- What Is The Principal Agent Problem And Why Does Naval From AngelList Think It Is So Important?
- How Is AngelList Helping International Startups Raise Capital?
- How Did Naval Ravikant Use Blogging To Get AngelList Started?
Full Interview Audio
This is a condensed, lightly edited transcript of an audio interview. The full audio is available and highly recommended. The interviewee may post clarifications in the comments.
Adrian Bye: Today we’re here with Naval from AngelList. I don’t know if I’ve ever said this before, but this is probably the interview I’ve most been looking forward to do because I think Naval was one of the most fascinating entrepreneurs in Silicon Valley and I’m incredibly honored that you’re here to talk. So Naval, thank you.
Naval Ravikant: Thank you, It’s very kind of you.
Adrian Bye: Tell us a little bit about your background. I’m guessing from your name that you are Indian?
Naval Ravikant: Yes, I was born in India, moved to New York with my family when I was nine, grew up in New York City. I went to Dartmouth to study Computer Science and Economics. I came out and started getting into the technology business when the web was still very nascent, started a couple of companies including Epinions, which’s been public as part of shopping.com back in the day; then did a few other companies, started doing Angel Investing, have a couple of successful investments and a lot of failed ones. After that I decided the whole investing market was very inefficient. People kept asking me for advice on it, so I was co-authoring a blog called ‘Venture Hacks’ with my co-founder Nivi, and after a while we said, rather than just write about it, let’s actually help people through a product. And so we created what became AngelList. Now it’s the largest online network of startups and investors where we match up startups for fundraising and for talent and for a few other things that we’re rolling out.
Adrian Bye: Something that’s interesting to me is that you are also the founder of Epinions. So you’ve ridden the first dot com wave, and now riding the second one.
Naval Ravikant: Yes, I founded a couple of companies, definitely been through the whole dot com wave before, and there is a lot of similarities and a lot of differences. There is some hype this time, nowhere near as much as last time. There is a lot of capital being allocated, although again not as much as last time and probably much more efficiently than last time. And the businesses that are being built today sort of rhyme with the businesses of ten, fifteen years ago. Except these ones are addressing customer bases that are literally ten or a hundred times larger. But the competition is now fierce and intense because it’s so easy to start a company although it’s still no easier to build one, probably harder. So there are parallels and there are differences. It’s kind of interesting to watch it all happen again.
Adrian Bye: When you did Epinions, that worked pretty well. You built a moderately important company by now, ten or fifteen years later, but you ran into some issues with the investors.
Naval Ravikant: Yeah, it’s a matter of public record and it also led to the creation of Venture Hacks which then led to the creation of AngelList, so these kind of experiences make you who you are. Back in that time the whole industry was much more opaque, so when you signed a term sheet you were signing up to all kinds of things you didn’t really understand and they were often very lopsided in the investor’s favor. Now things have got a lot more standardized and a lot more entrepreneur-friendly. You could even argue in some cases too entrepreneur-friendly. But the environment has changed alot since then.
Adrian Bye: People sometimes think that businesses are always built through fluffy save-the-world type visions, but in fact sometimes it is like, ‘there is a problem here, we want to do something about it’.
Naval Ravikant: Yes, the fluffy, save-the-world visions sometimes are the founding basis of the business, sometimes they emerge as you build the business, and sometimes they are tacked on afterwards for a good story. There is no single formula to building a business. If there were a single formula we would have systematized it and it would be straightforward and all the returns would be gone because you would do it all the time. But by definition, technology is the set of things that don’t quite work yet. Startup businesses are trying to solve the things that are still broken, and so there is no single path to fixing them. I think entrepreneurship by definition attacks the boundary cases where it advances human knowledge in creation, learning at the edge, and so it’s always solving the hard problems. It can never be automated.
Adrian Bye: That’s a smart way to think about it. In terms of what you’ve done with AngelList, it seems that you have commoditized a large percentage of investing worldwide and made it much more transparent. We still need lead investors but you’ve taken potentially one of the most critical things from Silicon Valley and flattened it and put it on the web using facebook-style publishing. And you’ve done it in a way that is to everybody’s incentive. Does that sound accurate?
Naval Ravikant: Yes. It’s still a little hard to describe because we’re doing so many things and some work and some don’t. I would put it more as we’re match.com for startups and entrepreneurs and investors and talent, and we are definitely a force for transparency and meritocracy. It doesn’t quite lead to commoditization, because just as the companies now have more investors to choose from, the investors have more companies to choose from. And generally, investors are scarcer than companies. So if anything, it might actually shift some of the power more in the investor’s favor for an experienced investor. That said, it really gives an opportunity for investors or for entrepreneurs who are out of market, but have merit or money to contribute to basically connect. Although we do a pretty good job connecting companies in Silicon Valley to other Silicon Valley investors, where we really shine is connecting out-of-market investors or out-of-market companies to in-market investors and companies. It’s a work in progress. We’ve only been at it three years. It’s a ten year mission. It’s going to take us a long time to nail it.
Adrian Bye: The way this started then was through email, right?
Naval Ravikant: Yes. It’s called AngelList because it’s an email list. We actually had two lists, AngelList and StartupList, and we ended up consolidating it into the AngelList brand.
Adrian Bye: So you got some traction on those and then you went to a website?
Naval Ravikant: That’s right. We started building out the website as the dual-flow volume became overwhelming and as we realized that we were on to something there was a lot of intelligent things to be done with the data and the structuring, yet make it more community based.
Adrian Bye: I’ve been reading Venture Hacks but I didn’t really notice places to join lists. How were you aggregating people back then?
Naval Ravikant: Venture Hacks just became popular as a blog. For a while Venture Hacks was the number two blog behind Fred Wilson’s AVC. We just had a big readership, but at some point we were going circles, writing about the same things over and over. A lot of the old lessons still apply, so we basically just launched it on Venture Hacks. We wrote a blog post, we explained to people this is what we’re doing, come sign up if you’re interested, and it just sort of took off from there. Emails are a great way to prototype a business. You can very quickly figure out if there is demand, you can stay in touch with your users very easily.
Adrian Bye: You started with the blog. The blog got a lot of traffic. You used that traffic then and you advertised in a blog post or an email list. The email list got traction that then led you to building out a proper site.
Naval Ravikant: That’s right. That’s a good order of operations.
Adrian Bye: Some interesting stuff you posted on Twitter a while ago was discussing this principal agent problem. Maybe this is a good chance for you to tell us about how some of your recruiting and functions work on AngelList and how they all tie together.
Naval Ravikant: To me the principal agent problem is the single most fundamental problem in micro economics. If you do not understand the principal agent problem you will not know how to navigate your way through the world if you want to build a successful company, even be successful in your dealings. It’s a very simple concept. Julius Caesar famously said, ‘If you want it done, then go. And if not, then send’. What he meant was if you want it done right, then you have to go yourself and do it, and if you don’t want it done right, send someone else to do it. When you are the principal, then you are the owner, then you care and you will do a great job. When you are the agent and you are doing it on somebody else’s behalf, you can do a bad job. You just don’t care. You optimize for yourself rather than for the principal’s assets. The smaller the company, the more everyone feels like a principal. The less likely you feel like an agent, the better the job they’re going to do. The more closely you can tie someone’s compensation to the exact value they’re creating, the more you turn them into a principal, and the less you turn them into an agent. Bigger governments are less effective and less efficient than small governments because they are more agents and less principals. Despite what Keynesians believe, a dollar spent by the government is generally wasted compared to a dollar spent by the private sector, because now you have the ultimate agents. Someone who seized the money rather than earned it is spending the money, as opposed to someone who earned it and is trying to increase it. Any big institution falls into that. I think at a core fundamental level, we understand this. We’re attracted to principals and we all bond with principals, but the news media and modern society spend a lot of time brainwashing that you need an agent, and that the agent is important and that the agent is knowledgeable.
To the extent that AngelList works, we are not an agent. We always try to connect principals. So on the fundraising side we connect startups directly to the investors; on the talent side we connect the founder or the CEO of the company directly with talent. We do not allow middlemen recruiters on AngelList Talent, which makes it very different from things like LinkedIn. You do not need a middleman, this is the Internet. The Internet hates information middlemen and ruthlessly removes them. Information agents are the least important kinds of agents.
Adrian Bye: How far does this go, though? For example, Zynga was run as an organization where they tried to have everybody very tracked for the results of the company. I guess in terms of hiring that maybe didn’t work out so well for them.
Naval Ravikant: Zynga is in a very difficult space. A lot of their fortune is controlled by what Facebook does. They also had a very idiosyncratic culture internally that was very hierarchical and they’re managed very tightly. I think the thing is to step back and look at and say, Why is it that every time a company becomes big it slows down, it stops innovating, it just starts working on protecting its existing revenue stream? And then some little startup that has one thousandth of resources and really has no right to come over and attack this big company does so and kills it. It happens all the time. I think the principal agent problem is literally what allows startups to exist. If agents were just as effective as principals, there would be no startups. IBM would have crashed, Microsoft would have crashed, Google would be crashing, Google would have crushed Facebook, Facebook would have crushed Instagram. But it’s the fact that a small number of people and principals that are dedicated to what they are doing and really care, whereas the agents are too busy optimizing their lifestyle. They’re not going to optimize for the company as a whole.
Adrian Bye: An example of that would be what Craigslist did in the advertising business? They put consumers in touch with each other far more efficiently and effectively.
Naval Ravikant: It’s a reasonable example. Craigslist has eliminated a lot of agents. It’s essentially as you democratize information, you get rid of information middlemen. A clear example is your real estate broker. Why the heck do brokers as agents get six percent of this gigantic transaction? Ninety percent of it is about information conveyance. Some of it is legal, some of it is habit, some of it is people don’t want to take a risk with such a big transaction, but I predict 20 years from now there will be no job called real estate agent.
Adrian Bye: We should talk a little bit more about what AngelList actually does.
Naval Ravikant: We have 54,000 company profiles. These are startups that are out there fundraising or recruiting on AngelList. We have about 12,000 vetted candidates who are looking for jobs, most of them are developers, designers, product managers, former entrepreneurs. We’ve got 5000 sophisticated investors who are looking to meet companies and invest in them. We’ve got another 10,000 accredited investors who are investing online, putting small checks into companies that have been vetted and have good lead investors. And then we have a few dozens incubators who have taken their applications directly for their incubator programs on AngelList. So we got a lot going on. You can think of it as a LinkedIn for startup ecosystem, but it’s highly transactional.
We want to be the place, and I think we are the place where you come to find investors and you come to find talent, and over time we’ll add more services. I think that Craigslist analogy is a good one, although we are far more technically sophisticated. We’re solving the harder problem of how to connect strangers for high-value transactions, not lower value transactions. These are more business transactions than consumer transactions.
Adrian Bye: We discussed the principal agent problem, so the key driver of your business philosophy is reducing that as much as possible.
Naval Ravikant: Yes. You are able to see the full range of options available to you and we don’t take a middleman fee or anything like that. You’ll be able to connect to the people that you need to connect to for your transaction. For a company that is in market we can accelerate their financing or fundraising or recruiting, and for a company that is out of market we turn it from impossible to possible.
Adrian: Where do you see it in terms of international adoption? How is it being used?
Naval Ravikant: Internationally it’s probably about a quarter of the activity on AngelList today, increasing pretty rapidly. We haven’t really focused on it because the startup ecosystem in most international places is not yet deep enough, especially on the fundraising side. That said, we now start seeing a lot of activity in India and in Europe, especially in London. And we got some companies funded in both places, we’ve some talent recruited in both places, so I think we’re gonna be pretty big in both of those shortly. We got a lot of Canadian companies funded by US-based VCs, we got a lot of New York companies funded by Silicon Valley based investors. We recently had an Austin based company funded by a Brussels based VC on AngelList, and a Silicon Valley based company funded by a London based VC. So the cross pollination is pretty incredible and I think it’s just increasing.
Adrian Bye: Is there anything else that you want to cover before we wrap up?
Naval Ravikant: No. I think that has been great. It’s been a great discussion.
Adrian Bye: Awesome Naval, thank you very much.