To The AngelList LP Community,
I’m writing this post to share some perspective about certain types of deals I see frequently on the platform. I care deeply about the AngelList community. My intent today is to help strengthen the community, and help all of us produce better investment returns.
As a starting point, let me tell you why you should listen to me. I’ve been in the startup and venture ecosystem since 2007. I’ve been angel investing since 2012, and have been an LP in AngelList syndicates since 2014. AngelList tells me I’ve now made over 500 investments on the platform (and tons more off it), and generated a >40% net IRR as an LP over the last 8 years:
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On top of that, we at Unpopular Ventures have now invested in over 280 startups since we began in 2019. According to AngelList, our gross IRR over the life of the UV syndicate is tracking at 78%:
I’m sure others have done even better, but the point is: I’ve seen a lot, and have done pretty well. Enough to have some perspective.
Second, I also want to say: the AngelList community is very smart. You all have done a great job of identifying some of our best investments, putting more money into those, while also helping us recognize that some of our other investments were less strong, and putting less money into those. There is definitely some “wisdom of crowds” here.
However, for years on AngelList, I’ve observed what I perceive to be a “market inefficiency” on the platform, which is what I want to call out today:
Tier 1 VC bridge rounds
What does that mean? There are tons of deals that come through AngelList that are “bridge rounds,” meaning it’s an in between round (Series A+, Series B+, seed extensions, etc.), usually for a company that is struggling, and/or that hasn’t hit all of their milestones to reach the next round. And by “tier 1 bridge” I mean there is a well-recognized VC leading the round (such as Sequoia, A16Z, Founders Fund, etc.), where it’s their second or third time investing, and there’s no new outside lead investor.
These deals both 1) tend to be easy to get access to, and 2) tend to raise a lot of money on AngelList. In the case of 1, they are easy to get access to because, well, these are usually struggling companies that most other investors aren’t interested in funding. And in the case of 2, they tend to raise a lot of money because there is an emphasis among AngelList LPs on investing alongside tier 1 VCs. In the context of AngelList syndicates, where LPs can’t meet the companies directly and do their own DD, co-investors is one of the easiest signals to get comfortable with. So I guess it makes sense that LPs heavily index on tier 1 co-investors.
Because of 1 and 2 combined — easy access and lots of LP interest — there are *tons* of these deals on the platform. It’s probably 60%+. If you look closely, you’ll see that ~80%+ of the deals on AngelList that involve a tier 1 lead VC are bridge rounds. It’s rare to see a deal led by a tier 1 VC, where it’s the lead’s first time investing.
Here’s the thing: these investments, as a whole, heavily underperform.
Why? All of venture investing follows a power law distribution, and it’s no different for the tier 1 VCs. Sequoia has a better distribution than others, but the pattern is the same: 1–3 investments per fund drive almost all of their returns, and 30–50% of their investments are losers. If you were to buy a fund that is the bottom 50% of Sequoia’s investments — you would almost certainly have negative returns. If you want to mirror Sequoia, it’s extremely important that you get into their best investments.
Their best investments don’t do bridge rounds. So the very act of buying up all of Sequoia’s (or A16Z’s, Founders Fund’s, etc.) bridge rounds is an exercise in adverse selection. As a whole, you’re going to buy an index of their money-losing investments.
Certainly, there are always exceptions. We’ve done some tier 1 bridge rounds here at UV. But: I’d expect a respectable lead to be transparent about what the round is, and clearly articulate why the investment is good in spite of the fact that it’s a bridge round.
And here’s the problem: some AngelList leads try to hide when rounds are bridge rounds. In many cases, they deliberately omit the fact that the lead invested previously (note that you can usually find a company’s fundraising history on Crunchbase). In others, they hide the amount the VC is investing. In lots of cases, the tier 1 VC might have put $10M into a Series A, and then just toss $100k into the Series A+ so it appears they still support the company — when in reality, they know the company is on the ropes and they are just hoping to get their money back.
So lots of syndicate deals on AngelList are communicated as, “THIS IS SUCH A HOT DEAL, LED BY X and Y, SO OVERSUBSCRIBED” — and they raise a lot of money. What is omitted is that X and Y did the last round, are now bridging this struggling company of theirs, and the VCs know they can get easy money from less sophisticated investors to support their struggling company so they have a chance of getting their money back.
I’ve invested in lots of these in the past as an LP, and I’ll admit: I’ve been duped. These investments, on average, have significantly underperformed for me. I’ve also observed that the syndicate leads who do an abundance of these types of deals, never seem to share any information about their past investing performance. As long as the AngelList community keeps dumping money into every bridge round with a brand name VC on it — they don’t have to.
So, in my humble opinion, this is a market inefficiency that I’d like to see go away. I imagine that many LPs on AngelList are newer to the game (like I once was), see a brand name VC in a deal and think “wow, great deal!” and pour money in — without looking deeper. As someone who has been at this for a while, I just wanted to say: beware.
I want all of us in the AngelList community to earn outstanding investment returns together.
Sincerely,
Peter Livingston
PS: if you’d like to chime in on this topic, you can comment under my tweet here.