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Here’s the program.
Andrew: Hi, everyone. My name is Andrew Warner. I’m the founder of Mixergy.com, home of the ambitious upstart, and joining me is a founder who’s reshaping the way startups raise money from investors. He’s Naval Ravikant, co-founder of AngelList, a matchmaking service that connects startups and investors. A few weeks ago the founder of LearnBoost told me that he was able to close about a million dollars in funding within weeks after being on AngelList. So I asked him to introduce me to the co-founder of AngelList, and he helped make this interview happen. And by the way, that’s not an atypical example, as you’ll see in this interview. People have just been on AngelList and getting funded pretty quickly.
I also want to ask Naval about how he built Venture Hacks, the company that educates founders about the process of raising money. So we’ll focus on AngelList, we’ll talk about Venture Hacks, and we’ll also talk a little bit about his investments. Naval, welcome. It’s good to meet you.
Naval: Thank you, it’s good to be here.
Andrew: So, I gave a quick example of a company that raised money through AngelList. Can you give me another example of a company that raised money with you guys?
Naval: Yeah, at this point there’s actually over 100. So it’s hard to even know where to pick from, but some of the ones who have come out publicly and talked about it are companies like Postling, FoodSpotting, BranchOut, AppMaker. There’s tons of them. We actually track them on our site on a Quora thread where people kind of write in what they think about AngelList and also in our Twitter favorites on AngelList.
Andrew: How about a specific story of one company that did it? I like to see the world through stories and examples.
Naval: Sure. So Postling was a good example. Actually, I’ll give you a different one. NewsCred is a good example. This is a company where the founder, Shafqat Islam was based in Switzerland, and he’d been trying to raise money there for many, many months and he was getting fairly frustrated. And he met with Fred Destin, who’s a VC with Atlas Ventures and Fred recommended to him to try AngelList. He got on AngelList, scheduled some meetings in New York, and got funded a few weeks later and then ended up moving to New York where his current investment base is. His round was led by First Round Capital with a lot of angels participating. I think he’s one of those people who will tell you that it just transformed the experience for him. But we actually have all ranges. There are companies who already had good investors and are looking to fill out the round with certain people with expertise in a given area. And we also have other people who just are looking for pure access to capital and don’t have it in their location. Or there are other people who are just looking to do a quick financing. So about half of our companies that get funded are in the Bay Area where they have access to lots of investors, but going on AngelList allows them to do it much more quickly and allows them to control the composition of their round.
Andrew: Really fast from what I’ve been hearing here. Now . . .
Naval: The average is about two weeks.
Andrew: Two weeks?
Naval: Yeah.
Andrew: And the average raise is how much money?
Naval: 500K to a million, although we’ve had companies raise as much as $6 million and as little as $50,000.
Andrew: Okay. And what kind of companies are looking to AngelList to raise money?
Naval: I’d say about 80 percent are web companies, consumer or enterprise, so software service or consumer web companies. Although, we do also now consider health care, green tech, biotech, anything technology related essentially. We’ve had one completely non-tech related investment happen off the site, but that’s still a rare occurrence. Most investors are looking for technology companies.
Andrew: All right, I want to spend a little bit of time later in this interview getting your advice on how companies can go through this process. Right, how they can even get accepted and have you guys promote their company to your list of angels. But I’m curious about how you got here. It seems to me that AngelList was just one of many ideas that you guys were trying on Venture Hacks, and a lot of the ideas didn’t work. Many of them inspired people, but this one really took off. So, first of all, am I right about that? And if I am, I want to hear that story.
Naval: You’re right about that, although AngelList is sort of a recurring theme in that sense. Basically, originally Venture Hacks started in 2007. We were educating entrepreneurs on the process of how you raise and negotiate venture capital. And we laid it out through lots of words and lots of blog posts and we had a book and a cap table and all that. And we grew it to become the second largest venture related blog on the Web, right behind Fred Wilson’s blog at AVC.
And what we realized was at some level people didn’t want to just be told how to do it, they needed it productized. So AngelList is a productization of Venture Hacks. So it’s taking the whole fundraising process, bringing it online, making it smooth and efficient, and putting in all of Venture Hacks’ learnings and principles and bundling the advice in along with it. It’s not the first time we’ve tried it. It’s actually the fourth time we’ve tried it. We tried it once in 2007, once in 2008, once in ’09, and this time in 2010. And this time it actually kind of worked. A perfect storm of forces came together that made AngelList actually work this time.
We did try many other things along the way. We have sold online books for a couple of bucks, not making anybody rich but just sort of getting some PDFs out there. We’ve had cap tables, we’ve had advice, services, all free. And this is sort of the social network for fundraising. We’re a Match.com for fundraising, and it took off. It started in December of ’09, last year basically. I called up my partner in Venture Hacks, Nivi, and I said, “People just keep asking me who are the angels. Let’s just put up a list.” And that’s how it started. But then it sort of exploded, and now we have built it out more into a service and much less of just a pure list.
Andrew: All right. What you just described there I want to dive into and fully understand. I love that story, and I want to learn how you adjusted to get here. But maybe we should start off before here, because you were the founder of a highflying, high profile Internet startup, Epinions. And from what I remember Epinions sued, you guys sued your investors, right? So you had a bad experience before this. Can you tell people about that?
Naval: I can’t. I’m under a non-disclosure.
Andrew: You cannot.
Naval: So, we settled. There was a lawsuit. It’s public knowledge. You can Google it. It’s all in the past. But essentially it was a learning and growing experience for me, and as part of that learning and growing experience I realized that entrepreneurs fundamentally have an information asymmetry relative to investors in the market. And so we set out to correct that. But that has been corrected on many levels. The modern financing environment is a lot, lot friendlier than it used to be a decade ago. The incident you’re talking about we raised money in 1999. Raising money in 2010 is completely different. And the kinds of terms you get, the kinds of investors you get, reputations, behaviors, outcomes are much more constrained and controlled. But that’s happened partially because of forces like Venture Hacks and Y Combinator and Brad Feld’s blog and Chris Dixon’s blog and Fred Wilson’s blog, Yokum and CVC and all those kinds of things. So the Internet has sort of made the level, created a much more level playing field. It’s still not level by any means. There’s still lots of asymmetries. There’s still lots of game theory. There’s still lots of bad outcomes that happen to good people. But I think the information is now out there and you can now be armed much better.
Andrew: Is the information asymmetry still to the advantage of the investor or to the advantage of the entrepreneur today?
Naval: I would say at the early stage it is actually more in the advantage of the entrepreneur. If you look at sort of these party rounds being done with convertible notes, the entrepreneurs have all the power. No one’s going to go Bernie Madoff and steal $50 billion here, but there is an opportunity for entrepreneurs to have good outcomes and the investors to not have very good outcomes. I would say once you start getting the Series A, B, C level, the asymmetry’s still mostly in the venture side.
Andrew: All right. All right. So you did Epinions, and then you went on the other side, right? Before you even launched Venture Hacks, you started investing in companies, didn’t you?
Naval: Yeah, I was angel investing, and I still do to a small degree. But I’ve invested in about 50 companies. The best-known ones are Twitter, FourSquare, Disqus, Heyzap, DocVerse, Jambool, Social Gold and then a whole bunch you probably have not heard of.
Andrew: And you were one of the first investors in Twitter?
Naval: Yes, that was in the first round.
Andrew: Okay. This is maybe a prying question, but from what I saw you didn’t end up happy with the financial outcome of Epinions. You sued your investors. Where you do get the money to make angel investments after that?
Naval: Like I said, I’m in a non-disclosure on the lawsuit, but I also did end up raising a small fund.
Andrew: Okay.
Naval: Super angel model and I have, I’m lucky to have a lot of great investors in that fund including Tim Draper and Marc Andreessen and Sutter Hill Ventures and Mechanic Capital and a whole bunch of people. So most of the investment has been a combination of my own money as well as that fund.
Andrew: All right. And so was Venture Hacks your way of doing what other investors do, which is I’m going to educate you so you come to me and trust me and we’ll have a trusting relationship, but the blog is my way of bringing the right entrepreneurs to me?
Naval: Actually, Venture Hacks started before I started doing angel investing. So it wasn’t even that. Venture Hacks was just scratching an itch. It was all this information that I had in my head about the game theory of venture capital, having educated myself on it. And people would keep asking me for advice, and at some point, it just seemed easier to write it down once and point them to the article than it did to just kind of keep repeating the same thing over and over. And in that sense, Angel is an extension of Venture Hacks because people keep asking us how to raise capital and we keep pointing them to the articles. And after a while, it’s okay fine, here’s the process, just fill out this form, and we’ll do the rest, so.
Andrew: Okay. And can you take me back to the original days of it? Was it still the two of you? Was it you and Nivi, or was it just you coming out with it? What was the origin of this business?
Naval: So Venture Hacks was Nivi and I from the start. He had been raising money for a company he was involved with called Song Bird and he asked me a lot of advice and I gave it to him. And he said, “Well how come this hasn’t been written down anywhere?” I said, “I don’t know.” So he actually did the hard work of putting it all together. And then when AngelList started, it was still mainly Nivi and I, but then over time we brought more people in to help us and Kauffman Foundation has been nice enough to back us in that effort.
Andrew: Okay. And they’re investors then?
Naval: Yeah, they basically gave us a bunch of money to build out the site and hire a developer and so forth.
Andrew: Like a grant?
Naval: It’s not quite a grant but might as well be.
Andrew: Okay.
Naval: They’ve been such supportive and patient and helpful and on such good terms that yeah, you can think of it as such.
Andrew: But from what I read in The Wall Street Journal, it’s a for profit business and I think it’s the two of you who own 100 percent of the business together, right?
Naval: We don’t own 100 percent of the business. We had some early investors in Venture Hacks who are still holding and there’s Kauffman as well, as well as the people who are working with us have equity.
Andrew: Okay.
Naval: There’s no business model in place per se, but obviously it does give us visibility and everybody looks at all the deals. So over time, if we wanted to, we could manage an investment fund that could invest in AngelList startups, but we haven’t done anything like that yet. We’ve just been busy building out the core site with features and getting companies funded. And frankly, it’s a lot more fun to be a facilitator than an investor. As an investor, you spend most of your time saying no. As an entrepreneur, you spend most of your time hearing the word no, and as a facilitator you get to say yes a lot more often. Not as often as you’d like, but you still get to say yes a lot more often.
Andrew: Okay. So take me through the evolution of this. You’re right, because I remember talking do Dharmesh Shah, who said that he invested in Venture Hacks, and this is more than a blog. And at some point it became more than a blog. Let’s learn the evolution. So you launched this as a way of saying to the world I know this information, I’m curious, I know some of it, I’m curious about the rest, we’ll both learn together, and we’ll share what we know. You start publishing this. When do you take it to the next level and what is the next level?
Naval: Well, Venture Hacks sort of became AngelList earlier this year, and we merged the two entities.
Andrew: Going back to Venture Hacks, what was the next level after you started blogging?
Naval: It was actually, for years, it was essentially just a blog coupled with free advisory service. So entrepreneurs would e-mail us, would call us and say, “Hey, I have this term sheet. I have this issue with investor. What do you suggest?” We’d get on the phone, we’d get on e-mail, and we’d just give them advice. You know, not charging anything. It wasn’t necessarily the highest, it wasn’t like legal advice. It wasn’t tons and tons of advice, but it was usually the point advice where we’d say, “Okay, we’ve seen this situation before. This is what the investor means. This is what’s standard and what’s not. This is probably the negotiating leverage you have on this term sheet, and you ought to probably walk away or it’s worth sticking around and dealing with it.” And we just did that a lot. And it was just really hard to say no. I mean, when a good entrepreneur comes to you and it’s very clear that they’re just learning something that’s very complicated and very difficult for them, you almost feel obligated to help out. I mean this even happened recently. We had a company that had gone through AngelList and they got a Series A term sheet and it was, and to the entrepreneur it seemed like a very friendly term sheet. And when I went through the share price and the traunching with them, it became obvious that it was actually an extremely hostile term sheet. But it was four nights of staying up till 3 a.m. working on spreadsheets to kind of turn it around. And at some point, I did think like why am I doing this? Right? But . . .
Andrew: Why? I understand you want to help people and you can’t say no. But at some point, you do have to say no to things that don’t make sense. So this must’ve made sense on some level. Why did you help people out in the early days?
Naval: I kind of feel like that’s our mission. That’s the mission for Venture Hacks and AngelList, which is to, for Venture Hacks it was to make all the information available to an entrepreneur who’s raising money. And if the information’s not on the website, we haven’t done our jobs, so we have to walk them through it, hand hold it and then maybe write a blog post about it so we don’t have to do it again the same way. With AngelList, the mission is to get every worthy startup funded. So if you have a good startup and you’re a good entrepreneur, you should be able to have a painless, easy, quick financing with people that you want and keep control of your company. And so we help you structure that. And Silicon Valley’s a small community. If you help enough people, you get what you want. It’s that simple.
Andrew: I see. So you don’t even have to name a goal for having those conversations with entrepreneurs. You just know something good will come of it.
Naval: Entrepreneurs all talk. They all know each other, and it’s sort of like a schoolyard. You wish the kids would listen to the parents or to the elders or the politicians or the school teachers, but in reality they listen to their peers. So, entrepreneurs listen to other entrepreneurs. And if you’ve helped one entrepreneur, you’ve helped the community of entrepreneurs.
Andrew: Okay. But there is a personal gain to this, and is it that you’re trying to get, or maybe not necessarily trying to, but you end up getting investments that you wouldn’t have had otherwise because people trust you. Is that . . .
Naval: That is true. I mean so, you know, Business Week had this list of Top 25 Investors, and you know how these things are in the media. They sort of make it up based on their friends. So it’s not necessarily the most rational thing, but I had a friend who recommended me for the list and I landed at number 22. They ran the numbers and they came up with number 22 for me. Or to quote Homer Simpson, you know, these people look deep into my soul and assign me a number based on the order in which I joined. So, that was pretty flattering, but if you’re in the Internet investing business, it’s a hit driven business. The vast majority of investments turn out to be worthless, and there’s a few that really matter. And those few are often very obvious to everyone because they have tremendous traction. And so your ability to get into those deals is your brand and your reputation. And in that sense, AngelList and Venture Hacks helped me build up my reputation to the point where I could get into good deals. Number 22 it turns out isn’t good enough. You can still get cut out of the top ten deals, and then you may as well have not shown up. So, one fact that’s always been important in my head is that it’s very important the community of entrepreneurs recognizes you as someone really that they want involved with their startups and worthy of dealing with. So, in that sense AngelList is very helpful. Also, within the community of angels, deal sharing is a valuable commodity. Angels respect and like other angels that have sent them deals. It’s the human principle of reciprocity. You want to do nice things for people who’ve done nice things for you. And through AngelList, we’re certainly sharing a lot of deal flow, so I hope some of that will come back to us as well.
Andrew: Oh, I see, okay. Now, maybe I could see that exemplified in one specific case. Did that help you connect with Evan Williams, the founder of Twitter and make that investment? No?
Naval: It did not. No. Twitter predated a lot of this. Although, in a sense, you could argue this is an example of karma. So, I was involved very, very early on with a Y Combinator company called Auctomatic, not automatic but Auctomatic, and it was founded by three guys, Patrick Collison, Kulveer Taggar and Harj Taggar, brilliant guys. I liked them from the start. I didn’t invest in their company because I felt what they were doing was inherently suicidal. They were taking on eBay. But I just loved the guys. I was constantly hanging out with them. I was dropping by their offices. We lived nearby, we had pizza occasionally. And two of the founders have gone on to do amazing things. One of them is now the newest partner at Y Combinator, working with Paul Graham, and the second one, Kulveer, he got into this early service called Twitter and he just kept tweeting and talking about it. He was SMSing me nonstop. So I said okay, there’s something here, and I tracked Ev down and basically begged him to let me invest. And I sweet-talked my way into it. That’s another story, but I wouldn’t have found out about it if it weren’t for Kulveer and I wouldn’t have gotten that data from Kulveer unless I had just been involved with him and liked him, and I like to think helped them get even a little bit.
Andrew: love that story because that does help me understand the process. You said that you sweet-talked and that was, you sweet-talked Evan Williams and that’s a whole other story. Tell that story. How did you do it? What’s there?
Naval: I had actually been building some Facebook apps with a friend, just to understand viral marketing and because I had seen what had happened with MySpace and was happening with Facebook at the time. Facebook Connect launched and we built some Facebook apps and sort of figured out what Slide and RockYou and some of the other companies at the time were doing around viral marketing. So when Twitter was staring to get popular, this was early on. It still wasn’t that popular, but Kulveer was constantly talking about it. I went in there and I met with Evan and one of his co-workers. I basically laid out the whole viral marketing graph and how you figure out the coefficient and how you do it. And I was basically trying to give them ideas on how they could make Twitter more viral. I think Ev basically looked at that, thought about it and said, “Okay. That’s great. We’re not going to do that.” And that was the end of that. And he made the right call because I think viral marketing often builds you inauthentic communities, and he was much more interested in building a long-term authentic community. But it was the excuse that I needed to get in front of him. He knew that I cared, I was thinking about it, and he allowed me to invest. And then just recently, they had t.co URL shortener that they’re using, so I got them that domain from the .CO Domain Registry, and I sent them some good engineering candidates. And so it all gets [interference] together, and now two companies that I was an investor in have been acquired by Twitter. So it sort of all ends up bundled together.
Andrew: Okay. All right. So, the next thing I wanted to ask you about in your evolution with Venture Hacks is the books. I’m looking online. I see an eBook for $9.00. I see on the higher end an EduFire class for $98. Let’s start with the $9.00. Why would you need to sell a $9.00 eBook? What’s the thinking there?
Naval: Oh, it’s pretty simple. If you just e-mail us, we’ll give you the eBook. If you apply to AngelList, we’ll give you the eBook.
Andrew: But back then, you didn’t even have AngelList. You were selling it for nine bucks. Why?
Naval: If you just e-mailed us at any point and said, “Hey, I’d like the eBook and I don’t want to spend nine bucks, we’d email it to you.”
Andrew: But what’s the thinking behind charging? There’s some thought there.
Naval: That was Nivi’s experiment. His theory is that if you don’t charge for something, it doesn’t have value, or it’s often perceived as valueless. I think he was simply testing that out. The truth is I can’t even . . . I mean if you added up all the $9 books we sold, I don’t think we even made enough money to cover one month’s worth of costs, so.
Andrew: What do you mean? What kind of costs do you have?
Naval: In terms of Nivi was working on it full time for years, so he was surviving by consulting on the side or through investors. We had a developer for a while. We had servers. You look at any Silicon Valley person’s salary and you look at server costs and costs to maintain a company, you’re talking at least 100K a year right there.
Andrew: Even on something like Venture Hacks, which is essentially a WordPress blog?
Naval: It’s a full-time labor cost.
Andrew: I see, okay.
Naval: So Nivi’s always working on it, and assuming that I value at my time at zero in terms of all the e-mails and phone calls and all that stuff.
Andrew: Okay. All right. So it was, and I saw that there were a lot of little experiments like that. There would be, I think a minimum viable product, eBook where you guys would launch maybe the first chapter or a cover page. Can you tell me about that? Do you recognize that?
Naval: That was mostly by Nivi, so that’s less kind of my thing. But honestly we’re just fooling around.
Andrew: Let me ask you something. I understand Nivi. Nivi’s a guy who’s got a lot of energy. He’s younger. He’s less experienced than you, but he’s testing with your name. He’s testing saying we’re selling this for nine bucks. Do you ever worry that what are people going to think that now I need $9 from them? Or what do you think?
Naval: I’m happy to send the $9 back to anybody who wants it. I mean, he was testing but I think a lot of people also knew that’s mainly Nivi and that wasn’t me. And if they e-mailed me, I’d be happy to send them the book. It was more that the way Venture Hacks worked is I provided a lot of the data early on, but frankly Nivi did a lot of the work. And later on, he was doing the work and getting primary data. The whole lead customer development process, the whole agile development school of thought. That’s all Nivi’s stuff. I actually have nothing to do with it and [interference] topic. I actually felt the other way around. I felt like he was giving me the opportunity where he was doing all the work and he’s letting me put my name on it. So I felt privileged to be involved.
Andrew: And let me just tell you that I don’t mean to be putting you down at all for this. What I was getting at was I remember when I interviewed Eric Reese about him selling a seminar. And he said when I first put up a price, I felt, I don’t know what the word was but it was almost embarrassed. It was embarrassed. He was putting up a price and charging for this session that didn’t really exist but he told me, “Andrew, I needed to do that to get real data. To know whether people really wanted to come to the seminar or just were checking off a checkbox.” And so I wanted to get a sense of where you guys were coming from.
Naval: Yeah. [interference] that one place instead. But the irony here is that AngelList is a much more valuable service than the Venture Hacks pitching book ever was, and we don’t charge anything for AngelList to either side. So, we were charging for a $9 PDF, but really you could get all that information for free or you could just search for Venture Hacks PDF and find it online. JavaScript and BitTorrent don’t exist. Or you could e-mail us and we’d give it to you. So, in fact, I think of the $9 PDF as more of a tip jar. It’s a tip jar where you get a little something back.
Andrew: All right. And by the way, when I was researching this interview to prep for our conversation today, I kept coming up with the actual link to the PDF that I wanted to find the order page for. So I see what you mean. I said I want to find the order page. I need to know how much he’s charging for this. Okay. So . . .
Naval: I can give you an example of how it’s useful to say you’re charging nine bucks. You know, a lot of times conferences or incubators will e-mail us and want to do a partnership, so we’ll give them a site license. We’ll say give it to all your startups.
Andrew: I see.
Naval: Giving you a free book that you can give to your startups, that has no value. But if it’s a book that would normally be $9 on an honor system that now you can give away free and clear of your conscience, then that has some value.
Andrew: Yeah, like a virtual currency almost that you create yourself.
Naval: Exactly.
Andrew: I think Kevin from Eventbrite told me the same thing, that by charging for Eventbrite, whenever TechCrunch had a conference he can be a sponsor of TechCrunch just by giving them access to the software that essentially didn’t have much more cost for him to give them.
Okay. So what about the next step here that I see? Next step that I saw was you had this social network where a lot of us came on and added our profiles and linked to each other. Can you tell me a little bit about that evolution?
Naval: Yeah. So we tried to create a social network for entrepreneurs and for investors to connect to each other. This was in 2007/2008. And that basically failed. It failed for a number of reasons. I think at the time we didn’t have enough deal flow or entrepreneurs or reach to kind of jump-start the process. Angel investing wasn’t as hot. There weren’t as many angel investors out there. Back then startups needed more capital to launch, so they were fundamentally more secretive pre-launch. There were other opportunity costs for your capital in ’08 with the stock market could only go up. And the interest rates were higher, so people could have other things to do with their money. The environment’s changed a lot now. There’s a lot more angel investing, companies need less money. They launch before they fundraise in many cases, so they’re much less secretive, and I was able to jumpstart the network with my personal deal flow and connections. So the timing was good, and I think we also learned a lot from the failures along the way. We executed much, much better this time.
Andrew: What did you learn?
Naval: There were a lot of learnings. I mean there’s a thousand little learnings. It’s interesting. There is no single, big overarching learning. So I think that whole aha moment is a myth that goes back to Archimedes sitting in his bathtub. But I just think that’s a myth. I think basically the way you learn to do something is by doing the same thing 10,000 times in little, little increments. And so after you’ve done the matchmaking thing for a while, you realize, okay, this kind of deal goes to that kind of investor. This kind of company will be popular and people will want to see, even if they don’t necessarily want to fund it. This kind of thing needs to have a little bit more traction before it gets funded. These kinds of investors need to be handheld in this way to bring them onto the network. E-mail is the best way to reach people. This particular kind of e-mail format will work better. These are the times of day to send it. So you just learn all these little, little tricks, and you kind of add them all up and you try and get over the activation energy threshold. And fourth time’s a charm.
Andrew: I think you once said that there are a million monkeys in Silicon Valley just coding up the next success. Is it possible that by taking 10,000 little steps what you’re really doing is taking, like a monkey, taking 10,000 attempts at writing the first paragraph of Shakespeare?
Naval: I’m one of those monkeys with my keyboard hammering away and just trying and trying and trying. And you know eventually you look at it and it says, “Oh, OK, I just typed up (_______). That sounds good, right? Now let’s go to the next step.” So yes, it’s a constant process of experimentation and iteration.
Andrew: So . . .
Naval: Sorry, go ahead.
Andrew: If I’m one of these monkeys and I feel like I just go over and over every day almost like Groundhog Day, with just a little improvement and some days not, what do you do to jump-start that in your experience?
Naval: There is no jump-start, there’s just you put enough time in.
Andrew: Just put enough time.
Naval: Put in the time. All greatness comes from repetition, and obviously hopefully you’re learning and adapting so you’re making some minor changes along the way. But even Charlie Munger, Warren Buffett’s right-hand guy, you ask him, “How do I end up like you?” And he always laughs and says, “Well, we get this question a lot. How do you become as rich as us but younger, because nobody wants it when they’re 80. They want it when they’re 30.” He said so, “Basically, get up every day early and work hard, advance yourself and discharge your duties faithfully and well, and little by little step by step you get ahead. And eventually if you live long enough, you get what you deserve. And that’s it. There’s no shortcuts.”
Andrew: Can you give me an example of someone who’s gone through it a long time? Because it seems to me that in the tech space, in the startup world, it’s you either hit big or you just say forget it, this wasn’t the right one, I’m going to go home and try something different.
Naval: I think that’s the mythology of Silicon Valley. We tend to fixate on the very few lottery tickets that seem like they paid back big time. Many of them actually aren’t like that. If you look underlying those people have been working on that problem for a long time.
Andrew: Can you give me an example maybe of one entrepreneur that you worked with closely or one that you invested in that took a long time?
Naval: Well, I would say that if you look at Evan Williams as a great example, he has basically been working on the same problem for well over a decade. He created Blogger First and then he created Twitter second, or co-created along with Jack and Noah and a few others. And fundamentally along the way he had some missteps. He had Odeo, which was his podcast directory. But basically it’s been the same thing all along, which is how do you get people to share little snippets of information with other people and make it easier to do so? And so he’s a deep, deep thinker on that problem. If you look at what Adam D’Angelo and Charlie Cheever were doing with Quora, they had basically been thinking about the problem of how to get people connected in knowledge for a long time. They were doing it in Facebook first and Quora second. Larry Page and Sergey Brin have been working on data analysis information retrieval for decades before Google is now the household word that it is today. Steve Jobs, I mean that guy’s been working on the same problem of accessible computing and beautiful and elegant devices forever.
Andrew: But isn’t that once it’s a hit, because you take a look at Quora, Quora within months of launching, we all knew was going to be a hit. Or at least we all knew was worthy of, you all knew I’ll say, you guys who are in this space who are really knowledgeable knew it was worthy of your time to answer questions there. Odeo didn’t really hit right away, but Twitter, most people in the early adopter stage knew within a year this is something worth playing with. We don’t know where it’s going but within a year. And if it wasn’t, it might be an Odeo that he drops and moves on.
Naval: Yeah, hindsight is 20/20. I mean if you look back, there are a lot of people who were very skeptical about Twitter and still are. FourSquare, remember it was DodgeBall first, so that’s another case where the entrepreneur’s been trying the same thing over and over. So I think entrepreneurs and the fundamental entrepreneurial ideas never really die. It’s the products and the companies that often die along the way. Which is fine because Silicon Valley makes it so easy, the culture makes it so easy to start a new company, that a company can live and die and live and die, but the idea just lives on underneath and it keeps evolving with the entrepreneur. So a lot of times, I know Andreessen Horowitz has this as one of their fundamental investing criteria, they look for an entrepreneur who fundamentally deeply understands the problem and has been working on it for a long time.
Another observation I would make is the best companies are usually an extension of their founder’s personality. And that personality ends up being shaped by having thought about this problem for a long time. Or the problem they choose to tackle is something that was core to their personality. It’s just who they are. They can’t stop thinking about it. In some sense, I have to do AngelList. I have to do AngelList.
Andrew: Tell me about the problem that you’re so obsessed with, that you focused on for years. What is it? How do you define it?
Naval: Fundamentally, I like to think as a scientist and economist, and to me the market for private fundraising and investment is broken. It’s inefficient, it’s illiquid, it’s slow, it’s stupid, it’s based on who you know and not what you know and what you do. It’s broken up into discrete rounds instead of being continuous. The secondary markets don’t work. The terms are all unique and it’s a black box. And that’s just hideously broken. If you go and you buy shares on the NASDAQ, you don’t worry about the terms that are underneath. You can open an account and just sign up and do it. You can sell your stock whenever you feel like. There’s no concept of rounds. Preferred stock transactions are rare. It’s all common stock, and it’s just simple and relatively easy. It’s highly regulated. All the parts of it that are hard are regulated parts. But the core process is very simple.
Compare that to trying to raise 500K for a startup. It’s hideously complicated. And we also live in an age where a startup does everything online. All your code is stored online at GetHub. All your marketing is done online through Twitter. All your sales are done online through Google. All your servers are online at Amazon or software at RackSpace or whatever. All your developers are communicating with each other through Skype. And then all of a sudden, when it comes time for fundraising, you’ve got to get off your butt, you got to start meeting people, shaking hands, going to conferences, going to coffee meetings, going to Sand Hill Road. Huge reams of paper float around. They want the original signatures and the faxes. And then you have to educate yourself on this Byzantine process that exists for no other reason than that’s the way it’s always been done. That whole thing is broken. So that needs to be fixed, and I understand it and I understand kind of how it needs to be fixed, so I have to do it.
Andrew: In your magical, actually before I get to what your ideal version is, I wonder as you say that why does it need to take all that money? Every time I interview Jason Freed, he makes a case that you don’t need all that money. And you’re now telling me that it takes maybe five, ten years of obsessive thought and work on a project before you really hit it big. So then wouldn’t it make sense to start off so small that you don’t really need a lot of money, $500,000 a million dollars and then build over time, over time, over time until you earn every dollar and every bit of growth, so that you don’t have to go through this?
Naval: Yeah, I think the great companies, the founder has been thinking about the problem for most of their waking lives, most of their waking adult lives, and you really want to raise money about two years before the market is ready for the product or at least somewhere between 6 months to 24 months, because the life span of companies usually measure in the 2 to 4 year time frame before. If you don’t find product markets within two to four years, people get tired or bored or wander off, or the investors will get antsy and the company structure will collapse. So, you don’t want to be too early. So in that sense you want to think about the problem for a long time, raise a small amount of money and prove out your hypothesis. And once it’s clear that it’s working, then you want to raise a lot of money, if you need it. If you don’t need it, don’t raise it. And you always want to do it on your own terms.
Andrew: All right. So your vision, what’s the utopia that you’re building towards?
Naval: Oh, in a utopia, a founder would give us their URL and their bank account number and we’d send them the wire and an investor would pull out their iPhone with their square attachment or their camera and just swipe their credit card and buy shares.
Andrew: What about, I mean, how do you make sure that the investor knows that the company is really going in the right direction, that the entrepreneur is the right entrepreneur for this business and for business in general? How, I mean what are you driving towards? What’s the efficient market that you’re hoping to create?
Naval: There’s a current model, which is the entrepreneur and the investor have a relationship or they build a relationship and get to know each other. There’s a newer current model, which is a little more risky, which is based on social proof. But in an ideal world, just like there are analysts in the pubic market that analyze companies and in theory you trust them although in reality a lot of them are co-opted by the company they cover, there would be analysts or other people in this market who would be able to send you signals saying, “I know this founder. I worked with them for a decade. You should trust them. I know this company or this market. I have some insight into it and I will validate the statements and claims that they’re making.” So I think you can bring crowd and social efforts to bear to make the process simpler and easier. And what I would like is nirvana. We’re not going to get there for decades. But it’s a long-term industry movement. It’s not something any single company or entity or individual can make happen. But I do believe we can take steps towards that path, make it simpler and easier. And the easiest way to see that will be that the amount of paperwork and the amount of time that it takes to do a financing will go down. If you look at Y Combinator today, a lot of great companies that are already fairly established and could raise angel money go to Y Combinator because they know that it is a brand like a Harvard or a Stanford. Having that stamp allows other investors to filter very quickly and say, “These guys probably aren’t crooks. They’re probably pretty hardworking. They’re probably technically smart, and they probably have built something or are capable of building something. Otherwise, they wouldn’t have made it through the Y Combinator filter.” TechStars and i/o Ventures and AngelPads all do the same thing as well.
Andrew: I was talking to the founder of DreamIt, and he’s been doing really well with this little, what I thought when I first heard of it as a Y Combinator imitator in the middle of nowhere Philadelphia. He’s doing really well. How are these smaller guys who aren’t Y Combinator and TechStars or even DreamIt today, how are they doing so well in this incubator business?
Naval: So what’s happening is venture capital used to be the bundling of advice, control, and money. And then angel investing came along and kind of threw out the control, and it’s advice and money in a bundle. And I think what these incubators are doing is they are unbundling the advice part. So they’re giving you, they’re not like the old incubators where they’ll take 40 percent or 60 percent and you’d work for the founder of the incubator. Here they’re taking a very, very small cut. In exchange, they’re serving the strong filter function. It’s like having gone to a good graduate school. They’re putting you in a community of your peers so you don’t feel all lonely and working alone, and they’re giving you very good advice and introducing you to investors after that. So I think there’s room for quite a few of them. They can be geographically segmented or they can be segmented by investment class. So AngelPad for example focused on ex-Google people. i/o Ventures focuses on people who are friends of kind of the marquee founders. There’s FoundersDen, which is more of a co-working space, less of an incubator. And just like there’s a Harvard, a Stanford, an MIT, and a Yale, I think there’s going to be those equivalents in this space. And just like there’s a University of Phoenix and a UC system, we’re going to have a little bit of that too. So I think there’s room for quite a few players.
Andrew: Okay. Are there any that we haven’t heard of yet that are doing really well? Or that we aren’t as aware of their success that you’ve seen?
Naval: I’ve actually been very impressed by i/o Ventures and AngelPad. I feel like the quality of their graduating classes has been extremely high, probably because they’ve been keeping the numbers small. There are quite a few more coming up. LaunchBox is out there and is making waves. Capital Factory in Austin has a really good kind of a view on the Texas startup scene. So I think there are a lot coming up. It’ll be like colleges. You’re going to have to start keeping a list eventually.
Andrew: All right. What else do I want to know? Did I get to all the failed attempts at Venture Hacks? What else was there?
Naval: There were a couple others in there. There was, we had a Google group that was for exchanging deal flow. We had a Yammer group that was for messaging and communication. We tried our own little Hacker News style Q&A site, but more around fundraising and much less around kind of all the Hacker News geek topics. So we tried a whole bunch of stuff. I actually kind of lost track to be honest.
Andrew: Naval, I got to ask you this. I feel like I should be talking just high level stuff and then I get back to the personal stuff, but I can’t help it. Why aren’t you discouraged by that? You’re someone with a lot of credibility in this space. You’re someone who needs credibility in order to do business. You’re a human being too. You tried these different shots on your own project and they don’t work and they don’t work publicly and they don’t work publicly with people who you respect and admire and want to work with. And still you keep on going. Why? And how? How do you do it? Be open with me on this.
Naval: Sure. So there’s two reasons. One is, I think like anybody who sets out to do anything great, I had the demons of my childhood, and so those drive you. One phrase that I heard that always stuck with me was until you’ve seen, once you’ve seen the bottom, you can’t stop till you see the top. So, just you get a drive built into you that’s sort of made and you can’t turn it off and that’s who you are, and I fully embrace that. I’m not ashamed of it. Secondly, I think to accomplish anything great in life you have to be willing to start over from scratch. There’s a certain purity to it. So if you look at the bands that do really well, like the U2’s and the Madonna’s of the world that are constantly reinventing themselves, new genres, new backup singers, new styles. If you look at the great authors, their subsequent books usually aren’t sequels, they’re complete restarts. And you can’t do those unless you’re intellectually honest and willing to fail. All greatness and all creativity comes through repeated failure. And if you’re not willing to suffer the failure, you can only be great once.
Andrew: What was, and before I ask this question, something happened to the mic when you moved the computer. Is your hand on the mic or did you? Okay. What . . .
Naval: Maybe that’s a little better?
Andrew: Yeah, a little bit. What are the demons that you’re not afraid to talk about publicly?
Naval: Oh, you know, it’s the usual story, poverty stricken, immigrant family, etc., etc. Nothing especially . . .
Andrew: Poverty stricken in the U.S.?
Naval: Well, essentially we didn’t grow up wealthy or anything. We were immigrants in New York and divorced parents and kind of that whole story. But it’s not . . .
Andrew: You know, I volunteered at Dale Carnegie for a long time, you know, How To Win Friends and Influence People, and they taught us that if you teach with one example, one story, people understand much more than that one little story and much more than one sentence ever could. So can you give me an example of one story that stuck with you, one example?
Naval: In what context?
Andrew: From when you were a kid. When you look back and you said, because I can think of, for me I’ve admitted my demons. I would want to talk to a girl and I got a vision of one person from college. I couldn’t even walk over and talk to her. And I would say, “You’re going to work like a madman until you do so well in life that you can hire people who are going to teach you to solve that problem.” Was there one incident like that that is your demon, that represents your demon?
Naval: There’s no single incident. I do remember when I went to college, you know, my first year there I had three jobs, and it was delivering newspapers and washing dishes and those kinds of jobs in the school cafeteria. And you know if you’re the 17-year-old kid and you’re working in the cafeteria and you’re washing dishes and all the other kids are out there kind of having fun and eating, it sticks with you. It makes an impression. And I said, “Well, this is terrible. I don’t want to do this.” At the time, I was majoring in English and history. And I was like, “Okay, if I keep doing that, I’m going to continue doing this and it’s not the way to go.” So I actually went and smooth talked my way into tutoring an advanced computer science class when I was completely unqualified. I didn’t even know the subject matter at hand. So then what I had to do was I had to learn the material well enough the night before that I could be at tutoring level the next morning in the class. And that was a seminal point, because it showed me a few things. One is you can get to whatever you want to get to. You just have to care about it badly enough.
Andrew: I see. So now when you started Google Group and you get investors and entrepreneurs to care about it and it doesn’t really go far enough, you think back to that moment and to experiences like that and you say I can’t stop, I got to keep going?
Naval: Yeah, at this point the drive is so built in, I don’t even need the anecdotes.
Andrew: I see, okay. All right, I get that.
Naval: It’s all emotion at this point.
Andrew: Before I move onto the next bit of point, next section of my outline here, I got to ask you are you calling me, are you Skyping me from an Apple store? I see boxes of Apple equipment everywhere. Where are you?
Naval: Yeah, that’s our office. Everyone’s all Mac around here these days.
Andrew: I see, and you just spring for new Macs for everybody before Christmas?
Naval: Well, I actually bought two this year for myself.
Andrew: I see.
Naval: Actually, Nivi, I’m sorry to say. So Steve Jobs has a good hold on me.
Andrew: What’s the favorite one that you got?
Naval: I got the new 27-inch iMac, which is incredible. I never thought I’d buy an all in one computer. I like to think of myself as more of a geek than that, but it’s a really beautiful package.
Andrew: All right. That’s the box I think that I see right over your shoulder on the shelf. Is it rude by the way for me to look over your shoulder as you’re answering questions and as I’m getting serious and spy to see what’s going on in your office? No, right? Show me around.
Naval: Nivi just walked in.
Nivi: How are you doing Andrew?
Andrew: Who is that?
Naval: That’s Nivi.
Andrew: Oh, Nivi.
Naval: My Venture Hacks partner, Nivi.
Andrew: I knew one of these days I’d get Nivi on Mixergy. I’m happy to do it today. Okay, so finally, my audience would be very upset if I didn’t ask you for advice on how they can raise money through AngelList. If they see what’s been going on and they want to be part of it, give them some advice on how they can stand out.
Naval: Yeah, so AngelList is not as curated as it used to be. So what used to happen is startups would apply, we’d reject most of them, and the ones that we thought were ready to get financed we’d e-mail out. Now it’s much more of an open community, so even though we e-mail out the top startups, the rest can still go onto the website, the angels can log in, they can take a look. The startups choose who they’re visible and exposed to, so there’s no issue about being open to too many people or competitive interests. And even the ones that we don’t e-mail out can often get intros and investments and sort of get crowd sourced up to the top. So you can put your startup as soon as you’re ready to go raise money. But in terms of actually successfully having a great financing, we’d really recommend that you have your product ready in alpha or beta form, especially if it’s a web product. Investors are very visual, like everybody else. You get a little bit of customer feedback with some early traction, so you can demonstrate that people actually want it. You have a provably good team; you got your Stanford or your Harvard or your ex-Facebook person, if at all possible. And if not, you know, point to your GetHub repository or your great blog or your great Twitter account. And then you have a little bit of social proof in the form of good investors or advisors who are surrounding you and then bought into the idea.
You don’t need all of those, but usually say we say on team, product, social proof, and traction, try and have at least one that is outstanding.
Andrew: What about on the other side? It used to be that every guy who I met wanted to be an entrepreneur and build a startup. Today what I’m noticing in small groups of people, most of them seem to want to be angel investors. They want to go and build a company so they can be angel investors that everyone would want to know them and court them. If they go to do it, what have you learned about being a good angel investor?
Naval: I think it’s really difficult. It’s a good way to lose money, so you want to be very careful. You definitely want to get on AngelList just so you’ll see all the deal flow and you’ll get enough data points. The hardest thing as an angel investor, it’s a very hit driven business. One out of 20, 30, 40 companies return most of the money. So, you have to do enough investments. If you’re going to do less than 20 investments, don’t bother. Your odds of finding a hit are too low. And you want to see enough data points. So you want to get on AngelList, your early investments you want to make them alongside other people who are more experienced, because they’ll have a good nose for what bad terms or a bad situation might look like and how to solve it. So I would say go very, very cautiously. Treat it like starting a company, but there’s a learning curve and you need to do it lots and lots and lots of times before you figure it out. And even then, you’ll never completely figure it out.
Andrew: And the way to do that over and over, is it possible to do it outside of Silicon Valley?
Naval: Yeah, it is. We get a lot of deals funded in New York. We’ve gotten a couple done in Canada, a few in Europe. It’s just harder. The communities there are smaller. I would say the two most viable angel investment communities are in San Francisco Bay Area and in New York. After that there’s a pretty steep drop-off, but it’s still possible in about another five to ten cities. And then if you’re not in one of those ten cities, than it’s really difficult. I probably wouldn’t do it because there’s probably no downstream Series A or Series B investor community to further fund your companies.
Andrew: I see. All right. I could do a whole interview just on that and I’d be fascinated with that, but we only have a few minutes to go. So I’ll end with two questions. First of all, I see on the top of Venture Hacks, you have incredible quotes, these short testimonials that every time I go there I think ah, if I only had that then Mixergy would be just like Venture Hacks. Well, now I got Naval here. Can you give me a testimonial if you believe it, and if you don’t, can you fake one for me for my audience?
Naval: Yeah, you know, I feel like this is actually the most thoughtful interview I’ve probably ever had. I’ve never been confronted by an interviewer who has done their research, hounded me on the tough topics while still keeping a smile and a positive attitude through the whole thing. So I’m pretty impressed. I’ve gone through interviews with the Journal and The New York Times where they haven’t dug up this stuff or done this level of homework.
Andrew: All right. That’s great. I appreciate that. I was being quiet as you said, so that we can record it exactly perfect. Finally, you said it is a long process, and I understand that long painful period in the middle. What advice do you have for somebody who’s going through that period where there isn’t any, there isn’t growth, where things are just flat, but they know if they work hard they’ll get to that steep rise in the curve?
Naval: There’s a couple of little pieces of advice, all of which I think are pretty important. Number one, make sure you’re doing it with a great, great partner. It’s very hard to do anything great on your own for a long sustained period of time. You eventually just run out of steam. It’s like a marriage. You can raise a kid on your own, but it’s better with a partner. If you can do that. Second is make sure you’re learning, advancing a little bit every day. If you’re sort of just spinning in place, then maybe you’re not ready yet. And the third is you got to do something you really care about, that’s fundamentally who you are. Because if not, eventually you’ll run out of energy before you crack it. So just do something where you love it so much and you enjoy it so much that even if it doesn’t work out, you enjoyed the process if not the outcome.
Andrew: That’s a great place to end it. This has been an honor. Your name and Nivi’s name and your site, Venture Hacks, has come up in Mixergy interviews for about as long as there have been Mixergy interviews. And for about as long, I’ve tried to get one or the other of you to do an interview with me and it’s been hard. I’m really grateful to you for coming on and doing this interview.
Naval: I’m grateful to you for having me. It’s an incredible interview. I’m looking forward to the transcript myself to see what trouble I got myself into.
Andrew: I appreciate it. Thank you for doing the interview. And thank you to LearnBoost for hooking me up with this interview. Bye everyone.
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