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In 2010, Naval Ravikant and Babak Nivi posted a list of angel investors on a blog to enable founders to look for funding before seeking venture capital. This list of angel investors eventually evolved into what is known now as the AngelList. AngelList is a platform connecting founders and investors and seeks to provide efficiency in the early stage of fundraising. In June 2013, AngelList has been very popular that it was being used by angel investors and venture capitalists. Since its inception, thousands of startups had been funded and acquired. Entrepreneurs found that posting a profile on AngelList is as common as one's Facebook or LinkedIn profile. The use of AngelList is free and one is not charged anything. Now, Ravikant and Nivi are wondering if they could charge fees for transactions in AngelList.
Ramana Nanda; Liz Kind
Harvard Business Review (814036-PDF-ENG)
September 25, 2013
Case questions answered:
- Do you think that equity-based crowdfunding will play an important role in the financing landscape for startups going forward? Which startups and investors will be most attracted to this mode of financing and what will be the drivers of success?
- Do you think that several niche crowd-funding platforms will continue to coexist or is this a “winner take all” market? What steps should Angellist take to be successful?
- Which elements of Angellist’s emerging business model do you like? What could go wrong? What could go right? How should Naval and Nivi manage the risk-reward ratio?
- As a VC investor, would you invest $25 million in Angellist at a $150 M pre-money valuation?
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Case answers for AngelList
1. Do you think that equity-based crowdfunding will play an important role in the financing landscape for startups going forward? Which startups and investors will be most attracted to this mode of financing and what will be the drivers of success?
Prior to equity-based crowdfunding, entrepreneurs used to rely on e.g. VCs, business plan competitions, and self-financing to obtain funding, ultimately limiting the potential number of enterprises that can secure funding, the potential amount of money that each can raise. As this used to put financial risk and burden on the investee, entrepreneurs have turned more and more to equity-based crowdfunding which plays a more and more important role. Besides that, this alternative to “friends and family” funding/seed stage has become more essential because entrepreneurs can now obtain small contributions of a large number of people.
Less regulations and fewer burdens (e.g. no accredited investor, less documentation) constitute an overall cheaper and attractive alternative source of financing. However, the future is yet to be determined as certain rules within the Crowdfunding Act in the US still need to be clarified, e.g. how to deal with the possibility of overvaluation and fraud.
Generally speaking, most attracted to equity-based crowdfunding are a) entrepreneurs trying to turn their ideas into viable businesses, and b) small business owners trying to keep their businesses afloat or get them to grow. To be more precise, especially social entrepreneurs and companies in the nonprofit or charity sector would favor this mode of financing.
The benefits stem from three key pillars and address investors and investees: first, transaction costs are reduced for both participants, especially if they have no broad network or any connections within their respective environments. Hence, hobby-investors as well as fresh investees can now participate in giving and receiving funding due to impersonal referrals, social media-like network-acceleration, and “matchmaking”.
Secondly, funds can be obtained in a quicker manner and from a wider variety and greater number of sources wider array of donors outside of traditional sources, with less effort by and risk to the entrepreneur. Thirdly, as some startups want to retain their independence, the equity crowdfunding offers the benefit that usually small investors do not take part in managing the startup (as VCs usually do it).
2. Do you think that several niche crowd-funding platforms will continue to coexist or is this a “winner take all” market? What steps should Angellist take to be successful?
In our opinion, niche crowdfunding-platforms will…
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