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

25:24And 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 raise 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 that went from six and right now it's cranting towards seven.

26:06And 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 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. that time to first closes also extended. They're taking longer to close and they would have, the first close and they would have actually expected. Are we also seeing a reduction in fund sizes for those going out? Yes, there is a reduction in fund size for, I would say, the much smaller funds, right?

26:40In 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 a $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. Such a cherry topic isn't it? Because you die all the time 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? So a lot of what Angelist does in the background is we manage everything about fund, right?

27:14We manage from the initial legal docs or sometimes we'll work with the external law firm, down to the fund set up, down to the filings, ADV filings, and then managing the portfolio for 10 years. 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 assume needed human judgment to do something. You can actually now replace with code. We've taken a subset of things that typically require human judgment and we've started replacing it with code.

27:49And what one example that put a final 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's this deal getting done here the capital is 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 action, you should require a human to manage and route and apply judgment. Because we now actually have all 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 a automated router?

28:31But it's not as simple as, oh, email comes here, and here's a subject line you send it. Now, you have to actually look at the content of the email. If you look at the contents of the legal docs, So for example, if it's a follow -on round and we're reviewing the docs in 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. Well automatically tag is it a share purchase agreement a cap table, etc. automatically from the documents that we receive and then if there's a delta it's oh actually this is missing a cap table.

29:02We 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. 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. I have a look. I mentioned before we started that I'm more direct at my questions nowadays. That would lead to cost reduction. It would lead to cost efficiency and, but the increase productivity within the team.

29:37Think I saw recently in a group, someone having a moan about angelist 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. 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 Many angels has been on. We've actually built software to help automate a lot of what it takes to manage a fund, other than the financial reporting, tax reporting, etc. 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.

30:20What we have to do is 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. write all those little details to do that in software it takes time. 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 in every year keeps increasing. And so today we're regularly taking on $50, $100, $200 ,000 ,000 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.

31:02And so the pricing change that we made was a function of taking pricing. There 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. I believe it was 1 % a year, cap that 25K a year, which effectively caps it at $250K overall. And that's for everything. We handled tax, financial reporting, all of it. And what we really did was we said, But the fun size 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.

31:37So if you actually take a look at the fun 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. Can I ask, is it a loss lead? I've obviously been a wonderful customer and user -ranger list and it's amazing, but I look at my go, they cannot be making money. I mean 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 25k a year and all you're doing? What are the margins on that? 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 full not necessarily on a specific product because when we think about a GP or we think about an LP We think about 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 their funds all their SPVs.

32:40Okay, great. They're gonna go raise angelus capital Great. We have a business ballerine angelus capital when you're a financial platform They're all of these other different ways of capturing more and more value as you scale 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?

33:14If 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 FastBite. That's actually how Gokal and I started working together. And when I joined Square was basically just the payment stongle. And in my time there, I saw how Square went from a payment stongle 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 roast margin expansion.

33:50And so I definitely took a lot of lessons from there and applied it at the Angelist. Man, I'm loving this. What Angelist product has the best margin today and what has the worst? 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 a sure 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.

34:28And 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 SPVs 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 and the tail issues are coming with the SPVs is only a small percentage.

35:04It'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 this be even lower and lower and lower and that my response typically is, hey, these are complex financial instruments that need to be managed for 10 years. 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.

35:39But 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 they're doing that. What product have you done that with the benefit of hindsight you shouldn't have done? 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 about less than that's been great. In hindsight, I think we would have approached it by asking the question, is this something unique that angelists can bring to the world? And if not, it doesn't make sense for us to be doing it.

36:11Why 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. Why not Europe? Europe seems to be a kind of shadow region for angelists, and there's so much to mourn for it in Europe. What's Angelus' thoughts around Europe? So when I came in, Angelus 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 dissolve were not as standardized as they would be in the US.

36:53And 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 standardize a 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. And the one thing I deeply believe as 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.

37:24And 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. What does winning the US mean? Winning the US for us is what percentage of venture funds are we supporting? and what percentage of venture back 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.

37:59What are we today in terms of fun design companies? We just started last year with our captable product and it's growing 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 fun 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'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.

38:32You mentioned the cap table product, Danvloch. Yeah, and I swim for the warning sign. I'm as do bluntness. Like a fuck on direct compared to the car. So 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? 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 maybe from somewhere else, where startups die of suicide, not homicide. I believe that for every single company, and cannolly, of my first company died by suicide.

39:10I basically killed it at nothing to do with competition. And so as we think about running Angelus 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. The thing we have working for us is we are very product focus. We are a team of pretty ambitious tinkerers, product builders, and we moving credibly fast once we're clear on the direction.

39:49And 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. Are you taking customers from Carta or are these net new companies created? 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.

40:21You mentioned about being a team of product inquiries. I tweeted this, but it is something that Gokal shares, which is an awe around the speed of execution with which angelist ex -acquies. 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? 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.

40:57From there, we just set We're 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 that is 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, and 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. Any process, anything that gets in the way of that crush it, if we have too many meetings, cancel the meetings.

41:28Like I'll regularly go cancel all my meetings on the calendar because all that really matters is that your shipping products Are your customers love and anything that gets in the way of that and you drag kill it crush it and just focus on Speed focus on getting the iterations with your customers. Folks. I'm getting that feedback So that's how we think about shipping really cool. Okay. What do you think are the biggest external threats to you Achieving winning the US market for an alarm 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 Angelist, that's a startup, but I've always been like that.

42:12How would you respond to the suggestion that the macro sentiment is your biggest external threat? If you think about Angelist, your trajectory and your transaction volume is predicated on the amount of deals done, the amount of funds closed, the amount of SPV's done, when the market shrinks, and cadences reduce massively, your business is damaged, no? 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.

42:49We're not just going live with funds that are net new. We're also going live with funds who are moving to Angelist after they've already been somewhere else. So you can think of Angelus 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 Angelus has always run as if the next bear markets are on the corner literally every year that I've been at Angelus. We've always said, oh, you know what, the next bear market is going to be next year.

43:20So we have to make sure we have countercyclical products in place and we diversify the product portfolio in 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 countercyclical motions in the company as well. But yeah, it's the strongest 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 coming in the next couple of months. And not just one, it'll be a few. Do you want to give it tease it?

43:51I don't even have one. Not yet. That was the moment I knew I had by myself. He was a moment, and I was like, it's very excited. I'm very excited. But not yet. I was about to. I'm like, ah, no, Bruce is going to kill me. I don't know, but I wasn't going to blame me for trying. I want to do a quick fire on Adlo. So I say, sure, statement, you give me your immediate thoughts. We mentioned the matter there. Will we be in a worse or a better place at the end of 2023? I think worse, but I think it'll get better in 2024. What trends do you see that others are not seeing? I think people are seeing this.

44:21I just don't think they're seeing the rate of change, which is the rate of change through which AI will actually Completely not estimate 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 friend others aren't seeing is just the magnitude of the change that's coming for why color work? Who are best placed to instill that change? Is it incumbents integrating AI into existing product suites or startups providing new products? I think starters providing new products and I think it's because the quality of the team of product craft Right or the team that's gonna care about the product the most typically comes from the founders and the founding team They bring together, so I think they're gonna be most suited that said Incomments 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 I love Alex Rampeos.

45:18Will the incumbent acquire innovation before the start -up 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? Sequoia to buy multi -stage firm. No comment on shorting. Fuck! You can buy one seed stage specialist and you can short one seed stage specialist. Go. See stage specialist haystack I would buy and then short also no comment on that one. One day I'm going to get someone just be that bucket I don't care. I think you're one of them who's retired and just doesn't give a shit.

45:57I just can be a curmudgeon and maybe catch me in a couple years and maybe I'll be a curmudgeon. What did you believe in investing that you no longer believe? 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.

46:31Man, it's exactly the same for me. Like, 100 % if you all go after something really fucking hard, consumer education market, and you're raising 18 months of runway, sure you made the world's best team, but you're gonna take 12 months to get 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 race Exactly especially in this environment now What do you think the biggest investment mistake of the venture landscape was when looking back over the last 18 months? 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 What would you most like to change about the world of LPs?

47:08I think with LPs there is a lot of focus and especially larger LPs 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 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 -son 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 diligently for some fun managers, I think it's an awesome way to invest.

47:42In fact, ILP into first some fun managers all the time, I'm like, yep, you're gonna be super hungry and you're gonna fucking crush it. So let's do it. Will Trump win the election? I don't think so. Who will? 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. Who's your favorite angel to what? With him, why that? Google 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.

48:18And Gokal is one of the few that actually has experience and not just star of stage, but also building an enduring company and being part of it. Final one, my friend. Angelist in 10 years. What is it then? I think on the current trajectory, we will be the infrastructure for all venture funds, for a lot of the venture back startups and will just be the fabric adventure. 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 Angelist. Do you think Angelist will be a public company?

48:51I don't know. We don't actually think a lot about going public. We just stay focused on how do we build an endearing company with large cash flows at compounds. That's how I think about it from a fair quantitative lens. And that's really all we focus on is how we just built an enduring large company that we would be proud of. I've so appreciated it. Hey, your patience with me just peppering you. It's been so much fun, so thank you so much for joining me. Yeah, nice and great. Thank you. I love that deep dive into the Angelless business style. I've never heard a discussion about their margin profiles, the different products.

49:23I want to say huge thank you to Avlok for being so open with that discussion. If you'd like to see more from us, of course you can on YouTube tube by searching for 20 VC, but before we leave each day, are you building enough conviction to outpace other investors in this changing ecosystem? Tegas helps VCs get under the hood of their investment's quicker. Map of all the markets with deeper research, monitor the financial health of portfolio companies and even source new deals. Tegas is trusted by top firms like Red Point and Spark Capital for everything from expert calls and transcripts to quickly surfacing insights across filings, comps and banish marking.

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