “The advantage Naval and AngelList have is that they are the best option out there for guys like me who don’t have large pools of funds but do have access to lots of deals.” That model, he thinks, is going to open up the field to other startup operators, eventually expanding the role for early stage investors. “The Angel Funds work really well because you can move quickly, write small checks and you don’t need all the social proof as you do with a syndicate” [which require permission for all parties to join an investment].

Inevitably, the Angel Fund model is tilting the table in favor of those who can deliver more than cash. While many startups struggle to raise money, the most attractive have the opposite problem: intense competition among potential investors. Angel Funds lets founders become even choosier about capital as it becomes a commodity. Coelius says the question for founders when picking investors increasingly becomes: “Are you valuable to the company or not? Have you proven to be useful?”

It’s not yet clear whether this will help or hurt traditional venture capital firms. Most likely, some of both. Despite initial wariness (or contempt) for AngelList, VCs have come to treat it as a source of leads for later-stage deals. AngelList is even setting up partnerships with venture firms such as Bain Capital, CrossLink Capital, and Accomplice Ventures to act as “scouts” for later investment. Venture firms also hold major advantages over angels as well: they take board seats (angels are often spread too thin), write larger checks, and, in some cases, offer business services and introductions to help their startups. Fred Wilson, a VC at Union Square Ventures, argues that many of the most successful venture investors bring superior managerial and strategic skills, not startup experience. “There is something about the other pathway into VC, via investing, consulting, writing, that works equally well, or better in some cases,” he writes.

Whatever direction venture moves, Ravikant sees AngelList serving as the minor leagues for a new generation of venture capitalists from the startup world. As the platform lowers the hurdle to start a fund, and shows a clear track record for those who excel, far more operators are likely jump into investing. “This will be a breeding ground for VCs,” he says.

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