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Informational Advantage, Social Proof, and AngelList’s 400 Million Dollars.

October 15, 2015

Monday’s announcement will be remembered as a watershed event within both the online equity funding space and the greater VC landscape. AngelList announced a dedicated $400MM fund (provided by CSC, a Chinese private equity firm with $12B under management) devoted to catalyzing companies raising capital on its platform through its syndicate model. This is undoubtedly a positive sign within the industry and bodes well for seed and pre-seed stage entrepreneurs seeking capital.

Of course, there would be those that might suggest it does a disservice. The simple knowledge of a 5-10 year capital base operating through the most well-known and established funding platform has the potential to create outsized and undeserved valuations too early; or, that by design, a platform whose strength lies on the ability of a select (and selected) group of syndicate leaders to broadcast their ability to pick winners now provides that select group with a long-term capital base to, at some level, ensure their talent in this regard becomes a self-fulfilling prophecy – either take is a possibility, though the end result will surely be more nuanced.

Sky-high valuations on one hand and on the other, power mongers with shotguns shells full of cash spraying and praying every which way-- both assessments are extreme and polemical, but it is usually the poles from which the loudest chatter speaks.

At its core, the announcement speaks to the patience of Naval Ravikant and the long-term viability and impact of online equity funding.

What this capital injection truly reveals is the informational advantage gained by all that raising capital through an online forum provides. Online fundraising has developed from a pipe dream to a niche-activity to a scoff-able last resort to vertically- validated to the new reality. It’s no longer a harbinger of things to come; it is where any upstart company with a defensible model should begin, unreservedly.

Why? Informational advantage. Through reaching potential investors at scale, entrepreneurs have the opportunity validate their solutions more efficiently than before. Does your team have what it takes? Does your concept ring true with regards to its potential? Is your market large enough to be attractive? Are investors willing to take the plunge?

As the capital raising process moves online, these questions will be answered with increasing efficiency and those providing conceptual frameworks that are worthy of investor capital will rise to the top, while those investors incapable of allocating capital will be wisely eliminated.

The informational advantages that previously existed to both entrepreneurs and investors will rapidly erode and a new efficiency will be brought to the angel and seed stage capital markets. Competition will increase substantially, valuations will increase accordingly, and early stage venture will collectively de-risk as a result. A true market will emerge and previous inefficiencies will begin to fall by the wayside.

Additionally, social proof will emerge as an increasingly telltale indicator of a company’s prospects for success. By reaching investors and experts at scale, the pretenders will be identified more easily and the true players that might have previously gone overlooked will be championed and recognized.

Those with domain expertise, either as investors or operators, will be beacons to which all founders are drawn, gathering a justified and more significant place of import within the ecosystem as a whole. Any domain expert interested in staying on top of new developments in her field will pay significant attention to related startups that are emerging and attempt to connect with those that she finds promising. A feedback loop will ensue where their product and outlook will improve by virtue of association with said domain expert and all at a much faster pace than ever before.

This ability to enable social proof at scale brings efficiency to intellectual capital as well as financial.

Now, let’s discuss the number. $400MM represents approximately half the amount of total seed stage funding annually. As reported, the $400MM is not a lump sum, but will be eased onto the platform gradually, over time. Nevertheless, we’re talking about a disruptive amount of capital coming from a large-scale traditional alternative asset manager – not the retail investors that platforms like AngelList (and FlashFunders) initially purported to target. A large, institutional foreign entity is now the primary limited partner across an (at this point) unknown number of seed stage venture capital funds.

Given the provenance and sophistication of this capital injection, I think we’ll soon see a major revision/retrenchment of the regulations surrounding online capital raising process. The impracticality and arbitrariness between 506b and 506c, the illusory financial burden of reg A+, and kicking of the can of title III are all up for review.

The venture world is changing faster than regulators can keep up with and capital will continue flowing in at steadily rising clip.

Or, in the parlance of our times, and as Startup L. Jackson tweeted in response to Semil Shah’s wonderful piece about the $400 MM deal: “the next 2-3 years are going to get cray.”

Topics: Industry

Vaughn Blake

Written by Vaughn Blake