Sep 11, 2017 ยท 24 minutes

The response to our “Beyond The Series B” podcast series - curating the best advice from the Pando monthly archive - has been incredible.

In fact the only (not really) complaints we’ve received are from listeners who want more. There are so many hours of interviews, packed with so much invaluable advice, that we’ve inevitably had to leave out some great stuff.

Which brings me to a new series-within-a-series, starting today. You could call it “Beyond Beyond The Series B”: Over the next few weeks, we’re going to publish longer transcripts from Pando Monthly, Pandoland and our various other events and podcasts - giving you even more context, and even more wisdom from our dozens of guests.   

Today’s complete transcript comes from our PandoMonthly interview with Naval Ravikant, co-founder of AngelList.

If you are outside a major tech hub, raising venture capital may seem impossible. But Ravikant is one of the people who has made it far easier and far more likely.

Ravikant’s journey came in part after taking an extraordinarily rare step: Suing his own VCs. He legally can’t talk much about that case, but when I interviewed him on stage back in late 2012, we talked about lots of other stuff. Including, a trend towards too much power going to entrepreneurs and the “karma” of money. Words that could be repeated back to Uber’s CEO Travis Kalanick today…. Nevermind, Ravikant was one of many early angels in Uber.

We also talk about the role that Ravikant played in getting the JOBS act passed… the only bipartisan bill passed during Barack Obama’s first term. This was an era when lobbying and remaking laws in your own favorable image was new to Silicon Valley.

Ravikant says a lot of the things Valley insiders don’t like to admit. Like the reality that very few companies build something scalable, profitable and lasting, and the rest of us just hang onto their coattails.

Sarah Lacy: How many VCs actually are really nice to you, but the second you leave the room are like, "Argh!" There's a lot angst about Angel List’s impact on the industry?

Naval Ravikant: I figured you would give me at least two soft balls before we launched right into it.

It's funny. Generally, I would say most VCs who are on AngelList...almost every VC firm has a partner who is tech savvy or an associate or two who are tech savvy.

SL: I would hope every VC firm would have a tech savvy partner.

NR: You'd certainly be surprised. There are definitely VCs who are not comfortable using LinkedIn, or Twitter and so on.

SL: There're people on Facebook's board who don't really use Facebook.

NR: Yeah, I am not going to name them.

Generally, a tech VC firm that have one or two people on AngelList. We'll usually have a good relationship with those people.

It's an open book. We're not trying to hold anything back for ourselves. My dream is, someday I'll delete my admin account on AngelList.

Generally, most VCs have a positive relationship. I think there's definitely ones who used to be the king of the hill and their little niche, or their little town, or their little venue. By commoditizing and opening up the deal flow and visibility and making more transparent, they've lost some of their information advantage.

The Internet hates middlemen who rely on proprietary access information to make a living. To the extent that they were relying on information advantage, that's gone away.

SL: What’s the story about how you got here?

NR: It’s not terribly interesting… I came out and just got into it, and the Silicon Valley scene was amazing, never looked back. I'm surrounded by great people, great tech. Did a bunch of companies and efforts along the way, some successful, some failed.

I've failed more than I've succeeded. Everyone's journey is unique and interesting, and there is a lot of luck involved too. Some people win and they get to sit up on the stage and talk about how they're photo uploading app got sold for a billion dollars and yours went out of business.

[Instagram] did an amazing job and [Kevin Systrom] did incredibly hard things. Not to take away anything from him, but there were a dozen guys who came before him who did incredibly hard things in the same space whose timing was just pre-iPhone, and there are a dozen people who will come later and do innovations, because they're post Instagram they don't get that same outcome.

Timing matters an enormous amount. Who you work with...If you were PayPal in the early days and ended up in the PayPal Mafia you did incredibly well. There is a lot of luck involved in the whole system.

SL: How do you feel about that whole, where luck ends and begins, and where skill ends and begins? I think this is something people have a lot of angst over in the Valley, and I think they have angst if they've failed, but they have more angst if they've succeeded.

NR: Success doesn't bring that much angst. That sounds like something successful people say to make it sound like their lives are hard.

They need to be slapped upside the head. That's just idiotic. There is no question that you are better off than you were before you sold the company for a zillion dollars.

I reject those viewpoints that fly in the face of common sense. We are here to succeed, and if you succeed, you've won, and it's great, and you should enjoy it. If it makes you more miserable then there is something deeply, deeply wrong with you.

SL: When you say you're here to succeed, what do you mean by that? Is it about money? What is the goal for you?

NR: Money for a lot of people ends up being their score card. I was at an event before speaking at Berkeley, and there were about 300 people in the room. A lot of them were mentors, and entrepreneurs, and investors, and some very successful people. I said, "How many of you in this room have started a company?" A lot of hands go up. Then, "How many of you have sold a company?" Some of the hands go down.

"How many of you have sold it, and it was a profitable outcome you made some money?" Some more hands go down. "How many of you built a product that was unique and new? You weren't just doing a variation of what already existed, but it was genuinely new?" More hands go down.

"How many of you managed to actually sell that product to customers, to end users, and get them to pay for it?" More hands go down. "In volume?" Nobody. The reality is that the history of Silicon Valley is maybe every decade 20 or 30 new great products get created, and the rest of us ride off their coat tails.

Including me for most of my career. We get lucky and we sell our companies to them, or we get unlucky and we don't.

SL: Or invest in them.

NR: Or we invest in them, or we get a job in those companies.

SL: Underwrite the right PO.

NR: Or we underwrite the right PO or whatever it is, but the set of actual things that are truly creative is very small. That is the ultimate goal.

That's why people look up to Elon Musk and Steve Jobs and Mark Zuckerberg because they managed to create something brand-new, that did not exist before and spread it to the world in volume and get paid for it. It's a very, very, very hard thing.

Almost all use is going to go to mobile devices, and tablets, and the like. There are large swaths of humanity who are growing up connected to the Internet but have never owned a desktop or a laptop computer, never will. Nor do they need to.

SL: It’s fashionable now to say that "Every business idea that came out in the 1990s was a totally viable idea, it was just done too early." Like WebVan and Instacart. Are you a believer in that?

NR: There's a lot of truth to that. For example, I did a business called Epinions, back in 1999, which did reasonably well. It went public as part of It wasn't the gangbuster blowout that Yelp is.

The reason it couldn't have been Yelp was because of the time, not enough local businesses were online. There was not enough density of users online that you could get them to review local businesses. All the pieces were not in place. It just was a lot harder to do something back then.

To give you an idea, with Epinions, our first round raised eight million bucks. It took us six months to ship our website. We had to buy our servers. There were no data centers. Those were brand-new. We had to host our servers ourselves in our office.

We had to get a T1 connection which is a very expensive Internet connection to host out to the Internet. We wrote our own deployment scripts. We had to buy Sun servers. We had to buy Oracle databases, no My SQL. There was no Git. There was none of that.

Everything was hard and took a long time. Then the addressable user base was a hundredth of what it is today. Just because the network effect and a critical mass effect, a lot of businesses couldn't work.

Even social networking is not a new idea. Before Facebook, of course, there was My Space, before that, there was Friendster. Before that, you go to Korea, and there were dozens of social networks there, including the very famous Cyworld that predated by years and years.

You needed a high enough density of your friends on the Internet that when you sent out that almost retarded sounding, "I'm your friend. Are you my friend" email?

Timing is very important.

SL: You brought up Epinions, which is a very controversial company. There was this massive scandal about you sueing your VCs.

I was reading articles saying things like, "This is going to change Silicon Valley forever, because everyone's been too scared to sue VCs before. He's utterly changed it now everyone's going to go ape shit suing VCs."

NR: I am under a non-disclosure as part of the finality of that.

SL: You're not going to tell us anything about your ballsy suing investors move?

NR: I'm legally bound. I mean it's all in the public record so you can go look it up.

SL: Are you surprised that people didn't start suing VCs left and right?

NR: It's a very difficult thing to do, and you have to be very certain.

Let's just say it did lead to the birth of Venture Hacks, which is what lead to the birth of AngelList, because I sort of became the go-to guy in understanding how to negotiate a term sheet, because now I was very cognizant of what goes into a term sheet and why.

Back then every term sheet used to be custom. They used to give a lot of power to the investors, whereas actually today, especially coming out of an incubator like these convertible notes and so on, give a lot of power to the entrepreneur.

Entrepreneurs take that for granted, it didn't used to be the case. With Venture Hacks we really [dug into] the game theory of venture capital, and how to negotiate a term sheet. These days the terms sheets are still standardizing. They've gotten either more balanced or more entrepreneur friendly, but it's no longer an issue. Angels probably wouldn't be here today if it weren't for that history.

SL: What were some of the ways entrepreneurs are taken advantage of?

NR: There are quite a few of them. One is the different kinds of liquidation preference. Liquidation preferences, the investors get paid back before you can make any money as a common shareholder, but it was actually not uncommon for term sheets to have multiples, or cases where they would get paid back and they would get a piece of the upside.

Anti-dilution, so how do you handle down rounds? Board control, who can fire you? What happens when you're investing? All those kinds of things. It was very common, and still happens unfortunately, where very often an entrepreneur will get pushed out of their own company, the investor will bring in someone who was like a friendly CEO.

Next thing you know the company runs out of cash, the investors recap it, it's a down round, and then they end up owning all the equity.

Today it's actually more likely that almost happening in the other direction. Where a lot of times founders have inordinate voting control. Or if you look at some of these notes that companies get their investors sign up to, when they come out of incubator some of these notes are pretty entrepreneur friendly, surprisingly so.

Term sheets are supposed to be this black art. They're supposed to be incredibly complicated, no one on earth can figure them out. You need expensive lawyers to spend $20,000 per law firm, and they have to spend a month negotiating this document, this closing.

Thousands of companies have done it, and hundreds do it every month, so how can it be something that has not been standardized by now? The good news is it started to get very standardized, so we took the series seed docs that Ted Wang had put together and that are used for a large chunk of financings today.

It's a permanent shift and it's a good shift. When you buy shares in a company on a stock market you don't sweat the details about what the paper is underneath. You don't think about all the ways you can get taken advantage of.

You shouldn't have that fear in the private markets either, neither side should, and it should be well established contracts, and norms, and a balanced contract law.

I don't think any VC sits around smoking a cigar saying, "I got to go grab power in the ecosystem." I think it's just more about, we're negotiating a deal, contracts are negotiated for the worst case not for the best case, things could go wrong. If things go wrong, I trust me more than I trust you, so let me just make sure that we do it my way. I think it's that simple, and I think the entrepreneurs will do it back to the VCs if they have the opportunity.

I don't think it's a fairness thing. I think at the end of the day it just boils down to, unfortunately, a power thing. Which is by the way what game theory teaches you, most of it boils down to power, there is no concept of fairness. You just have to make sure that you don't get taken advantage of.

In a situation where you have some power you exercise it to get a fair outcome, or if you don't have power you're at least aware of it so you know what the consequences could be.

I think there are definitely entrepreneurs who do push it too far. I actually think the rise of uncapped notes is one example of that. There is all these little twists and loopholes you got to watch out for. Which is another reason why it's good just to put these things online, standardize them, and then have one set of docs where you can say, I read this, I agree with this.

Now I don't have to touch it again, I don't have to think about it again, and next time the docs show up I know it's the same docs. If there is a change you can call that out, but just make it very standardized.

SL: What would you recommend of young entrepreneurs who are in the room raising money? If they have a hot company people want to get into, should they try to push it as far as they possibly can?

NR: No, because money has karma too. If you treat it badly it will treat you badly. The wheel always comes around I feel. You have to be balanced about it, but if you have a strong hand then you do deserve a strong outcome. Like a good rule of thumb in negotiations is, negotiate hard, get what you're fairly due, and in the end, give something back. Because you have to work together for the long term. I actually now firmly believe that everything you do in life, all the returns in life come from compound interest. If comes from the length and strength of your relationship.

Look at the PayPal Mafia and how they just keep compounding into new companies that they do together. Similarly, in your marriage or relationship the longer you hold out, the better it gets, the more you survive.

Warren Buffet is the richest guy on the planet, or legally richest guy on the planet, there is a lot of illegal wealth out there too, because he never spends a dollar. He just reinvests it, he just keeps compounding it, and he holds it.

The same way, your best business relationships are going to be with the people that you end up working with for decades. That is true of your investors too. If you treat them well and always try and make them money, and if you don't make them money at least they don't feel like you overreached, you will keep that relationship for a long, long time.

One of the things that I'm now very wary of is people who are over optimizing for the moment, because they're signaling they're not a long term player. If they're not a long term player you don't want to establish a relationship with them.

SL: How frequently in the Valley do you think people with the wrong interest win?

NR: Probably more than half the time.

SL: Does that bother you?

NR: Yeah, you can't let it because most of the times that you do good work, and you do good things, and you do it the right way, you will lose. Most of the time, you will do good things, and you will lose. That's just the nature of the beast.

It's a very efficient market. There's a lot of luck. There's a lot of competition. The first time you do a company, it will probably fail. The second time you do it, you'll probably do it with the wrong people. The third time you do it, you'll probably get taken advantage of.

You go through these learning curves. You only have to get it right once. That's the good news. The outcome is usually so good in a binary sense when you get it right. You just have to get it right once.

The thing that actually disrupted the industry was not us. I give Y-Combinator, for example, a lot of credit for pioneering the new incubator, but it wasn't them, either. The thing that disrupted the industry was just the cost of building a business has collapsed. That has changed everything.

Like I said, before we had our Sun servers and our Oracle databases, now you have AWS. You want to market, you want to acquire customers, you use Google. You want to do customer service, you go on Twitter. You want to market, you use Facebook.

You want to host, it's on Heroku. You need some part-time labor, it's Elance or oDesk. You need your site cleaned up, that's Mechanical Turk. You want money, it's Kickstarter or AngelList, or there are angel investors. There's just so much embedded leverage in the system now that a single person with a lever can truly move the earth. It was impossible.

The community, for example, likes to treat Instagram as an aberration. They like to say, "Oh, yeah, Instagram, don't worry about that. The rest of you are still going to need a hundred million bucks from us." I don't think that's true. We're going to see a lot more Instagrams.

There was actually a specific point of disagreement I had with Mark Andreessen since you want me to be controversial. Marc's counterpoint to this would be that Instagram didn't monetize. They could have monetized fine with five people, five additional people. There's nothing about Instagram that needs 200 people.

We're going to see more and more and more great businesses built that are essentially built entirely through leverage, that are communicating to the world through APIs and just have very, very, very little headcount. They just need very little capital.

Because they need so little capital, everything changes. The entire ecosystem changes. The entire nature of the venture industry and the relationship with the entrepreneur changes.

SL: It also changes the biggest pain point that entrepreneurs have right now, which is talent.

NR: That's right. Talent is the biggest pain point at the moment. It actually makes it a lot harder because people can go start their own company. If you don't have product market fit, also in Andreessen's words, why should they come work for you?

Why shouldn't they just start their own company or go into an incubator? Certainly, if they have a good idea, and they have the risk profile, and they feel like they're ready, that's your opportunity cost.

The days when, for a product market fit, you'd raise a million bucks and you'd hire your first engineer, you'd give him a quarter point, those days are over. If you don't have product market fit, these people are just late founders. You have to treat them as such. It makes it a lot, lot harder to hire.

It also means that the entire venture capital community has gone through a massive shift in the last three years, which I don't think most of them are aware of. Many of them are aware that things are changing, but I don't think they understand what a deep level they're changing at.

To give you one example, Sand Hill Road became the center of the tech universe because that is the place you used to go to for your first check. It was the first credible money in, who took a board seat and had influence over the company.

That position and power moved away from them. In 2007, they started moving toward the so-called super angels. Now, today, that first check privilege goes to the incubators.

Most companies don't go around calling themselves a Sequoia company. Rather, they are YC-backed Dropbox, or they are TechStars-backed Torbit. They're marketing themselves in a different way, it's AngelPad-backed MoPub.

These companies are taking their brand and their advice. Their first check, the first people who believe in them, are doing it with $25,000, $15,000, not with $3 million. That puts the venture capital industry in the further back section of the feeder chain, which is dangerous because the brands get built by establishing the early relationship with the entrepreneurs.

To me, the distinction at the end of the day is not drawn between whether you have other people's money or not. It comes down to, are you willing to write a small check? Are you willing to decide quickly? Most importantly, are you willing to forgo the normal control terms that a VC would have put on you back in 2007?

You say, "OK, I don't need a board seat. I'm in the service business. I'm going to help you. You tell me how I can help you."

Proprietary deal flow is dead. There are hundreds maybe thousands of great angels who have started their own companies, exited them, are operators, and are very entrepreneur-friendly. You're just not going to reach them knocking on doors one by one. AngelList commoditized that. They opened that up. They allow you to create more of a market for your shares. It is not about deal flow anymore. A lot of the firms that are doing consumer investing are falling all over themselves, trying to figure out, "How do I differentiate myself? How do I get access into good companies?"

That is the current name of the game. It's not about the deal flow anymore. It's like branding oil. Do you really care about Shell versus Chevron? It turns out you do. The reason you do is because the VC brand often reflects how nice they're going to be to you once they have control.

SL: I do want to go to questions in a minute so that Dave or whoever else is out there, before I yell at them, they can ask you whatever. I want to talk about your experience with the JOBS Act first.

NR: We definitely were very involved in it. The securities laws were written in 1934, which is a long time ago. They probably referenced a telegraph in there somewhere. A lot of the stuff that goes on in incubator demo days and at these conferences is technically illegal.

When someone stands up in demo days, some mentor, and says, "You should invest in this company," that's not completely kosher, or says, "Here's a standardized term sheet that we're using. This is the standard AngelPad or TechStars note," that is not legal. You're supposed to be a broker-dealer if you're doing those kinds of things.

All of this is operating very much in the gray area of the securities laws. We bend over backwards to be securities laws-compliant. We have full legal opinion up and all that stuff. We never touch money. That's part of the reason.

It's still pretty scary. There are a bunch of products we wanted to offer, like Docs, that we could not legally do. It was just illegal for us to offer without a Docs product being a broker-dealer. "Broker-dealer" means you have all these regulations and requirements that actually make it impossible to work with startups.

We wanted to get the law changed. People told us it was impossible, which it actually is, basically impossible. We hired a bunch of gumshoe lobbyists, who are awesome. We paid them purely on a contingency victory fee. We just pulled out all the stops.

SL: How did you find these guys?

NR: Friends of friends, actually. What really made the difference was we were doing something that we thought was pretty good, which was we were spreading investment and investing around the country. That's really what Congress wants to hear right now, which is, "OK, you are helping companies in my jurisdiction get funded."

When we went to Congress and we said, "This needs to exist," all the lobbyists can do is open the door for you. You still got to make the pitch. We basically showed them how, in every state, in almost every major city, we had a bunch of investors.

We had a bunch of startups, who are willing to stand up for what we were doing. There was all this good karma that was paid back. I spent six months of my life just calling in favors left and right. It turns out there were a lot of them to call in.

These were the kinds of things that we had to basically make sure were taken care of. The JOBS Act was the only bipartisan act passed by this Congress in the last four years. We got to go to the Rose Garden. Obama signed it. I have a copy sitting next to me, signed by him, which is great. It was really fun and really crazy.

It's one of those things where you pull a hundred favors. I had Mitch Kapor call up Anna Eshoo, who is a Silicon Valley rep. I had Steve Case work with us to get a piece and his recommendation to the council and so on. You call in literally a hundred favors. Each one of them takes a toll on you.

At the end of the day, a random five magically come together and make it happen. At the end, for a while, it looked like it was going to get shot down in the Senate. By the way, we had to put together this crazy thing. We had to satisfy the investment banks and the regulators and all the different constituencies.

It ended up being a giant dog's breakfast of different bills combined together. Some genius, I don't know who, but I can almost imagine is sitting around, probably some Congressional staff, was like, "How are we going to get this thing to pass? It doesn't make any sense. Let's say it has something to do with jobs. Yes, jobs, jobs." What Congress person can vote against something called a "JOBS Act"?

It was a miracle. It was literally a miracle.