33. AngelList Syndicate Investing (Gil Penchina)

The Full Ratchet Podcast DownloadNick Moran Angel List

Gil Penchina joins Nick on The Full Ratchet to discuss Syndicate Investing, including:

  • Gil Penchina The SyndicateCan you first provide an overview of your angel portfolio performance?
  • Why is it that you decided not to raise a fund?
  • How does the syndicate approach work on AngelList and why did you adopt this approach toward angel investing?
  • How many backers do you have, what does the composition look like and what is the average deal size for one of your syndicate investments?
  • So, I am a recent member of your group that helps evaluate and triage deal-flow… but for those in the audience that aren’t aware, can you talk about how evaluation and diligence works in your decentralized model?
  • How do you explain creating the biggest following on AngelList?
  • How long does your process typically take from first introduction to either a pass or an investment?
  • With the size of investments that you are doing, it seems you are in the Series A territory…  potentially even B.  Have you transitioned to more A or even B deals from seed?
  • Do you lead rounds?
  • You have a track record of having very positive relationships w/ entrepreneurs and, at times, have competed w/ VCs to lead rounds.  Can you illustrate why so many entrepreneurs pursue you for investment and also why they choose you over VCs?
  • You’ve had the experience of being re-capped to zero.  Can you explain how this happens and what early investors can do to avoid it?

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Guest Links:

Key Takeaways:


1- Syndicate Origination

Gil talked about how Syndicates emerged from the JOBS Act, which allowed an investor and up to 99 other investors, to group their investment into a Special Purpose Vehicle, like an LLC.  This permits one check to be written to the startup as opposed to 99 separate checks.

And AngelList, in particular, then handles all the electronic documentation and financial facilitation, such that the syndicate members don’t have to each spend the same overhead and time on the transaction that they often would.


2- Why Not Raise a Venture Fund?

Gil has the network, resources and background of many VC’s out in the valley.  Yet, he opted for the road less traveled and did not raise a traditional venture fund.  Gil mentioned that he probably would have raised a fund if it did not involve all of the lawyers, accountants and family offices.  And there’s also an amount of bureaucratic inertia that accompanies a fund.  Certain guidelines about % of ownership or control provisions might be required by LPs, for every investment.  And, realizing that he didn’t need a $1M check via a fund to make startup investments, Gil could avoid these burdens and limitations.

Of course, more recently, with new legislation and the evolution of Angel List Syndicates, he can now work with a group of 2,000 angels…. providing access to well-vetted deals and getting the benefit of a larger pool of smart individuals that can help companies become successful.  So, effectively, he can exploit the benefits of a venture fund without suffering the commonly cited challenges.  And his co-investor followers always have the final decision on investments that they make.  So, as opposed to a blind bet on Gil, it’s more of an informed vote-of-confidence.  Investors can say, I want to monitor Gil’s activity, process and deal-flow, but I still reserve final decision to invest or not.

And we haven’t even talked about the role of the entrepreneur.  In this situation w/o hard and fast rights and control provisions, the syndicate investment allows more flexibility, speed and founder-friendly terms.


3- The Recap to Zero

This is a big watch out and I’m glad we had Gil, with his many years of experience, to weigh-in on it.  As discussed w/ Joanne Wilson, this can happen in a predatory fashion where the startup is not experiencing extreme hardship, yet a VC mandates a re-cap to zero in order to take more equity.  When early stage investors don’t have any dilution protections or a pro-rata in place, they can be completely watered-out.  However, the scenario we talked about today was related to a situation where there is no choice.  The startup either dies or all the previous investors agree to the re-cap.  Due to external market factors or otherwise, the valuation of a startup may plummet, mandating an extreme down-round.  Now, clearly there are external factors that can not be controlled, like in Gil’s example, where Facebook shut off the ability to embed videos in the feed and, effectively, ended the business.  And his story here does illustrate a situation for early-stage investors to look out for when evaluating startups.  And that leads into our tip of the week, called The Channel Choke.


Tip of the Week:   The Channel Choke

Below is the “Tip of the Week” transcript from the Podcast Episode 33: The Syndicate (Gil Penchina):
In many cases we see a startup that is exploiting a trend or riding a thermal and they've built a feature or product that is exclusively used within one platform.  And there is a sole player that owns the platform and it's entire distribution channel.  A couple, off the top of my head include Amazon, Apple iOS and Google's search engine marketing.  Yes, there are competitors to these companies, but with each they have created a market and have total control over their channel of distribution and, ultimately, the offerings that will be allowed through the channel. I have seen situations where people build businesses on Amazon, with no brick-and-mortar, that are ended overnight b/c Amazon (more…)

*Please excuse any errors in the below transcript


Nick: Today, Gil Penchina joins us from San Francisco. He’s a veteran of some of the tech giants that have become household names and now spends a great deal of time angel investing as the largest syndicate leader on AngelList. Gil, it’s been exciting for me to become involved in your deal making community, and I really appreciate you joining us today.

 Gil: Thanks, Nick. It’s great to have the support and I’m hoping I can keep your listeners entertained.

 Nick: I’m sure that won’t be a problem! Can you start us off by walking us through your background and tech and how you got involved in angel investing?

 Gil: Sure, so I moved out here in ’97 and joined eBay fairly early on. So that was my first real startup. Prior to that I had done a couple of smaller tech startups on my own. I’m an engineer by background. So joined eBay in ’98 and was there for a number of years, and then went and ran a spinoff of Wikipedia called Wikia—left there and helped start Fastly, left there to help start Vouch—so I’m one of the people that when I get some free time, I’m trying to start a company. Of all the bad habits to have, I guess it’s not the worst one in the world. In my spare time, I really liked talking to entrepreneurs and learning about new ideas, and so back in late ’98, early ’99, I started angel investing, just as a way to sort of network and meet people and learn. And have since done almost a hundred investments from ’98 to today. Until AngelList came along, it was me just out there writing checks to people.

 Nick: Right. And so—you said ‘98/’99 was the first investment. When did you kind of switch over fulltime from operator to angel investor?

 Gil: I’m not sure I have! I mean, the syndicate stuff we’re doing now is slowly taking over my life, but I still help a couple companies that I founded fairly actively as well. It’s just that angle investing is taking up more and more of the hundred hours a week.

 Nick: So you said a hundred investments, which is just incredible, but can you touch on the performance of your portfolio and some of the exits that worked out well?

 Gil: Sure, uh, interesting companies from the portfolio include evite, and PayPal, and Military.com, and LinkedIn, back in the old days, and more recently companies like Indiegogo, and AngelList, and Fastly, and Wealthfront, to name a few. We just put a bunch of money into BP, which is really one of those sort of classic rocket ships. So it’s been—it’s funny, I always have to remember like…I mentioned like ten awesome ones, and there were ninety that I wish I could forget. So one of the things that I always tell people if they’re thinking about doing this is don’t plan to invest in one company or five. Try to do at least twenty. So set a budget for yourself like I did in the early days, and say “Okay, if I was gonna put a certain amount of money into twenty companies, what is that amount of money that I can afford to lose?” because when you’re doing one or five the odds of losing all your money is actually quite high.

 Nick: Right, and do you tend to reserve capital for follow-ons as well? Or do you take sort of that initial interest and focus your efforts elsewhere?

 Gil: Yeah, I—I mean, I’m like a fund. As an angel, you don’t really reserve money. Some deal will come in, and later on a VC will invest and—you rarely actually get pro-rata rights as an angel. A lot of times, I’ve found that the venture capitalists sort of find a way to, quote-unquote, screw you out of it.

Nick: Yep.

 Gil: But it’s not like I would reserve money for it. If it showed up, I would have to look at my checking account and say “Okay, how much is this investment and how much money do I have in the bank right now, and do I want to do this or not?” But I’ve actually been very disappointed by how many times I did not have a chance as an angel to invest on follow-on rounds. And that’s why the syndicate is fairly aggressive about asking for pro-rata rights, and trying to get them so we have those sorts of options.

 Nick: Gotcha, and I’ve read some snippets from your past about choosing not to raise a fund and instead keeping sort of your angel approach. Can you talk about why you didn’t raise a formal venture fund?

 Gil: Yeah, I mean, my joking answer was always “I totally would have raised a venture fund if it wasn’t for the fact it involved lawyers and accountants and family offices! People I don’t like.” But the reality is, the thing I enjoyed about investing was meeting interesting people and getting a chance to help them. And I could do that with my five or ten or twenty-five thousand dollar check. I didn’t need a million dollar check to do it. And so all of that administrative burden that came with opening a fund just felt like a lot of work that wasn’t necessarily very beneficial to what I liked doing and what I was good at. I think the difference with AngelList with the syndicates is that I’m not just helping me, I’m helping now two thousand people who are able to get in on deals with us, and we’re starting to find ways to help those two thousand people in turn help companies. And so really trying to build this uprising where the angels can come together as a group and be more effective and more successful, both at getting into good deals and also actually helping companies become successful.

 Nick: Is part of the reason you’re focused on AngelList because there’s less overhead and legal requirements, side documents and such, because they have more of a platform and some standardized approaches?

 Gil: Yeah, you know, it’s a truism in internet startup land that if you make things easier, more people will do it more often. So AngelList certainly made it more easy to launch your own venture fund. Anyone can start a syndicate and start investing and see who will follow them. That doesn’t necessarily mean they’ll get into good deals or have good judgment. So you have to sort of—it’s a market like any other market. You have to evaluate each deal and decide when you want to do. So it did certainly make it easier for me to do something I would have done anyway. And then, frankly, just the number of people involved has been incredibly gratifying to me. I mean, the amount of emails I get from people who are thanking me or offering to help or going out of their way to help without me even asking has really been remarkable and is really one of the wonderful things about it.

 Nick: Yeah, so, Gil, we have a number of entrepreneurs in the audience, and a majority are investors that may be operating at a local level, maybe doing equity crowdfunding—just so that we’re all on the same page, can you give us all an overview of the syndicate approach on AngelList and then how you’re using syndicates with your group?

 Gil: Right. So, syndicates come out of the crowdfunding law. And the crowdfunding law basically said if you’re a credited investor, you and up to ninety-nine of your friends can pile in together into a SPV, or Special Purpose Vehicle, like an LLC, and you can all put money into that LLC, and that LLC can turn around and write a single check to the startup and not cause a bunch of problems for the startup that happens if they get over a hundred investors. There are a bunch of reasons in other regulatory parts of the federal laws where you don’t really want to have a hundred or five hundred or two hundred shareholders. So a lot of entrepreneurs wouldn’t want a thousand dollar check from me because it’s too much work and paperwork relative to the value.

 Nick: Yep.

 Gil: What AngelList does with the syndicate is it lets me say “I am investing in this startup. If you would like to join me, you can click here to join.” All the paperwork is DocuSign, all the paperwork is electronic.  all the money transfer is through ACH or wire transfer, so there’re no checks being mailed in. and AngelList helps facilitate collecting all the checks, putting them into one LLC that they run, and they actually have a professional fund manager who takes care of it so I’m not the one holding the checks, which is good—I don’t really want that responsibility. And then that LLC in turn will write a check to the startup and they get a single check from a big group of people. So that’s what a syndicate is. I now run about a dozen different syndicates on AngelList, and the reason for that is I view this investment opportunity more like Fidelity or Vanguard than like being a venture fund. And what I mean by that is I’m an investor in Greylock, and one of the Matrix funds, and one of the more David Al funds and a few other ones. And I write a big check into I don’t know what. I’m basically trusting generally six dorky white guys in blue jackets to take that money and invest it in stuff and make me money.

In the AngelList syndicate context, you may back me or one of my funds for a thousand dollars or a hundred thousand dollars, per deal, but it’s per deal and each deal you get to look at and evaluate, make a decision whether or not you want to back out or write a check. And so what we saw is different people have different hypotheses about what’s gonna make money. So rather than just having a fund where you follow Gil, we’ve tried to build market oriented funds. So we have a financial services fund. We have a SAS fund for software and service. We have a marketplace fund. We have an ad-tech fund. We have an ed-tech fund. We have a Bitcoin fund. We have an internet of things fund. And people can self-select into essentially a mailing list by backing us in those funds, see that deal flow, and then make their own choices. And so rather than you getting flooded with deals of every possible color and flavor, you’re able to sort of pick the type of deals you’re interested in, and evaluate a smaller group. So we just think it’s more efficient, and then I’ve been recruiting partners to help me manage these various funds and I’m still looking for partners on fintech and ad-tech and some of the other ones as well.

 Nick: Gotcha. And there are a number of established venture capitalists and angels that run syndicates on AngelList, but you seem to have the most significant following and have put the most money to work through these syndicates. How do you attribute the growth of your group and how have you achieved this level of angel investment in such a short time?

 Gil: Uh, clean living? In all honesty, I’m not entirely sure I really know why, but I’ve been asked the question enough times that I’ve had to try to think about it, and…I can attribute the success, or some of the success, to a few different things. I don’t really know what the right answer actually is. When I look at all of my peers who were angel investors in ’98 to 2005, every single one of them is a venture capitalist now except me. Whether it’s Reid Hoffman, or Josh Kopelman, or Jeff Clavier, or Dave Warden, or—I mean, you just go down the list of all the people I was investing with in that era, they’re all VCs now. And seem to have been the one hold out who didn’t get the memo. So from that standpoint, what it means is when I went on AngelList, I was one of the few early syndicate members who actually had a five plus year track record. I had a fifteen year track record. And I think that gave me some advantages.

The other part of it is, you know, a lot of my friends and peers on the syndicate list—people like Jason Calacanis, or Tim Ferriss, or Elad Gil, who are all great investors—are also busy and have a lot of other stuff going on, and so I was one of the few, if not the only one, who sort of made this something I was willing to put forty hours a week into. So good time, good preparation, lots of hard work, a little luck—some combination of that is my guess.

 Nick: And can you talk about how many backers you have in total and how much money has been put to work, as well as the average deal size of investments?

 Gil: Yeah, so, we, uh—we have over two thousand backers now and my current forecast is that we will—and that’s, you know, up from zero essentially a year about—and I expect to get to about ten thousand by the end of this year, which is really a crazy number.

 Nick: Wow.

 Gil: Yeah, that’s usually what I say.

 Nick: You’re gonna need some fund managers, Gil!

 Gil: Yeah, we need a lot of help. Andi often tell people, you know, my email’s gilpenchina@gmail.com. If you want to help, let me know. We have people all over the place helping in a variety of different ways. So that’s the backer size. We were just getting started in Q1, and started doing this more seriously in Q2 and later through the year, and lastly we invested in total about 8.7 million dollars. By comparison, I think we’re gonna do three million this month, in January. So my current forecast is we’ll do something between thirty and fifty million dollars of investing this year. Which is a pretty healthy growth clip. And quite exciting.

 Nick: Maybe we can talk about this a bit later, but is it beginning to creep into a Series A or Series B with the amounts escalating to that level?

 Gil: Yeah, we’ve actually lead two Series As, written term sheets, priced them. We’ve put money into a B and a C, and we’re very active in the seed stage as well. Our typical check size is two hundred thousand, five hundred thousand, and a million dollars. We’ve done a number of checks at each of those sizes. Our biggest deal was BP where we put 2.8 million into a very large round lead by Foundation.

 Nick: You mentioned before that you’ve created this group—it’s a very innovative model of evaluation and sort of triaging your deal flow. And you talk about how this works and how you get your evaluation and diligence completed?

 Gil: So each of the teams—SAS, fintech, ad-tech—have their own team that are out looking for deals and evaluating deals. I get now a crazy amount of inbound because my syndicate, the one with my name on it, is the number one syndicate on AngelList—our late-stage syndicate is third largest, our SAS syndicate is the fourth largest. So when you go to AngelList looking for funding, we show up awfully often. And that has certainly brought in a lot of deal flow. And then we have volunteer lists, volunteers on our mailing list, who also help source deals, look at deals, evaluate deals, you name it. So there’s the whole team. Nowadays a deck will come in, we’ll ask for some metrics, and there’s a team of people out there looking at it.

 Nick: So I’ve talked to a lot of angel group leaders and angels as well as venture capitalists about the time it takes from introduction to an investment is made, or eventually a pass, can you talk about the amount of time it’s taking you and your team from the time you meet and entrepreneur until you make an investment?

 Gil: Yeah, we’ve made decisions in a day, and we’ve made decisions in three months. It—like any VC, you’re looking at a combination on intangibles, products, traction, team, market, idea. And sometimes you meet someone and you go “Oh my god, that’s amazing and you’re amazing” and “When can I write a check?” A lot of times, you meet people—my joke is that it’s sort of like dating. Most of the time you go out on a date, and you’ve got to think about it, and you call some friends, and you find out a little bit about the person, you wanna meet them a few more times, and so really varies. But we try to be really efficient, we try to do a lot of it by email. A lot of the deals we’re looking at already have data, and so we can sort of run a lot of analytics from the data without bothering you as the entrepreneur, and that seems to—people really seem to appreciate that.

 Nick: Now we’re on entrepreneurs. You have a very positive track record of relationships with entrepreneurs, and at times a polarizing track record for track records with some VCs and some insider VC rounds, so to speak.

 Gil: What I would say it I like disruption. I like change. I’m constantly trying new things. and so a lot of the things we’re doing are inherently disrupting to venture capitalists, much like a lot of angel party deals that were happening a year or two ago pushed a lot of VCs out of doing seed or early A into doing larger later stage checks. So I think what we’re doing is just sort of pushing further venture capitalists into the larger check zone, while letting angels become empowered to do sort of the earlier stage seed and Series A stuff. And from that perspective, I think everyone is really excited about what we’re doing, and I meet with a lot of VCs who are trying to figure out how to work with us and what it means to work with us and how they should think about us, and all that sort of good stuff.

 Nick: You ever had a situation where you took over the lead from a venture capitalist what was trying to lead a round?

 Gil: Yeah, we—we have definitely outbid a VC for a deal, and that’s great, and honestly that happens all the time. It’s a free market and entrepreneurs are always looking for the best deal they can get. So that’s really nothing special other than it used to be that angels had the firepower to do that for two hundred thousand dollars and now we have the firepower to do it for two million dollars.

 Nick: Right. And I’ve read that you’ve put maybe less focus on price and maybe pro-rata than some other investors. Is that the case? And if so, why?

 Gil: Well, so, we obviously would like to get a good price and we would like to get pro-rata, but the real difference if you think about it is the six dorky white guys in blue jackets ultimately have this whole bureaucratic inertia of an LP agreement and a set of things they’re trying to do and they have all these things that when you’re an entrepreneur they’ll tell you “Well, we need to have pro-rata, and we need to have twenty percent ownership, it’s a rule” and I go “It’s a rule, where?” and they go “It’s a rule!! Have this ownership percentage thing and we have this board seat thing and we have this other thing. And we need veto rights on this. And we need information right son that.”

And as an example, we had one deal, we were bidding against a VC and the VC had all these control provisions and things they wanted, and the entrepreneur was really sort of frothing at the mouth over how much control we was giving up and had called me and I said “Those things have value.” Right, I understand why the investor wants those things. “So I’m happy to make you an offer that doesn’t have anything of these things, but the price would actually be a little lower because I’m taking more risk. But if you want to have more control and you’re willing to accept a little lower price, I’m willing to make that trade with you.” And he ended up decided to go with us and traded a five or ten percent lower price for a whole bunch of things he found very unpalatable about venture investors.

And so what I tell people is we don’t have that rulebook. We don’t have those LP agreements, we don’t have Stanford or Kelpers breathing down our neck asking why we deviated from our rulebook. We’re much more entrepreneurial and we’re much more entrepreneur friendly because everyone on the team is entrepreneurs and has been at startups or run startups. And so we view the world the same way they do and we understand what’s important to them, and we throw out our rulebook when we have to.

 Nick: Gotcha. So pro-rata wouldn’t be a requirement then for an investment depending on what the price is and some other provisions.

 Gil: Yeah—you know, my joke is investors ask for lots of things, that’s one of the things we ask for.

 Nick: Doesn’t mean you’re gonna get it.

 Gil: Life is about tradeoffs.

 Nick: You’ve had situations in the past where you’ve been recapped to zero in a downstream financing from a venture capitalist. Can you talk about how that occurs? Maybe a story or a situation that you’ve bene in—and what early stage angels can do to prevent that from happening?

 Gil: Honestly, there’s not much you can do to prevent it. So your company goes out and raises money and it’s growing and it goes out and raises more money, and then something geos horribly wrong. It could be—Viddy which was growing literally to the moon at some astronomical tens of thousands of percent a year rate, until Facebook turns off videos in the feed, and their growth rate literally plummeted within days to almost zero. And they’re sitting on this big venture capital round with lots of money and the VC all of a sudden realizes they’re an idiot. It happens. You can’t predict the future. It’s why it’s—they joke it’s a risk business. So in those instances, a lot of times what’ll happen is when the company starts running out of money, the VC has a veto on any future financings, and so they get to play hardball and say “Well you want to raise more money and not go bankrupt, great, what’s in it for me because I already look like an idiot.”

And so you’ll see things like the Friendster cram down round where after client had already put in a ton of money into Friendster, they turned around—I think the Friendster evaluation was in the fifty million, hundred million, two hundred million range, and they turned around and organized a three million dollar financing at two pre, where they effectively bought sixty percent of the company for three million dollars and crammed everyone else out. Including management. And they could do that because the alternative was bankruptcy because they said “Well, any other offer we’re gonna veto and we can because we’re VCs. It’s what we do.” So the only thing that saves you on a deal like that as an investor is if you have pro-rata rights, you can at least buy your share to keep your ownership percentage. If you’re an employee like my friends were, you’re screwed and there’s absolutely nothing you can do about it.

 Nick: Either let the company die or accept the down round, huh?

 Gil: You get screwed or you get screwed.

 Nick: Okay, that’s crazy. Do VCs always ask for that veto?

 Gil: Yup.

 Nick: Not much you can do in that case, then.

 Gil: No. There are people who go to non-VCs, right. There’s people who do convertible debt and never raise another round. There’s people who come to me and—where that’s the important thing to them, and there are people who raise debt like Softlayer, which IBM bought for over a billion dollars. Never had any VC. They leased all their equipment and used all that money to pay for everything. And they were hand and mouth for years, growing at whatever rate the banks would let them borrow money at.

 Nick: There are alternative strategies, then. Continual fundraises ‘til Series Z.

 Gil: Yep.

 Nick: So, Gil, what’s the best way for listeners to connect with you?

 Gil: You could find me on Facebook. You could email me—my email is gilpenchina—G-I-L-P-E-N-C-H-I-N-A–@gmail.com. And you can find me on AngelList. So I’m—I get lots and lots of people reaching out through all three.

 Nick: Well, Gil, it’s a pleasure being part of the team, and thanks so much for the time today. I’m sure your insights will be really valuable for the listeners. And look forward to hearing more about what your syndicates do in the coming years.

 Gil: Thank you, Nick.