Why Angel List Syndicates Could Change The Asset Management Industry

Angel List Syndicates enables angels who want to be VCs to establish a track record and then be remunerated like VCs for taking the lead on a deal. Then Angel List takes care of the admin side of being a VC.

Most innovations that change the world look ridiculous at first – think Twitter, Facebook, YouTube, WordPress & PayPal.

The Angel List core idea is simple – they poached it from Twitter. It is the Follower model. How can something as simple as “Following” somebody change an industry as huge and complex as the Asset Management Industry?

Two stories will illustrate why:

Story # 1: Lloyds Insurance.

A long time ago, I had a friend who had a gopher job at Lloyds Insurance. He was a “runner”. He described how massively complex risk could be financed in a day. Imagine insuring a space rocket launch; how on earth do you figure out the risks? This was a real world example. Lloyds had lots of specialists in different domains. One of them was a space expert. He would set the rate, basically committing his investors to underwrite the risk (he was the GP in VC parlance). My friend would then walk/run around to all the other specialists who would only look at two things – the area of expertise and the expert. If those two lined up, the other specialists underwrote massive sums in an instant, just putting in an amount and signing their names. My friend and I were staggered by how much money was deployed in such a short time around hugely complex subjects.

Story # 2: Family Offices.

This was more recent. It was a networking event to discuss direct investing (i.e. buying equity in companies, not via a Fund). Each of the participants was asked to describe their Family Office and how they made their money. The range of expertise was wide. For example, one was an expert in property in Dallas, while another was an expert in Biotech. Both were super experts in their domain and had no knowledge outside that domain. So the simple idea was to “Follow” them in their domains.

What Angel List has done is make that easy. They take care of things like ensuring the money is wired, creating Special Purpose Vehicles, tracking investments and so on. These are mission critical tasks, but they are not competitive differentiators. Those details matter and they are complex; get a detail wrong and it’s a disaster. However, these details are not the judgment on whether to invest in Facebook vs Friendster. That is where the super-experts are the key.

The “super experts” are the specialists who really know their subject cold, who have done their 10,000 hours. They are the same folks that journalists court as sources and that you can follow on Twitter.

Like the space launch example, each venture has massive complexity and risk; but once the lead investor signs onto the deal, the others follow with their checkbooks open.

The VC industry – it is now an industry – has worked by herding those experts into a few funds. The funds were the gates to those experts and they charged a hefty toll to all – LP investors and entrepreneurs – for the privilege of getting access to those experts.

The folks running those funds were smart enough to know that they were not the 10,000 hours experts in all those specialist areas, so they invited those 10,000 hours super experts to co-invest in deals in their domain. This was a great win/win:

  • Fund got the insights and network of the super expert.
  • Super expert invested on same terms as the Fund, without any fees.

The VC business is subject to the most Darwinian power law. Both LPs and entrepreneurs know that the returns are massively skewed to a few elite firms. Most LPs don’t get access to these elite firms and investing in a startup fund is too big a risk for most LPs. This makes it very hard for new funds to get established and implies a “permanent aristocracy” of a few firms.

Angel List could change all of that.

Angel List Syndicates, with their simple Follower model, solves the biggest problem for all the market participants:

  • Investors who want to be active and take a lead role. Angel List Syndicates allow angels who want to be VC GPs (General Partners) to establish a track record and get paid on the profits made by the passive investors. It enables upstart VCs to get their foot on the first rung of the ladder.
  • Investors who want to be passive. This is the normal LP (Limited Partner role). Compared to investing in a traditional Fund, LPs who back an Angel List Syndicate get three benefits:
  1. Lower fees (no 2% of AUM and Carry that is about 50% less than the Fund norm of 20%)
  2. Less lock up – they commit one deal at a time.
  3. They get to choose which companies to back – they don’t have to back every deal that the GP likes.
  • Entrepreneurs who want the lead investor to be motivated. Finding the lead is the whole game for entrepreneurs. With the right lead, the round is oversubscribed and easily closed. Without a lead, entrepreneurs spin their wheels with a bunch of investors who are all waiting for somebody to take the lead. Angel List ensures that the lead investor is financially motivated to take the lead.

In my title I said that this was a game-changer for the Asset Management Industry. I deliberately did not limit this just to the VC early stage high trajectory industry. The basic idea of a Follower model applies more widely, as my two stories relate. To use Hedge Fund terminology, the domain expertise and network of the 10,000 hours super expert is “Alpha”.

The Follower model can work in public markets as well as private markets. It can work in debt, or in property, or in any domain where investing today is mostly done via Funds.

Angel List blows up the idea of a Fund in the same way that iTunes blew up the idea of an Album.

Moving into public equities will put Angel List in competition with firms like Covestor that already use the Follower model in public markets. Marketplaces are a network effects game. If Angel List gets great investors (both Lead and Follower), then moving into other asset classes will be easy.

The current asset management industry is based on asset class categories such as public vs private asset or debt vs equity or VC vs Leveraged Buyout. However, the two most fast-moving pools of capital – Hedge Funds and Family Offices – often operate thematically more than by asset class. They invest based on themes, such as a rising middle class in India, Healthech, Fintech, Edtech, urban property for Millenials or retirement homes for Baby Boomers. They care less about the stage (early stage, late stage, emerging growth public, late stage public) or the asset class (debt vs equity); those are rightly seen as subsidiary transactional issues related to specific issues such as cash flow and liquidity.

As Angel List (or other network/marketplace with a similar model) scales, the domains will get more and more specialized. Today, it is enough to be a specialist in Fintech. Tomorrow you might wany to follow somebody who is a specialist in a sub-sector such as Crowdfunding or SMB Lending or Consumer Lending. Or an expertise in Biotech might break down by disease or by market (how to market in the Rest is different from the West). Property investing is always local, so there is room for lots of experts. One can envisage thousands of sector experts to Follow.

Yesterday I looked at Seedrs. They have done the work that enables them to create something like Syndicates. It will be interesting to see how this plays out. Can Seedrs get traction in Angel List’s home turf (Silicon Valley) before Angel List comes to the UK?

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