AngelList Commits to Crowdfunding

Venture Capital Dispatch | By Lora Kolodny April 24, 2013

A site that connects startups and early stage investors, AngelList, is rolling out a long-anticipated equity crowdfunding service to its users this week, according to Chief Executive Naval Ravikant.

Dubbed AngelList Invest, the service has been available to a handful of companies, by invitation only, since December 2012. Eighteen startups, including Transcriptic, Double Robotics and Tred, raised $6.7 million in funding commitments from 620 investors, via AngelList during that test period.

The service is now available to any qualifying startup or “top-tier” accredited angel investor using the site.

Ash Fontana, a “venture hacker” who develops AngelList’s fundraising products explains: Startups who want to try this already-legal form of crowdfunding (known as Reg-D crowdfunding) through AngelList and its partner SecondMarket, must have already attained $100,000 in seed funding from a “top-tier” investor. They must also be incorporated in Delaware.

AngelList ranks accredited investors based on their past experiences founding and funding, or advising companies. If a deal they were involved in was a big success, the investor accrues more points and may qualify as “top-tier.”

It’s not a “stack ranking” but puts investors into a “bucket,” says Ravikant. “You’re not asking if Reid Hoffman is a bigger deal than Ben Horowitz, but you can see they’re both ‘top-tier.’”

The ranking system is programmatic, not subjective, and works somewhat like Page Rank technology, he emphasizes. “We’re not in the business of picking winners. We let our community do that, and let the facts speak for themselves,” he says.

Here’s how AngelList Invest works, generally:

A founder logs into AngelList, and creates a company profile. If they want to try raising money there, they click a button that says “Invest” on their company profile page. That leads them to an application.
There they agree to certain terms and conditions, and provide information verifying that they have attained an earlier investment from a well-regarded accelerator, incubator, venture firm or individual angel. The funding should be at least $100,000.
Existing investors must confirm their earlier commitment, as well, over AngelList.
Once a company’s qualifying details are confirmed, its profile page will feature an “invest” button, visible only to accredited investors, so the public can’t tell if it’s fundraising and how much it wants to raise.
Clicking the button allows qualifying investors to make a “reservation” to fund that startup. They must commit at least $1,000 per order.
Once a company attains a minimum of $200,000 in reservations, the AngelList site will notify it, and ask it if it wants to close that deal or continue fundraising.
As a founder closes their reservations, AngelList sends the information to SecondMarket to wrap up final due diligence, and complete paperwork with their committed investors.
A single-purpose fund is created and managed by SecondMarket, which invests in the startup on paper.
Only one fund is listed on a startup’s cap table. Individual investors in the fund are not listed, nor do they have direct access to a startup’s information or operational involvement in that company.
SecondMarket charges startups a $10,000 fee to handle legal and compliance issues, and to pool demand up into a single-purpose fund. It also charges investors $250 per deal to cover costs.