20VC AngelList's Naval Ravikant on The Secrets To Success At Seed, Why Micro VC Is The Return of Traditional Series A & Why We Will See The Unbundling Of Traditional VC Brands

Abstract

Abstract

In this episode of "20 Minutes VC," host Harry Stebbings interviews Naval Ravikant, the influential founder of AngelList, who has backed over a hundred startups, including Twitter and Uber. Ravikant shares the origins of AngelList as an offshoot from the blog Venture Hacks, and discusses the changing landscape of venture capital, emphasizing the importance of transparency and control over valuation. He also touches on the rise of personal branding for VCs and the potential of cryptocurrency investments that traditional VC firms might miss. Additionally, Ravikant reflects on the transformative power of technology on society, predicting significant shifts in warfare, urban planning, and financial systems due to technological advancements. Finally, he outlines AngelList's broader platform beyond fundraising, including talent recruitment and product launches, and the importance of learning and seeking truth as personal drivers.

Summary Notes

Introduction to Naval Ravikant and AngelList

  • Harry Stebbings introduces Naval Ravikant, founder of AngelList, highlighting his investments and operational success.
  • Naval's brother, Kamal Ravikant, facilitated the introduction for the podcast.
  • Harry also discusses Foundersuite and Greenhouse software before starting the interview.

"Well, it's with great pride that we welcome Naval Ravikant, founder at Angel List, to the hot seat today."

This quote is Harry Stebbings introducing Naval Ravikant, emphasizing the significance of having him on the show.

Origins of AngelList

  • AngelList originated from Venture Hacks, a blog co-authored by Naval and his AngelList co-founder, Babak Nivi.
  • The blog focused on the game theory of venture capital, specifically negotiating term sheets.
  • Readers requested help in actually obtaining term sheets rather than just negotiating them.
  • Naval was investing through a small fund and observed the information arbitrage in the venture capital industry.
  • AngelList was created as a community service to distribute deal flow for free to quality investors without a business model in mind.

"AngelList came as an offshoot from venture hacks... And that's how AngelList was born."

This quote explains how AngelList was conceived as a natural progression from the Venture Hacks blog, aiming to democratize access to deal flow.

Micro VC Fund Experience

  • Naval had experience with both large VC firms and a micro VC fund.
  • Micro VC is seen as a return to true Series A investing, filling a gap left by larger VCs.
  • The cost of starting and building a company has decreased, but the competitiveness has increased.
  • Micro VCs write smaller checks with less hassle, allowing companies to build initial products and acquire early customers.
  • Micro VCs operate with lean teams, do not seek control or board seats, and run larger portfolios looking for breakout successes.

"Fundamentally in Microvc, it's funds of one to two people... And you're really just backing early entrepreneurs and giving them a chance to build their initial product."

The quote summarizes the nature of micro VC funds and their role in supporting early-stage entrepreneurs.

Seed Funds vs. Series A Funds

  • The definition of seed funds varies, and there are genuine seed funds taking seed-level risks.
  • Fund size often determines whether a fund is a seed or Series A, with funds over $10-20 million likely bleeding into Series A.
  • The market for early-stage investment is growing, with a mix of angel investors, syndicates, and seed funds.

"I think like one of those new things, you can define it, however, which way you want."

Naval Ravikant discusses the fluid definition of seed funds and acknowledges the diversity of investment models in the early-stage market.

Angel Investing and Power Law Math

  • Predicting winners at the seed stage is extremely difficult due to the nonlinearity of success.
  • Instead of trying to pick winners, investors should focus on eliminating potential losses.
  • Naval's colleague, Parker Thompson, mentions Naval's ability to understand power law dynamics and make rational investment choices.

"Yeah, I think it's extremely difficult. You're not predicting what the winner is going to be."

Naval Ravikant explains the challenge of early-stage investing and the importance of avoiding bad investments rather than trying to predict the few massive successes.

Economic and Sector-Based Factors in Seed Investing

  • Entrepreneurs skilled in raising uncapped notes must also maintain reasonable valuations to profit.
  • Investment decisions may be influenced by perceptions of a sector's potential, such as the belief that social media is no longer a viable investment.
  • Timing is crucial; an investor might misjudge the longevity of a sector's dominance.
  • Diversification in a portfolio is essential to increase the chances of a breakout hit.
  • Prorata rights are important to retain proportionate ownership in successful investments.

"So for example, some entrepreneurs have gotten very good at raising unkept notes, but you can't make money on that. You also have to keep valuations in check." This quote emphasizes the importance of not just raising funds but also ensuring that valuations are reasonable to secure a return on investment.

"Some of those factors are sector based. You might decide that a certain sector is already over or no longer fit for investment." This quote highlights the importance of sector analysis in investment decisions and the risk of misjudging a sector's potential.

Portfolio Strategy and Power Law Distribution in Seed Investing

  • The strategy in seed investing involves eliminating losers and assembling a portfolio with potential for breakout success.
  • Success in seed portfolios typically follows a power law distribution, with the top investment outperforming the rest combined.
  • A broad portfolio with many investments increases the likelihood of catching a "unicorn" (a highly successful startup).
  • Losses are capped at the initial investment amount, but gains can be substantial, emphasizing the importance of winning big when opportunities arise.

"I actually think of the whole seed investing category early on as not so much as picking winners, as eliminating losers and assembling a portfolio of good founders, good projects, good spaces with potential breakout opportunities." This quote reflects the strategy of focusing on creating a diverse portfolio with the potential for high returns rather than trying to pick individual winners from the start.

"The real money in a seed portfolio usually falls right along a power law distribution, where your number one winner will return as much as two through the rest of them, number two through whatever put together." This quote explains the disproportionate returns characteristic of seed investing, where a few top performers yield the majority of profits.

Aligning Investment Style with Portfolio Approach

  • The debate between a broad portfolio approach and doubling down on successful companies is subjective and depends on the investor's style and expertise.
  • Investors may gravitate towards later stages where larger checks and more ownership are desired, requiring more due diligence.
  • Seed portfolios tend to consist of many small early-stage investments.
  • The venture capital industry requires both broad portfolio investors and those who focus on fewer, larger bets.

"I think it's more important that it lines up with how you do your own investing, what your best style is, and where your area of expertise is." This quote suggests that an investor's personal style and expertise should guide their portfolio strategy rather than adhering to one-size-fits-all advice.

"So I don't think it's an either or. The industry absolutely needs both." This quote acknowledges the necessity of both broad and focused investment approaches within the venture capital ecosystem.

The Unbundling of Venture Capital: Advice, Control, and Money

  • Entrepreneurs increasingly separate advice, control, and money, seeking each from the best sources.
  • In later stages, the focus shifts towards securing capital at the best valuation, with less emphasis on investor advice.
  • Control is a critical factor that neither entrepreneurs nor smart seed investors want to relinquish early on.
  • The trend in venture capital is moving towards unbundling these elements, with control being the most complex to navigate.

"Venture is a bundle of advice, control, and money. And good entrepreneurs unbundle those things and kind of purchase what they need at market rates sometimes." This quote describes the traditional combination of elements in venture capital and the modern trend of entrepreneurs selectively sourcing these components.

"I would rather take a low valuation and keep control in terms of board control and control of protective provisions, rather than vice versa." This quote expresses a preference for maintaining control over a company rather than maximizing valuation at the cost of control, highlighting the long-term strategic importance of control in venture deals.

Importance of Investor Brand in Venture Capital

  • The brand of a venture capitalist is important because money is a commodity and differentiation is key.
  • Salespeople in commodity markets are highly compensated, and similarly, VCs must add value through advice and brand.
  • Individual reputation is becoming more important than the firm's brand in the venture capital industry.

"Money is money as long as the Federal Reserve signature is on there. It's a federal reserve note. It doesn't matter who it comes from." This quote reinforces the idea that money is fungible and that the value VCs add lies in their advice and brand.

"What matters is who is the individual? What have they done? What do entrepreneurs think of them? How can they add" This quote highlights the shift in the venture capital industry towards the value of individual investor reputation and contributions over the prestige of the firm they represent.

Brand Unbundling and Individual Influence

  • The value of a brand is now more about concrete actions and transparency rather than just being a recognizable name.
  • Brands are shifting from firm-level to individual-level due to the rise of direct media and personal branding.
  • Individuals can now build their own brands independently, as seen with journalists on social media and politicians like Bernie Sanders and Donald Trump.
  • The unbundling reflects a larger trend where personal brands can become larger than traditional institutional brands.

"So I think that the idea of a brand, just because they're recognizable name, is diminishing in value. And instead, the brands are being driven much more concretely, much more transparently based on what you do."

This quote highlights the transition from brand value being tied to recognition to being tied to concrete actions and transparency.

"Brands are unbundling from the firm level to the individual level."

Naval Ravikant explains how personal branding is becoming more significant than the branding of the firms or networks individuals are associated with.

Impact of Technology on Society

  • Technology is the fundamental driver of human progress and societal structure.
  • Technology leads to wealth creation, which in turn influences social organization and politics.
  • The impact of technology on society is profound and includes changes to military systems, urban planning, financial infrastructure, employment, and the structure of firms.
  • Understanding technological trends can provide insights into the future direction of society.

"I think the history of the human race is actually the history of technology."

Naval Ravikant posits that technology is the primary factor shaping human evolution and societal development.

"I think technology changes society, whereas we like to think that technology is a subset of society."

This quote emphasizes Naval's view that technology is not just a part of society but the main force that shapes it.

The Future and Concerns of Technological Advancements

  • Technological advancements will continue to reshape society in unprecedented ways.
  • While the transition may be tumultuous, the overall impact of technology on humanity is seen as positive.
  • There are concerns about the increasing destructive power of individuals due to technology.
  • Humanity may need to evolve its social consciousness to manage the risks associated with technological power.

"I think drones are going to replace every single weapon system on the planet."

Naval predicts a future where drones will become the dominant technology in warfare.

"Our level of consciousness, sophistication, we almost have to start of thinking of humanity as a multicellular organism as opposed to a collection of unicellular organisms..."

Naval discusses the need for a collective human consciousness to manage the risks of technological power.

AngelList's Vision and Expansion

  • AngelList is not just about funding; it's expanding into recruiting and product launches.
  • The platform has facilitated a significant number of deals and is growing beyond seed funding to later stages.
  • AngelList acquired Product Hunt to become a comprehensive platform for raising money, hiring talent, and launching products.
  • The vision for AngelList includes proving its sustainability and value to the VC community and entrepreneurs.

"We have now run about 1200 deals through the AngelList platform, raise hundreds upon hundreds of millions of dollars for entrepreneurs."

Naval outlines the success of AngelList in facilitating deals and raising capital for entrepreneurs.

"So really what we're doing this year is putting all the pieces together so that we're the best place to raise money to hire talent and to launch your product."

This quote describes the strategic vision for AngelList as a comprehensive platform for various aspects of startup growth and investment.

Vision for Technology Network

  • The vision is to create a powerful technology network akin to LinkedIn.
  • The network is based more on usage rather than just a collection of resumes.
  • The speaker does not believe in long-term plans due to the rapid change in the world.

"So the combination of that I think, creates a powerful technology network, sort of like LinkedIn, but much more based on usage and not just a big connection pile of resumes."

The quote explains the envisioned technology network's focus on usage and practical connections rather than simply accumulating resumes like LinkedIn.

Approach to Reading and Favorite Books

  • Naval Ravikant doesn't have a single favorite book due to his extensive reading habits.
  • He buys or downloads books recommended by smart individuals.
  • Books that don't resonate are discarded.
  • "Sapiens" by Yuval Noah Harari, "The Rational Optimist" by Matt Ridley, and "Poor Charlie's Almanac" by Charlie Munger are mentioned as favorites.

"My favorite book of the last few years is sapiens. You all know of Harvey's history book. Previous few years was the rational optimist Matt Ridley's book, but it changes all the time. Poor Charlie's Almanac by Charlie Munger is another one that I would throw in there."

The quote lists Naval's favorite books over the years, highlighting his dynamic preferences and the influence of recommendations on his reading choices.

Desired Changes in the World of Venture Capital (VC)

  • Naval wishes venture capitalists would behave more like entrepreneurs.
  • He advocates for transparency in product, pricing, and values.
  • Naval suggests venture capitalists should provide concrete information online, like a service level agreement (SLA).

"I'd love to see venture capitalists provide an SLA, a service level agreement, put their principles and values directly online."

This quote emphasizes the desire for venture capitalists to be transparent and upfront about their practices, similar to how entrepreneurs present their products.

Common Misconceptions about AngelList

  • AngelList is often mistakenly thought of as a crowdfunding platform.
  • The platform deals with sophisticated, accredited investors, not general crowdfunding.
  • People wrongly assume posting any idea will lead to funding.
  • AngelList's talent platform is a significant part of its operations.

"Probably the most common is people think it's a crowdfunding platform. It's not."

The quote clarifies a common misconception about AngelList, stressing that it is not a general crowdfunding platform but caters to a specific audience of accredited investors.

Must-Read Blogs and Newsletters

  • Naval reads from various sources but prioritizes certain blogs and newsletters.
  • Kevin Simbler's Melting Asphalt, Shane Parrish's Farnham Street, and Ben Thompson's Stratechery are highlighted.
  • Twitter is a significant source of reading material for Naval.

"I'll always make time to read Kevin Simbler's melting asphalt blog. It really makes me think on many, many levels."

This quote points out specific blogs that Naval finds thought-provoking and valuable, indicating his preference for deep, analytical content.

Personal Drive and Core Motivation

  • Naval's drive has shifted from making money to learning and finding truth.
  • He seeks to understand fundamental truths rather than social truths.
  • The 'Aha' moment of connecting concepts is a key driver for him.

"So I'm mainly about learning truth in the Aha moment. I would say that's the main driver, at least intellectually."

Naval's quote underscores his intellectual pursuit of genuine insights and the joy of discovering new connections between ideas.

Recent Investment Focus

  • Naval does not focus on individual investments but on a class of investments.
  • He is interested in cryptocurrency investments, which he believes many VCs are missing.
  • Cryptocurrencies like Bitcoin, Ethereum, Zcash, and Monero, as well as blockchain-based protocols, are areas of focus.

"I think a lot of the protocol level innovation is moving away from venture backed startups and moving into blockchain based protocols."

The quote reveals Naval's belief that significant innovation and investment opportunities are shifting towards blockchain and cryptocurrencies.

Conclusion and Promotions

  • Naval appreciated the concise interview format.
  • Harry Stebbings promotes following both on Twitter.
  • Foundersuite and Greenhouse software are pitched as valuable tools for startups and hiring.

"Yeah, thank you. I'm impressed you kept it at 20 minutes."

The quote reflects Naval's acknowledgment of the interview's efficiency and conciseness.

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