ARENA VENTURES Taps AngelList to Merge Crowdfunding and Venture Capital

LA Angel Investor Paige Craig met New York-based Fortress trader Jeff Lo through a mutual friend in Vegas in 2012, in a conversation that started about poker — namely, why Lo liked to back good players. Turns out that Lo staking players was a lot like how Craig sought and backed early stage founders in the VC space.

Over the course of the conversation, the pensively fascinated Craig took keen note that the two of them have a mix of scientific / creative brains for understanding people.

The friendship led to informal Angel investing a few months after that, in which the two ran ideas and deals past each other. In the ensuing years, they always talked about doing something together, but it wasn’t until late 2014 that they worked out a proper framework.

Paige Craig

The two bounced around ideas and looked at incubators, accelerators, seed funds — the whole gamut of options — but around Thanksgiving 2014 the two decided to build a VC firm.

Says Craig of Lo, “This is a guy I really like — we have common values, but we’re also very different. I’ve always been the guy in the trenches looking at founders super early, and Jeff knows how to start a fund, how to run a fund, how to look at growth deals, this hands on experience looking at a company after it started to scale… and I realized we had very complementary skill sets. A lot of guys I looked at partnering up with in the past were a lot like me — we had extreme overlap on our capabilities, it was like two exact guys trying to do the same thing.”

So the two sat down after the Thanksgiving holiday and hammered out all of Arena Ventures in Lo’s living room in New York over three days. And then months of filing paperwork and fund formation ensued.

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Jeff Lo

When Arena Ventures officially launched a couple weeks ago, they closed their first fund at $37MM and already had 16 portfolio companies, many of them brought in from Craig and Lo’s own personal investing stables — companies like Laurel & Wolf, Honk, Plated, and Reserve.

And in addition to raising a closed fund of Limited Partners like a traditional VC firm (an area of Lo’s expertise), Arena knew that it was important to tap into the new wave of money coming from accredited investors as the final portions of the JOBS Act came into law — something Craig has seen on the horizon for years, having been an early investor in AngelList.

Craig laughs when recalling a tale of hanging with the AngelList founders at SXSW 2010: “I was with Naval Ravikant, talking about capital disruption, how equity crowdfunding is going to change the world, I think maybe 20 people showed up,” but here we are five years later, and Arena is using AngelList to build a syndicate of accredited investors who can invest in companies alongside Arena.

“Normal VCs make a bunch of money for a bunch of already rich dudes like ourselves and other people, but equity crowdfunding is a movement Jeff and I both believe in. What if we could create a fund where you can unite both — we can have a very strong fund and full-time team, all we do is find deals, support great deals, and reserve capital to keep investing in these companies.

“But what’s interesting is we can go to the equity crowdfunding world, and go help all the people out there — you don’t have to be an insider. You could be a New York professional. You could be a Hollywood agent or a small business owner in Utah.

“We have syndicate backers in Turkey, London, Singapore, all over the world, all over the United States, as long as you are accredited [$200,000 annual earnings for past two years or $1 million in assets not including your primary home]. Roughly, that’s 2.5% of America — tens of billions of dollars that could come to early stage investing.”

Says Craig, “A lot of crowdfunding is a tiered democracy, a pure shitshow — because it’s all party rounds, there’s no leader in the pack. My idea is your VC acts as an anchor. All we do is find great deals and support them. The public gets to back our deals. We’re the guys who do all the hard work — not just up front, but also years going forward, but this can give confidence to everyone else.”

Arena’s AngelList Syndicate currently has over 300 backers, but AngelList keeps the number of backers in a given deal at 97 — so each deal is first-come, first-serve, at a financial level the investor is most comfortable.

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Arena Portfolio Companies

So how does this thing work?

Arena has two tiers of investors — first, Funded Backers who have already put money into escrow with Arena on AngelList, to be deployed into Arena-backed companies at the amount they wish; and second, Unfunded Backers, who only put in money on a case-by-case basis when they want to invest in a certain deal.

Funded Backers get first dibs on the deal, and the Unfunded Backers get to fill out the deal if there is room left — say, if Arena is looking to put $500,000 into a Seed Round for a Company they believe in, and they do not raise that full amount from the Funded Backers, then the Unfunded Backers get the opportunity to invest.

Both parties are given a ton of information on the Company, all prepared by Arena — presentation decks, outlined analysis, video Q&A’s (with questions supplied by the Backers on webinar site Crowdcast), basically, as much data as the founders of the Company are comfortable offering.

Funded Backers are given five business days to review the materials and decide if they wish to invest.

After that, Unfunded Backers are then given time to review the materials and decide if they wish to invest.

The one thing that might not be clear on AngelList is that when you decide to back a Syndicate, the Backer is asked at what investment size you want to back that Syndicate with.

If you as a Backer have $100,000 and think you may invest in 10 companies that year, most people would average out and think they should back the Syndicate with $10,000. You can always invest less (or nothing at all) in each opportunity; however, you aren’t able to invest more than that amount.

If you want to invest $20,000 in a company but you had initially stated your backing amount was $10,000, well, you’re capped at $10,000 per investment.

Therefore it is best to back a Syndicate at the highest check you think you will write for a given deal– but don’t input your limit at $100,000 if you don’t ever plan on writing a $100,000 check — maybe $20,000 or $25,000 is more appropriate for the optionality to invest more in a particularly attractive startup that speaks to you.

Craig likens being a backer of a Syndicate to making a reservation at a restaurant — if you sign up as a Backer, you can still back out without consequences, but inevitably after some time such members would be dropped in order to make room for others. “When you come to back the Syndicate, it is simply an expression of interest.”

Throughout the conversation, Craig talks very plainly of transparency, trust, and giving investors all the tools they need to make informed, smart decisions, “When we find a deal, we’re very transparent. What we didn’t like about other approaches is that people shop a label to you and basically say, ‘Trust me and invest.'”

Craig walks through the timeline in the decision-making process, favoring a solid five-day review period (plus a heads up in advance) instead of a rushed, “Dude, ya gotta invest in this deal right now” approach that has burned starry-eyed neophytes in the past.

Says Craig of rushed deals others have offered in the past, “Unless I have previous knowledge or immediate access to the founders where I can go figure it out, I’m gonna pass — I don’t like hot deals, I like deals that are genuinely hot because I am internally excited by the potential of the company.

“When a lot of people say ‘hot deal’ that means a lot of people are buzzing around it, but that buzzing could be buzzards over a dead carcass or a bunch of flies over a stinking pile of shit.

“We’ve taken the approach of educating our investors, giving them enough time to make smart decisions. I’ve seen other investors use urgency to cram money into deals; it works in the short term, but in the long term people won’t trust you if you take that approach.”

And when it comes to what types of companies Arena invests in, it always comes down to the team.

Craig notes that Arena doesn’t invest in verticals such as AdTech, Consumer Package Goods, pure content plays, or complex enterprise IP, but are otherwise open to a wide range of both B2B and B2C companies — “We’re looking for companies where we can see in the earliest days that there is a business or consumer willing to pay for the product you’ve built. We also look for unique, scalable ideas — founders who come to us and can boil down their whole business to one or two critical insights that are going to lead to an amazing outcome some day.”

Craig also notes that deciding on companies in which to invest is a collaborative process amongst the team of six, who work together on a daily basis, talking about the ideas, companies, and the people who come across their radar.

See: How Arena Finds Companies to Invest

When asked about the state of tech and finance in LA, he’s bullish on both, noting that he sees more friends and associates moving to LA on a frequent basis, as the diversity of industries in LA provides an alternative to the all-tech all-the-time bubble that can inhabit the perspectives of our neighbors up north.

He notes the collaborative atmosphere between investors here has made it a healthy ecosystem for seed funding, and that many of the established VC firms from the Bay Area are coming down more frequently to scout startups they’ll want to invest in at the next stage.

“For those who want to invest, you can follow the lead of our Syndicate. We are opening angel investing to the world, and personally, I’m trying to create 10,000 new angels over the next couple of years.”

For more information, see also: Why We’re Merging Crowdfunding & Venture Capital

Author Description

Scott Perry -- LA Tech Digest founder

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