20VC: WTF Is Going On In Venture Capital; Seed Round Pricing Will Remain High, Series B & C Has Gone Completely, Downrounds Are Coming | Why Defensibility is BS on Day 1, Why Market is More Important Than Founder & Why Being First To Market Doesn't Matter

Avlok Kohli is the CEO @ AngelList. Under his leadership, Avlok has taken AngelList from an SPV provider to a company that is becoming the software platform for the entire industry. Today, AngelList supports over $15BN in assets and 40% of US unicorns have had a GP invest in them through AngelList. Prior to becoming CEO @ AngelList, Avlok founded 3 companies, all of which were acquired including by the likes of Square and eBay. In Today's Episode with Avlok Kohli We Discuss: 1. From 3x Founder to Scaling AngelList to $15BN in AUM: How did Naval convince Avlok to join AngelList and be CEO? Does Avlok believe in startups having defensibility in the early days? How important does Avlok believe it is for companies to be "first to market"? Why does Avlok believe all the last-mile grocery delivery companies will go bust in the downturn? 2. What is Going On in Venture: New Funds, LPs, Secondaries: Are we seeing the amount of net new funds reduce in the downturn? Are we seeing the size of new funds being raised, being smaller? Is the time to first close increasing in time? Does AVlok agree that the fund segment hit hardest by the downturn is micro fund managers? Which LP class has pulled back from fund investing most significantly? Why does Avlok believe institutions have returned to fund investing more than ever right now? Are we seeing an increase in fund secondary positions? 3. What is Going on in Startups: Rounds, Valuations, Party Rounds Are we seeing the number of startups able to close their round reduce? Are we seeing the size of startup funding rounds reduce? How does this depend on the stage? What are we seeing for startup valuations? Why is seed as high as ever? What is the most hit? How is the composition of funding rounds changing? More or fewer party rounds? When does Avlok believe we will see down rounds and pay-to-play, really come into effect? 4. The Business of AngelList and its Future: What are the margins on AngelList products today? What is the best margin AngelList product? What is the worst? What product did AngelList do that in hindsight, Avlok wishes they had not done? Why did AngelList back out of Europe? Was it a mistake? How does Avlok think about AngelList's fierce competition with Carta today?

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

  We're actually in the depth of the bear market, if you will, for venture right now. Deal volume in Series B down more than 50%, valuation's down more than 50%. Series A is also down. Series C is basically gone. Net new funds is definitely down. We've definitely seen the time to first close has increased.

• 0:18Harry Stebbings?

  Now, I know what you are thinking. Wow, this episode sounds like a ray of light, a real positive energy in my day. Well, maybe not, but it is an incredible in-depth analysis of both the venture and the startup ecosystem today with real data and live examples. And there's no one better to join me for this than Avlok Kohli, CEO at AngelList. Under his leadership, Avlok has taken AngelList from an SPV provider to a company that is becoming the software platform for the entire industry. Today, AngelList supports over $15 billion in assets and 40% of US unicorns have had a GP invest in them through AngelList. I want to say a huge thank you to Gokul Rajaram for some amazing questions, suggestions today. They really did help make this so special. But before we dive into the show today, are you building enough conviction

• 1:02Harry Stebbings?

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• 2:30Harry Stebbings?

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• 2:55Speaker 02

  You have now arrived at your destination.

• 2:58Harry Stebbings?

  Avlok, I'm so excited for this, my friend. It's been a while since we last had you on the show, but I want to start today. How did you come to be CEO of AngelList and what was that entry to the role for you?

• 3:08Speaker 00

  Yeah, so the background is Naval, who's one of the founders of AngelList, had been an investor in all three of the companies I'd started. And when I wrapped up the acquisition of the last company, I stepped back and was effectively going to just focus on investing. So semi-retired life at that point for me, since I wasn't building anything new. And Naval approached me to consider stepping in AngelList as CEO, as he'd already stepped back. Originally, it was a hard decision, but I was like, hey, it's probably not the right fit. I was just coming off of the last startup. And as you know, startups are a marathon and it gets quite intense. But the idea of AngelList and the concept of AngelList just stuck with me. And we kept talking every week, every other week.

• 3:51Speaker 00

  Six months into it, I fell in love with the opportunity and officially accepted in mid-July. And Naval said, can you start tomorrow? And that was it. And it's been crazy ever since.

• 4:01Harry Stebbings?

  Now, before we dive into some of the craziness, I just have to ask about one of the startups you founded. Believe it or not, lost mile delivery is a passion area of mine. And so my question to you is, I know Gokul, obviously, and you coincided around this with FastByte, which was 15-minute delivery and it was the first 15-minute delivery startup. What were your single biggest lessons from the FastByte experience, was Gokul's question.

• 4:22Speaker 00

  I'll actually share two of the lessons. I think first one is building for yourself will lead to a much higher probability of building something that people love. Because when you're building for yourself, you then just need to believe you can find other people like yourself that are going to use the product. And the second one, and the reason I wanted to add this one is you want to think about the variables that you can optimize for the utility function of your products. Any product you use has some utility function. The utility function could be price, convenience, speed, the customer experience itself. And you want to think about what are you optimizing on? Because different products actually have different diminishing returns. And as you think about really fast delivery, you can optimize on the delivery speed.

• 5:04Speaker 00

  But then sometimes people actually don't want it to be as fast, right? They actually want it to be a little bit slower. That was a pretty good lesson for me in terms of how to think about overall product experience. It isn't just about a single variable you want to optimize on. You want to optimize on multiple.

• 5:19Harry Stebbings?

  Gokul made a special note of saying that it was really the first in market to do this. How important do you think is being the first?

• 5:26Speaker 00

  I don't think being first in market matters all that much. Before I get into the answer for that question, I'll introduce the concept of idea maze. And the idea maze basically talks about how every entrepreneur has to go through this journey of looking at an entire industry and looking at all the twists and turns. They base their business idea and their strategy accordingly. And if you're first to market, you're effectively building the idea maze for all the other entrepreneurs that'll come after you, unless you navigate that idea maze yourself successfully. And we've seen a ton of examples where sometimes first to market isn't the company that wins the market. Google, I believe, was a 17th search engine. iPhone was not the first smartphone. The way I think we're first to market is it doesn't guarantee success.

• 6:11Speaker 00

  And you should probably assume you're building out the idea maze for all the future founders that will benefit from your work.

• 6:16Harry Stebbings?

  I find so many investors oscillate on defensibility and I think it's just complete bullshit, especially at pre-seed and seed. Do you agree with me in finding it completely useless at pre-seed and seed? Or do you think there is inherent defensibility within companies?

• 6:29Speaker 00

  Let's define defensibility as the cost to replicate your business as time goes on. When we say defensibility, when we talk about moats, what we're really saying is how costly would it be for someone to replicate your business and compete with you? So definitionally, you don't have any defensibility on day one because you don't have a business. Or even day 30, unless you magically get pretty large network effects. And even then, I would doubt that because that means if you were able to get a large network within a few days, I mean, someone else can do it as well. I agree with you. I don't think there is any defensibility on day one.

• 7:03Harry Stebbings?

  Final one, and then I promise we'll get to the schedule. But what did you think when you saw the host of European 15-minute delivery companies launch?

• 7:10Speaker 00

  I thought, hope to God, they are keeping track of the capital markets. Because anything in logistics, anything in offline to online or online to offline just requires a lot of capital and capital is really a function of the capital markets and the macro environment. And when I saw a lot of them launch, and I think some of them also were in New York, the no one thought that went through my mind was, I hope they're keeping track of the capital markets because they will need a lot of money to scale.

• 7:39Harry Stebbings?

  Do they all go bust in the downturn?

• 7:41Speaker 00

  Hundred percent. Because the cost of capital goes up. And when the cost of capital goes up, you can't invest into launching new cities. What typically ends up being the J curve of this type of a business where you end up losing money every order and then at scale it spins back up. And it does work, but you need a lot of capital to sink in. But when the capital markets dry up, interest rates go up, where are you going to go get that capital? It is near impossible.

• 8:05Harry Stebbings?

  We're just killing industries one by one on 20VC. Last week was like, direct consumer subscription model does not work. Boom. Now we've just killed a whole other industry there. Good. Glad that we are continuously losing friends. It's me that takes the heat for this, don't worry. We spoke about funding markets there. I won't talk specifically about the funding market that we have today. So much has changed and you have this incredible Per view at Angel List, what are the most notable changes that you're seeing in how companies are getting funded, given the unique seat that you have?

• 8:34Speaker 00

  Yeah, so for context, Angel List supports 20,000 funds and syndicates now, and we manage a portfolio of more than 13,000 startups. We have a pretty deep and broad view of the industry. And when we manage the investments for these funds and syndicates, we're actually the signatory on the funds. So we also receive all of the deal documents for follow-on rounds, all of the cap tables, all of it. Now, of course, this is being done on behalf of the funds. And so from that purview, we actually do have a pretty deep understanding of what happens in venture. And we actually track on a quarterly basis, to put it really simply, the good times and the bad times. We actually have a chart that we publish every quarter now, the rate of activity,

• 9:17Speaker 00

  or it's actually called the boom times and the bad times. And on this chart, what we have is the activity rate as the X axis, the positive activity rate as the Y axis. Activity rate you can think of as what percentage of startups actually had an investment, right? Some sort of an investment. And the percentage of positive activity rate is what percentage of those were actually up rounds. So you can generally sense that if you have a high number of investments and then a high number of positive activity, you're going to have a dot at the top right quadrant, which is boom times, awesome. And I actually have it up here. 2022, early 2022 and 2021 is like this top right quadrant, boom times. And then now it's actually the bottom left. And it's actually one of the worst bad times,

• 10:00Speaker 00

  where not a lot of startups are actually even getting an investment. And of the ones that do, a much smaller percentage actually have a positive investment. And so we're actually in the depth of the bear market, if you will, for venture right now. And that spread between where it was in the boom times and the bad times is the farthest distance it's ever been on everything that we track.

• 10:20Harry Stebbings?

  Is it a different time length between the highest and the lowest than traditional? Like when you compare back to prior chasms in those two dots?

• 10:30Speaker 00

  Yeah.

• 10:30Harry Stebbings?

  Is this a faster compression timeframe?

• 10:33Speaker 00

  Yes.

• 10:33Harry Stebbings?

  Between those two dots?

• 10:35Speaker 00

  It is. It's incredibly fast and that distance is also incredibly large. So typically, when you have these dots that collect and it's reported every quarter, they're all collect pretty close to each other, right? It's okay. Yeah, there's a little bit of variation quarter to quarter. And the gap between early 2022 and right now is like the farthest it's ever been. And the fastest it's ever contracted is the best way to think about it.

• 10:57Harry Stebbings?

  But people still say prices remain the same, especially at pre-seed and seed. And honestly, Avlok, I think they are staying the same. So help me understand this because to me as an investor, day to day, they are still really high prices, but you're telling me that actually it's never been a greater chasm. Where's the disconnect here?

• 11:16Speaker 00

  So the disconnect would be in the pre-seed and seed market versus the series A, series B, series C market. So as we look at follow-on rounds and the up rounds or down rounds, those typically happen at the series A, B, C onwards. And that market is absolutely compressed pretty significantly. You're talking about deal volume in series B down more than 50%. Valuations down more than 50%. Series A is also down. Uh, series C is basically gone, right? You don't really hear of many late-stage deals getting done anymore. It's rare. And what's happened actually at the pre-seed and seed stage is all of the different investors that were investing later stage, some of them have started moving earlier and earlier.

• 11:58Speaker 00

  And so you just have a larger number of investors who have a lot of capital to deploy. Where are you going to go? You're going to go to pre-seed and seed. And so what you have is you have pre-seed and seed, they're buoyed. And we don't see that changing. We actually still see that staying the same and the valuation staying the same. Maybe a little bit of compression, but we're not going to see it the same rate of series A, series B and onwards.

• 12:21Harry Stebbings?

  So I think there's also an additional component here, which is also bluntly, the check writers at the multi-stage funds who are writing those pre-seed and seed checks are actually principals and associates. Because their partners are saying, hey, Avlok, I'm underwater with my board positions. I'm fighting so many fires. Go and write $2 million checks and be in market. It's good for the brand. And so those new check writers are less price sensitive than ever. They're more excited than ever because they're writing their first checks. And it's creating this increased, less price sensitive capital entering seed, meaning the prices are where they are, which I think is really telling. Do you not think that Series A is just a shit market to be investing in right now too as well? Reason being, any good companies have had everything preempted by existings.

• 13:05Harry Stebbings?

  And anything not good is out in market. And so there's this real adverse selection. Are you seeing that too in your data?

• 13:12Speaker 00

  What we're seeing in our data is that only the companies that actually have credible traction are raising now. So even if you put aside adverse selection, meaning the set of companies who are raising from insiders and insiders are leading the rounds, we're definitely seeing a set of companies who just can't raise at all. And for them, the capital markets are all but shut down. Then you have to look at the set of companies where they're raising from insiders or they have a new outside lead. I would say that we're not seeing anything in our data that distinguishes between the quality of either of those companies now. Definitionally, if you have an insider that's going to lead your company, like a true lead, I'm not talking about an extension. Okay, let's give you a little bit more runway. No, it's, hey, we're going to invest a significant amount of capital for a little bit more ownership in your company. That's a real lead, insider lead.

• 13:53Speaker 00

  We're not seeing as many of those relative to just the total number of Series A deals that are getting done.

• 13:59Harry Stebbings?

  Is this structure of seed rounds and pre-seed rounds in terms of the investor types? Is it changing? Is there more party rounds because traditional institutional investors are more quiet? Are there less party rounds because the tourists have gone? What are we seeing in terms of the structure of those rounds?

• 14:15Speaker 00

  Let's define party round. If we're talking about party round as no investor is writing more than 40% of the checks, so there's no lead. We are seeing the percentage of party round to non-party round actually being the same. But the overall volume has contracted. Now, the set of companies that could have raised on just a party round in terms of raising a little bit of capital and not hitting their target, those are gone, right? So what was happening in the Heyday of 2021 and 2022 was that companies would just keep raising these successive rounds. And we would see it like C plus, C plus, right? It just keep going on and on and always just raising a little bit of capital from like these small set of party round investors. Those companies literally cannot raise anything at this point.

• 14:57Speaker 00

  But we are seeing companies still being able to raise from investors where there is no lead. Because you do have several investors all come together to create the round. So we're not seeing that lead investors are absolutely necessary for a round to get close, especially at the pre-seed and seed stage, right? You don't need a lot of capital to get started and to close a round. But if you're getting to a larger seed round, because let's keep in mind that seed is means 2 million or 5 million there. It's two to five, so 2 million, you can do a party round. 5 million, it's much harder to do a party round now. So I think we have to also distinguish between the size of the raise itself.

• 15:30Harry Stebbings?

  Is the time to raise a pre-seed or a seed round, is that increasing or is it the same?

• 15:35Speaker 00

  So time to raise a pre-seed and seed is definitely increasing. Also, the time to markups is also increasing. And what we actually looked at this in our data where we looked at a sample size of the investments over the last 18 months. And we compared it to a sample size of the investments since 2015. And what we were looking at was let's not compare it to the heyday of 2021 and early 2022. Let's actually take a look at historical averages. So how are we doing today relative to historical averages? When you just take a look at that sample size of companies from today, same size of companies in the historical average. We're actually seeing a 33% drop in companies in terms of how many companies we expect would have raised by now. And so that's a pretty significant drop. 33% is high.

• 16:17Speaker 00

  And what that's telling us is there definitely is a freeze in the market relative to historical averages. And there's a lot of repricing happening. And there's a lot of still founders coming to terms with a new normal, right? If you're going to raise on 200X AR and now all of a sudden you're being told it's actually like maybe 20, maybe 10. That's you're coming to terms with brutal reality at that point. We still think we're in the thick of it and we think it's going to take another few quarters before everything just works itself out.

• 16:47Harry Stebbings?

  Harry and Havlock crushing one industry and then bringing you brutal reality. This is the positive show for you. No, this I totally agree and I see the same thing. You mentioned that kind of cram downs and kind of deal structures. In your data, are you very much seeing the repricing begin? Or are you actually seeing so many companies have so much cash that they're not needing to come back to market?

• 17:08Speaker 00

  It's the latter, but it's starting. We're starting to see it. So in Q1 so far, we've seen 48.

• 17:14Harry Stebbings?

  Forty-eight flat rounds, down rounds.

• 17:16Speaker 00

  These would be the pay-to-plays. And so we're starting to see it tick up. So it's definitely ticking up from Q3, Q4. But we think that it's still early days and we think it's more the latter of the scenarios you mentioned where startups do have a lot of cash, right? Because if you've raised a lot of cash, you go through layoffs, you increase your runway. So you've actually pushed out your cash out date and so you buy a few months. And it's logical. You're playing to your incentives. Buy a few months. Hey, maybe Jerome Powell changes his mind. Maybe they bring down the interest rates and it'll be boom times again, which I don't think will happen, but that's my personal opinion. What's happening is a cash out date has been pushed out for a lot of companies. And so our view is that these will start ticking up in Q2 and then definitely Q3, Q4.

• 17:59Speaker 00

  Because these startups, they have a brick wall that they're going to run into. And so we think that's going to start coming to play in the next couple of quarters.

• 18:05Harry Stebbings?

  Do you think we'll see a spree of acquisitions, a consolidator environment occur? Where bluntly, some of the big incumbents pick up great teams for nothing. And companies can tweet that they got acquired and what a successful exit and bluntly, no cash is returned.

• 18:19Speaker 00

  I don't think so. I know I'm probably departing from the conventional wisdom on this one. I don't think so because I think if you take a look at the companies that could be acquirers, you have public companies and you have private companies. With public companies, they themselves are going through a pretty brutal rewriting of what the new guard looks like, of what the investors are expecting now. And investors are looking at not just the cash that your business can generate, but also your stock-based compensation. So gone are the days of like constant dilution of stock-based compensation and hiding it from all of the investors. That's basically how it was being done in the public markets. And so I think they're going to be under intense pressure and you're seeing it. You're seeing it across the board, even with some of the big tech companies.

• 19:02Speaker 00

  So I think the appetite to just do rapid set of acquisitions in this market, I don't think is going to happen. And then in the private markets, the key question that's going to come up is what price do you believe? Meaning if you're a private company and you've raised and then there's another private company that you're looking to acquire, then the key question comes down to how do you align on what the price is to acquire the company? I don't think the conditions are there for a rapid acquisition spree, unless these are like rock bottom prices and if you're getting an amazing deal. But I don't think that's going to be good for employees or investors.

• 19:35Harry Stebbings?

  I don't think it is good for employers or investors, but I'm saying for zero. And I still think it wouldn't happen because I don't know many private companies that are like, yeah, we've just got rid of a load of people to reduce burn. But no, we're going to make this acquisition and bring on 20 more people because the cost isn't zero.

• 19:51Speaker 00

  Exactly. It's not zero. It's also additional overhead for the private company to take that on. Because even if you just acquire the product or the IP, even then, there's a cost of integration. And I've been through an acquisition. I've been on the other side of an acquisition as well. And these do take time from the company. My read on it is we're not going to see a lot. And again, because we're the signatory for all of the funds, we also see M and A. We've seen that the M and A, even within Angel's data, M and A has gone down pretty significantly.

• 20:20Harry Stebbings?

  How do you think that will continue or change over the next six to 18 months?

• 20:25Speaker 00

  I think it will likely stay the same. Our view is actually a little bit more pessimistic in terms of just the broader market. If we look at the next six months, I suspect it'll be the same because the current macro sentiment is higher interest rates for longer. So that's a lot of downward pressure on venture as a whole because venture is a risk asset. For some investments, it's a great risk profile, right? You invest and you get 10,000 X. That's awesome. At the same time, as a broader bucket of capital allocation, it's getting compared to earning 5% risk free. And all of a sudden, a lot of people who typically would invest in venture are saying, maybe I'll just burn in US treasuries. So I think there's a lot of downward pressure on venture.

• 21:07Speaker 00

  And so we just, we don't think it's going to change in the next six months, next 18 months, maybe. But you would need to see the interest rates starting to come down and starting to see some signs of recovery in the broader market, inflation subsiding. So it all depends on the macro at this point.

• 21:23Harry Stebbings?

  Not only that, in terms of venture being a risk asset class and kind of the interest rate environment associated, but there's also this real illiquidity challenge within the venture model. What are you seeing in terms of fund secondary positions? People wanting to get out of fund positions, people wanting to sell fund positions, defaulting. What are you seeing there?

• 21:43Speaker 00

  When it comes to LPs within funds. We've definitely seen an increase in appetite to sell positions. And also sometimes sell positions in name brand companies are actually just great companies. The reason to sell can range from either their own investment ratios are off, right? They were just caught on the wrong side of illiquid to liquid, or they actually just have a serious liquidity crunch and are just looking to sell. And so we have seen an increase in it. The key question really comes down to who's the buyer and what's the clearing price? There are deals that are getting done and there are deals that are getting done, not just in small funds, but also very large funds. And typically these deals happen more in the background. And typically it's around the LP base shifting, right? So one LP will purchase another LP's position.

• 22:28Speaker 00

  And the range of discount that we're seeing actually is anywhere from 20%, but what's more common is actually 40% or 50% from last round mark. And so you're talking about a pretty significant discount to last round valuation as the clearing price for some of these deals.

• 22:45Harry Stebbings?

  And is that on direct deals or is that on fund positions?

• 22:48Speaker 00

  On fund positions.

• 22:49Harry Stebbings?

  But that's not too bad, actually. If you actually look at like other secondary market data, some are as much as 60 to 70% down. So I think that's super interesting. I think the one really challenging segment of the kind of funding market in terms of from a fund manager's perspective is the micro funds. These were funds which rose from founders and GPs of venture funds, which is awesome, but they're not writing LP checks anymore. Do you see that trend? And how do you foresee the next six to 18 months for the micro fund segment?

• 23:17Speaker 00

  So we track LP commitments based on the type of LP and based on the product it goes into. And so within rolling funds, which is one of the products that we have, both individuals, institutions, commitments aren't actually down by much. It's close to only 20%, which is very interesting. When you compare it to venture funds, the adventure funds are the traditional structure. And we have a pretty large venture fund business. Individuals are actually down 60% when we compare it to a year ago. So like the early 2022, when there was a significant amount of investment still going in. And institutions, this is actually incredibly interesting, went down. And then in recent weeks spun right Back up and has recovered in our data.

• 23:57Speaker 00

  And so that was the one surprise that I saw as I was going through the data was that any of the folks investing in venture funds that are not individuals, they're starting to increase their investments back into venture funds.

• 24:09Harry Stebbings?

  What do you think that is? Do you think that's just like a stabilization of certainty? Knowing where we are, being aware that actually rates will likely go up a little bit more. We're all kind of aligned on where we think it will go now. The certainty is all there.

• 24:23Speaker 00

  I think so. One part is certainty. The other part is the technology cycle we're in, which is one of the biggest technology cycles with AI. And all of the possibilities of what it can do in terms of net new opportunity and rewriting industry. And a lot of the large language models and their advancements there have had a major impact on Angelus, just our own internal operations. It's been huge and we've been tinkering on it for many months now. And it's actually automated a good portion of the work that we do. And so we think it's the capital from institutions recovering is a function of a little bit more certainty of what could be happening in the macro market. And then also the fact that we're in the middle of one of the biggest technology cycles since the internet or mobile phone. And that's our hypothesis around it.

• 25:07Harry Stebbings?

  I'm not going to let you just like glaze over that, but I do want to just finish on this thread because otherwise I get too distracted. Are we seeing the number of net new funds raising go down significantly? Or is the number of net new funds same? Where are we at there?

• 25:21Speaker 00

  Good question. Net new funds is definitely down. And so the way you reconcile this with the capital flows is the funds that are raising are raising more because they're a little bit more experienced and they have more of a track record. The other interesting data point is looking at when does the fund raise the first dollar of capital? And when does the fund conduct their first close? And first close is typically when you've raised enough and you have confidence that you're going to hit your fundraising target. We've definitely seen the time to first close has increased. It was three months in the boom times and now it is six plus months. And when I say six plus months, what I'm referring to is the timeline went from six and right now it's trending towards.

• 26:05Speaker 00

  Seven. And what this means is even for the net new GPs or funds that are raising, one, we've seen an overall drop, right? In terms of like how many GPs even get to the point where they're like, you know what? I can raise this fund. Let's do it. So we've seen a drop there. But the ones who hit that confidence of yes, I can raise this fund. Let's do it. The time to first close is also extended. They're taking longer to close than they would have, or the first close than they would have actually expected.

• 26:30Harry Stebbings?

  Are we also seeing a reduction in fund sizes for those going out?

• 26:33Speaker 00

  Yes, there is a reduction in fund size for, I would say, the much smaller funds, right? In terms of if you could raise a $5 million fund as your first fund, you're not going to raise that anymore. It's going to be closer to 1 million, 2 million, or 3 million. So we're definitely seeing a reduction in overall fund size, actually at all stages at this point, but definitely for the first time fund manager.

• 26:56Harry Stebbings?

  Such a cheery topic, isn't it? Can I see you dangled it in front of me there in terms of bluntly how you're leveraging AI and LLMs to be more efficient and better as an institution? What have you done? And what's been the effect?

• 27:07Speaker 00

  So a lot of what Angelus does in the background is we manage everything about a fund, right? We manage from the initial legal docs, or sometimes we'll work with the external law firm, down to the fund setup, down to the filings, ADV filings, and then managing the portfolio for 10 years, right? And all the distributions that come after that. Along the way, when you think about all of the different workflows, it requires judgment. And so it requires humans with a lot of the work and the advancements on large language models, we can start replacing what we assumed needed human judgment to do something. You can actually now replace with code. We've taken a subset of things that typically required human judgment, and we've started replacing it with code.

• 27:49Speaker 00

  And one example to put a finer point on it is we receive, I think it's something like 15,000 emails a week, right, on behalf of all the funds. And these are not emails you can just ignore. These are not emails that are like, hey, we'll get back to you in a week. No. These are emails where it's, hey, there is this deal getting done. Here are the cap deals, your legal docs, like review. So just a simple process of how do you route? How do you make sure that the email gets into the right place for the right? Right action used to require a human to manage and route and apply judgment. Because we now actually have all of the training data, because we've been doing it for so long. We essentially looked at that as one of the problems of how do you create an automated router?

• 28:31Speaker 00

  But it's not as simple as, oh, email comes here and here's a subject line, you send it. No, you have to actually look at the content of the email. You have to look at the contents of the legal docs. So for example, if it's a follow on round and we're reviewing the docs and the cap table on behalf of the fund. We know that what are the set of documents that we need to complete the review? And what we now do is we'll look at the documents, we'll automatically tag. Is it a share purchase agreement, a cap table, et cetera, automatically from the documents that we receive? And then if there's a delta, it's, oh, actually, this is missing a cap table. We now know, hey, we respond back and automatically just ask, hey, we're missing the cap table. Can you send it? That's just one very small example of how we're using it. And we're in a fortunate position that we've just been building up all this training

• 29:16Speaker 00

  over the last five to six years of just doing this at scale. So when we started tinkering with this, we're like, oh, this is awesome. We can actually just use this and start applying it right away.

• 29:25Harry Stebbings?

  Avlok, I mentioned before we started that I'm more direct with my questions nowadays. That would lead to cost reduction. It would lead to cost efficiency and bluntly increased productivity within the team. Think I saw recently in a group, someone having a moan about AngelList pricing for managers going way up. Help me kind of coincide the two, which is like increased productivity, usage of AI to make costs lower and then pricing going up.

• 29:51Speaker 00

  I think what that's referring to is the pricing update we made on funds that are larger sized funds. If we think about the journey Angelus has been on, we've actually built software to help automate a lot of what it takes to manage a fund, all the way down to financial reporting, tax reporting, et cetera. When we launched the fund product, which I believe was in 2017, the very first fund product, it was like a tiny fund. It was like an offshoot of an SPV and it could only do a million dollars because that was the simplest thing we could do. What we had to do was over the years, build more and more software to support more and more complex funds, more and more complex. parameters, carry hurdles, cashless contributions, you've been through all of this, right? All of those little details to do that in software, it takes time.

• 30:33Speaker 00

  And so the path we've been on is every year you can actually chart, and we've done this, the size of the funds we take on and every year it keeps increasing. And so today we're regularly taking on 50, 100, 200 million dollar funds. Whereas two years ago, we were saying no to all of them. They were coming in, but we said, hey, we just cannot take you on because we can't credibly serve you for the next 10 years because we have a very strong eye towards software and automation to handle all of the portfolio management distributions, et cetera, over the years. And so the pricing change that we made was a function of taking pricing. That was actually meant for funds that were like two and a half million, three million, five million from a couple of years ago. And there was a pricing cap that was set.

• 31:15Speaker 00

  I believe it's 1% a year capped at 25K a year, which effectively caps it at 250K overall. Right? And that's for everything. We handle tax, financial reporting, all of it. And what we really did was we said, the fund size that we've taken on has kept increasing. And we never removed the cap because that cap was meant for much smaller funds. And the change that we made was mostly just removing the cap and then sizing it to the size of the funds. So if you actually take a look at the fund size relative to what it costs today, it's actually similar. So I think the way we rolled out the pricing probably caused a little bit of confusion.

• 31:47Harry Stebbings?

  Can I ask, is it a loss leader? I've obviously been a wonderful customer and user angel list, and it's amazing. But I look at them, I go, they cannot be making money. And I mean it nicely, but it's a great service and it's not that expensive for those small funds. Is that a loss leader? When you look at the 25Ks a year and all that you're doing? What are the margins on that?

• 32:07Speaker 00

  It's not a loss leader. A lot of the automation that we've built in, and that's also continuing to come in, keeps expanding those margins. And so anything around funds is definitely not a loss leader for us. And we continue to see the margins around that increase. And the other way we actually think about it is we think about the entire business as a whole, not necessarily on a specific product. Because when we think about a GP or we think about an LP, we think about it as, hey, you should just come to Angelus and we'll handle everything. All of your needs around venture going forward. So for a GP, it's all of their funds, all of their SPVs. Okay, great. They're going to go raise Angelus Capital. Great. We have a business model around Angelus Capital. When you're a financial platform, there are all of these other different ways of capturing more and more value as you scale.

• 32:50Speaker 00

  And so the way we look at margins are actually more holistically over for the entire product experience. So all the products GPs would use, all the products LPs would use versus on any single product. And so our margins are actually north of 80% when you actually take a look at the overall experience. And you take a look at overall products that customers are using. Again, this is the key around a platform play, right? If you're doing just only a SaaS play, it's a little bit different. When you have a platform play, you actually have products that can feed into other products that can feed into other products. And I actually learned a lot of this in my time at Square. So Square had acquired FastByte. That's actually how Gokul and I started working together. And when I joined Square was basically just the payments dongle.

• 33:34Speaker 00

  And in my time there, I saw how Square went from a payments dongle to a platform, where you would literally have one product that feeds into another, that feeds into another, that feeds into another. And you get this compound effect of pretty rapid gross margin expansion. And so I definitely took a lot of the lessons from there and applied it at Angelus.

• 33:55Harry Stebbings?

  Man, I'm loving this. What AngelList product has the best margin today and what has the worst?

• 34:00Speaker 00

  I would say funds have the best margins and the smaller SPVs have the worst. For some of the smaller SPVs, those are a loss leader for us. And this shouldn't be a surprise for anyone paying attention. We saw Assure, which was an SPV provider, effectively blow up completely. And they blew up in a spectacular fashion. They basically had took money in from all the SPVs that they were supposed to manage over six years or 10 years. And when they blew up, they're like, hey, we don't actually have any of the money left. And so all the GPs were now left to fend for themselves in terms of, how are you going to get the money to manage all the SPVs for all the out years? And key learning there, and we already knew this, but the key learning there for other folks in the industry is that SPV

• 34:46Speaker 00

  And managing these SPVs and especially the smaller ones, it looks easy at the outset. But what they're missing is that a lot of the surprises actually happen in the out years. It's one of those like tail issues and it's not that the SPVs then the tail issues that come with the SPVs is only a small percentage. It's more about what could happen that could be really costly for the company. And so it can actually wipe out the margins of a larger group of SPVs. I think most people get surprised by the margin profile of SPVs and especially small SPVs. And I see this with GPs sometimes ask, hey, why is it so expensive? Why can't this be even lower and lower? And that my response typically is, hey, these are complex financial instruments that need to be managed for 10 years.

• 35:28Speaker 00

  And it's not the place you actually want to be optimizing on costs at all. Because it's one of those things where when it's just working in the background, you have someone credible that can run it. You never have to worry about it. But as soon as you're dealing with a provider who's using cost and price as a way to get you in, you should stop and ask them and think about why are they doing that?

• 35:47Harry Stebbings?

  What products have you done that with the benefit of hindsight you shouldn't have done?

• 35:51Speaker 00

  I think we got into incorporation for startups. That's one we ran that for a while and we fixed it. We actually just partnered with Stripe Atlas and that's been great. In hindsight, I think we would have approached it by asking the question, is this something unique that AngelList can bring to the world? And if not, it doesn't make sense for us to be doing it. Why do another product where we can't contribute something new and novel that people are going to find really useful? In hindsight, I wouldn't have tackled that.

• 36:19Harry Stebbings?

  Why not Europe? Europe seems to be a kind of shadow region for AngelList and there's so much demand for it in Europe. What's AngelList's thoughts around Europe?

• 36:29Speaker 00

  So when I came in, AngelList was in Europe. We actually had a few funds that were there. After I sat with the Europe business for a few quarters, the observation I had was we hadn't won US yet. We weren't at scale in the US, but we were in Europe. And the regulatory structures in Europe that we need to solve were not as standardized as they would be in the US. And so it was the combination of, look, Let's win US first. US is also just the largest market for venture. And then let's make sure we have a clear view of how we can sanitize the structure in Europe and then we can go there. And so I actually made the decision to scale back and shut down Europe because it was just splitting our resources.

• 37:11Speaker 00

  And the one thing I deeply believe is you should always look at how do you sunset things? I think it makes sense for a company to explore new products and new expansion. But if it's not working at the rate you expected to, let's sunset, focus back on the core. And so that move was more about us focusing back on the core around winning US, scaling US. Because the ambition of the team is very large and we didn't want to get distracted by trying to solve for the regulatory structure there when we hadn't won the US yet. I think now we're actually in a very different position.

• 37:40Harry Stebbings?

  What does winning the US mean?

• 37:42Speaker 00

  Winning the US for us is what percentage of venture funds are we supporting? And what percentage of venture-backed startups are we supporting on our infrastructure? And so we look at it simply as percentage of market share. We want to be north of 50% across all of the different segments and it's as simple as that.

• 37:59Harry Stebbings?

  What are we today in terms of funds and companies?

• 38:02Speaker 00

  We just started last year with our cap table product and it's grown quite fast. I can't share market share data yet, but it is growing incredibly fast and we're very happy with that and we're continuing to invest there. On the fund side, anytime we enter a particular fund size, we go after it. We'll typically get north of 50% market share pretty quickly. And so that's how to think about it. It's like 50, 60% market share as we eat into the different funds. Because again, our product is just fundamentally different than any other back office provider.

• 38:32Harry Stebbings?

  You mentioned the cap table product envelope. Again, I swim for the warning sign and let's be blunt. It's like a fuck on direct competitive carter. How do you think about competition was the right way to embrace it? And bluntly, how have you been able very quickly to catch up and level with them in such a short space of time?

• 38:51Speaker 00

  So the way we think about competition is really having an eye towards competition, but we're not really focused on the competition. There's actually this great quote, I think it's from YC, but it may be from somewhere else where startups die of suicide, not homicide. I believe that for every single company and candidly, my first company died by suicide. I basically killed it. It had nothing to do with competition. And so as we think about running Angel List and the products we build, we really stay focused on how are we delivering an amazing experience for our customers? And what makes sense for us to pursue and grow regardless of the competition, regardless of whatever market share someone may already have. If we think that we have a unique view on something and we can create a significantly better product experience, we will just go do it.

• 39:36Speaker 00

  The thing we have working for us is we are very product focused. We are a team of pretty ambitious tinkerers, product builders, and we move incredibly fast once we're clear on the direction. And so I don't really think about competition in terms of focusing on it. I think about it more as how do we build something amazing for our customers with an eye towards a competition? Meaning you can't just ignore competition, but that's more of a secondary thing. Our main focus is on building an amazing product and just owning that market.

• 40:06Harry Stebbings?

  Are you taking customers from Carter or are these net new companies created?

• 40:10Speaker 00

  It's all of the above. We're definitely taking on net new customers. We're taking on customers that are using other providers. And so we are just sucking in companies and customers from everywhere at this point.

• 40:21Harry Stebbings?

  You mentioned about being a team of product tinkerers. I tweeted this, but I think it's something that Gokul shares, which is an awe around the speed of execution with which Angel List executes. What do you do to be able to execute on new products so fast? Because it is faster than anyone else. What do you do to enable that speed?

• 40:38Speaker 00

  We've hired a group of very ambitious people and a group of ambitious people are very dissatisfied all the time. Right? All the time. It's like, hey, why aren't we there yet? Like, why aren't we building something even larger, bigger? So that's a number one ingredient. Just hire a group of incredibly ambitious, dissatisfied people all the time, which is great. From there, we just set very clear and ambitious deadlines, right? Product launch timelines. And the last piece is just keeping a very tight loop between the working team and just making sure that if there are any blockers, anything coming up, address it. And then let's just get the product out. Let's not have meetings about meetings or process about process. Now that shit matters, right? The only purpose for a company, it's just a group of individuals that are coming together to build product for your customers.

• 41:23Speaker 00

  Any process, anything that gets in the way of that, crush it. If we have too many meetings, cancel the meetings. Like, I'll regularly go cancel all my meetings on the calendar because all that really matters is that you're shipping products that your customers love and anything that gets in the way of that, any drag, kill it, crush it, and just focus on speed. Focus on getting the iterations with your customers. Focus on getting that feedback. So that's how we think about shipping really quickly.

• 41:48Harry Stebbings?

  What do you think are the biggest external threats to you achieving, winning the US market? Final one.

• 41:54Speaker 00

  The biggest external threat, I actually don't think we're in that anymore. I was gonna say, I never underestimate a small group of really ambitious individuals. And I would say the biggest external threat would just be anyone that's looking to compete with AngelList. That's a startup, but I've always been like that.

• 42:12Harry Stebbings?

  How would you respond to the suggestion that the macro sentiment is your biggest external threat? If you think about AngelList, your trajectory and your transaction volume is predicated on the amount of deals done, the amount of funds closed, the amount of SPVs done. When the market shrinks and cadence is reduced massively, your business is damaged, no?

• 42:30Speaker 00

  It actually isn't. It actually is the strongest it's ever been. Again, it goes back to the platform play that we have and how we're actually continuing to move up market, take larger and larger funds. And so while net new fund creation may have gone down, we're actually taking on funds who have already fundraised and deployed. We're not just going live with funds that are net new. We're also going live with funds who are moving to AngelList after they've already been somewhere else. So you can think of AngelList as just continuing to grab more and more market share and is not dependent on net new funds. And the way we actually generate revenue is we actually have all these different products that feed on each other. And so we're actually the strongest we've ever been. And AngelList has always run as if the next bear market's around the corner.

• 43:13Speaker 00

  Literally, every year that I've been at AngelList, we've always said, oh, you know what? The next bear market's gonna be next year. So we have to make sure we have countercyclical products in place and we diversify the product portfolio. Every year since the mid 2019, we're like, yep, next bear market's coming, next bear market's coming. And so we've actually always been paranoid about the next big bear market. So we actually built in counter cyclical emotions in the company as well. But yeah, it's the strongest it's ever been. We are absolutely firing on all cylinders right now. And we have a series of new products coming. I'll just tease that here. It's it's coming in the next couple of months and not just one, it'll be a few.

• 43:50Harry Stebbings?

  Do you want to give a teaser? Do you want to give one?

• 43:52Speaker 00

  Not yet. It's

• 43:53Harry Stebbings?

  That was the moment I knew I had by

• 43:55Speaker 00

  It was a moment. I was thinking that very excited. I'm very excited, but not yet. I was about to, I'm like, ah, no, Bruce is gonna kill me.

• 44:04Harry Stebbings?

  Alex, you can't blame me for trying. I want to do a quick fire on Avlog. So I say a short statement, you give me your immediate thoughts. We mentioned the macro there. Will we be in a worse or a better place at the end of 2023?

• 44:14Speaker 00

  I think worse, but I think it'll get better in 2024.

• 44:17Harry Stebbings?

  What trend do you see that others are not seeing?

• 44:20Speaker 00

  I think people are seeing this. I just don't think they're seeing the rate of change, which is the rate of change through which AI will actually completely, not decimate, but amplify knowledge work. But I do think there will be a lot of reskilling, a lot of retraining needed. And it's getting deployed extremely fast across many industries. And so I would say the biggest trend others aren't seeing is just the magnitude of the change that's coming for white collar work.

• 44:43Harry Stebbings?

  Who are best placed to instill that change? Is it incumbents integrating AI into existing product suites or startups providing new products?

• 44:51Speaker 00

  I think startups providing new products. And I think it's because the quality of the team of product craft, right? Or the the team that's going to care about the product the most typically comes from the founders and the founding team they bring together. So I think they're going to be most suited. That said, incumbents do have a lot of advantages, distribution advantages being one of the biggest ones. So I wouldn't count out any incumbent as we've definitely seen. But I personally lean more towards startups being able to capture a lot of value.

• 45:17Harry Stebbings?

  I love Alex Rampels. Will the incumbent acquire innovation before the startup acquires distribution? I think to that the whole time, actually. Okay, my friend, you can buy one multi-stage firm and you can short one multi-stage firm. Which one do you buy? Which one do you short?

• 45:33Speaker 00

  Sequoia to buy multi-stage firm. No comment on shorting.

• 45:37Harry Stebbings?

  Fuck.

• 45:39Harry Stebbings?

  You can buy one seed stage specialist and you can short one seed stage specialist. Go.

• 45:46Speaker 00

  Seed stage specialist haystack I would buy and then short also no comment on that one.

• 45:51Harry Stebbings?

  One day I'm gonna get someone just be like fuck it, I don't care. I need someone who is retired and just doesn't give a shit.

• 45:57Speaker 00

  I just can be a curmudgeon and maybe catch me in a couple of years and maybe I'll be a curmudgeon.

• 46:01Harry Stebbings?

  What did you believe in investing that you no longer believe?

• 46:04Speaker 00

  That a great team can go find a market and find a great market. I actually think you need a great team and a great market to come together. Otherwise, you just have a great team that can burn a lot of cycles on a market that is just utterly broken. And I've seen this time and time again. And that's the one thing I think a lot about now. What market are they going after? And look, I think there are some founders that can pivot and find it, but that assumes that they'll have enough capital in the bank to go do it.

• 46:31Harry Stebbings?

  Matt, it's exactly the same for me, like 100%. If you are going after something really fucking hard, consumer education market and you're raising 18 months of runway. Surely you may be the world's best team, but you're gonna take 12 months to get to that realization place and then you're gonna raise again or need to with nothing but again, a good team. That's a hard another raise.

• 46:50Speaker 00

  Exactly, especially in this environment now.

• 46:53Harry Stebbings?

  What do you think the biggest investment mistake of the venture landscape was when looking back over the last 18 months?

• 46:58Speaker 00

  Oh, that's simple. Lack of diligence in the companies that they're investing in. There was a lot of FOMO investing that happened in the heydays.

• 47:05Harry Stebbings?

  What would you most like to change about the world of LPs?

• 47:08Speaker 00

  I think with LPs, there is a lot of focus and especially larger LPs, there's a lot of focus on name brand. The key thing I would change is breaking out of that cycle of only name brand and actually looking at other signals. And it reminds me a lot of what we do as a society and when we look at someone graduate from Harvard or Stanford, right? There's a lot of brain signaling and I think that has a place. But when we look at our data, first time fund managers are fantastic. Not all of them, but when you look at some of the returns, they can be great. So if you have a different way of diligence in first time fund managers, I think it's an awesome way to invest. In fact, I LP into first time fund managers all the time. I'm like, yep, you're. Going to be super hungry and you're going to fucking crush it. So let's do it.

• 47:49Harry Stebbings?

  Will Trump win the election?

• 47:50Speaker 00

  I don't think so.

• 47:51Harry Stebbings?

  Who will?

• 47:52Speaker 00

  I hope not Biden either. I hope we just get a different candidate, a more sensible candidate. The way it's trending right now, it is not looking great.

• 48:00Harry Stebbings?

  Who's your favorite angel to work with and why that?

• 48:02Speaker 00

  Gokul is actually my favorite angel to work with. And why him? I think he's incredibly sharp and understands all of the life cycles of a company from the idea stage down to how do you actually scale it and become one of the enduring companies? And Gokul is one of the few that actually has experience in not just startup stage, but also building an enduring company and being part of it.

• 48:25Harry Stebbings?

  Final one, my friend. Angel list in 10 years, what is it then?

• 48:29Speaker 00

  I think on the current trajectory, we will be the infrastructure for all venture funds, for a lot of the venture backed startups, and we'll just be the fabric of venture. That's how we think about it. It's one of those things where all the activity that happens in venture, investing, ownership management, rather than being done in spreadsheets and offline, it's all done in software on Angel List.

• 48:48Harry Stebbings?

  Do you think Angel List will be a public company?

• 48:51Speaker 00

  I don't know. We don't actually think a lot about going public. We just stay focused on how do we build an enduring company with large cash flows that compounds? That's how I think about it from a fair quantitative lens. And that's really all we focus on is how do we just build an enduring, large company that we would be proud of?

• 49:07Harry Stebbings?

  I've so appreciated your patience with me just peppering you. It's been so much fun. So thank you so much for joining me.

• 49:14Speaker 00

  Yeah, no, this has been great. Thank you.

• 49:18Harry Stebbings?

  I love that deep dive into the Angel List business. I've never heard a discussion about their margin profiles, the different products. So I want to say huge thank you to Avaloc for being so open with that discussion. If you'd like to see more from us, of course you can on YouTube by searching for 20VC. But before we leave you today, are you building enough conviction to outpace other investors in this changing ecosystem? Tegus helps VCs get under the hood of their investments quicker, map evolving markets with deeper research, monitor the financial health of portfolio companies and even source new deals. Tegus is trusted by top firms like Redpoint and Spark Capital for everything from expert calls and transcripts to quickly serve. Insights across filings, comps and benchmarking.

• 49:59Harry Stebbings?

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• 50:42Harry Stebbings?

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• 51:23Speaker 00

  As always, I so appreciate your support and stay tuned for an incredible 20 product episode on Wednesday with Jack Brody, VP of Product at Snap.