Naval: We’re living through a unique time when, as Andreessen says, software is eating the world. We’re undergoing a phase shift where technology is being adopted by everybody, not just knowledge workers.
This transition has created a gold rush era in technology. If you’re in the tech industry and living in one of the tech hubs, you’re already halfway to being a good investor. That’s half the battle. You’re well positioned to angel invest.
There are only a handful of these hubs. If you have to ask, then you probably aren’t in one. It’s usually obvious. There will be hundreds of startups, at least, including some with successful exits that made their investors rich.
If you’re not in a tech hub, the odds are stacked against you
If you’re in the tech industry but not in a tech hub, you should consider moving to one—unless there are strong lifestyle reasons keeping you away, such as family or quality of life, which is often higher outside of the technology hubs.
You can do it remotely, but the odds are stacked against you. You won’t have the trust networks; you won’t see enough of the dealflow. In this case, it’s often better to work through a proxy, like investing in a trusted friend’s venture fund or going through AngelList or coming in for YC Demo Day.
There are about two dozen tech hubs in the world
Nivi: Do you think this advice is just for people in Silicon Valley, or does this apply in New York? Does it apply in Seattle? Austin? China? Bengaluru?
Naval: I think it applies in probably two dozen cities around the world. Some of these cities are emerging, which complicates this. Seattle and Austin are probably stable; you can probably find good deals there. But you need to have access to everything and realize that the city may only produce one or two great companies each year.
Silicon Valley is a more forgiving place to invest
Silicon Valley’s a little more forgiving: There are maybe 20 or 30 great companies created every year. You just need to invest in one of them—although you’ll have to find them in a much larger pool of companies.
Places like Bengaluru, India, or even Kuala Lumpur, Malaysia, be may be up-and-coming cities, but timing is hard: Is this when the tech industry there breaks through? If you’re in Australia and invested in Canva or Atlassian, then great. But if not, there’s not as much of a pool to work with.
At the same time, your returns potentially can be a lot higher outside of tech hubs. Because there’s less competition, the valuations tend to be lower because the risks are higher.
You don’t want to be in a city with no history of producing good startups, where you only see one or two startups a year and you’re paying Silicon Valley prices because they’re keying off of valuations they saw at YC Demo Day.
It’s much safer and easier to get started in San Francisco, New York, Beijing, Shanghai or Bengaluru. Pros can play in places like London, Austin, Seattle, Denver, Boulder and Chicago.
Anything below that, and you better know what you’re doing. We have seen a phenomenon on AngelList: Angels invest locally in a city that is not producing good tech startups, only to surrender and start investing in Bay Area startups because they don’t see the quality or returns in other cities. The returns are so much higher in Silicon Valley.
The best indicators of a startup hub are exits and later-stage investors
Nivi: What’s the best indicator that a startup hub is working? Is it exits? Is it a thriving community of other angel investors?
Naval: Unfortunately, it’s exits.
The typical way a hub develops is this: Founders start a company, the company does well, the founders and employees get rich in the IPO or acquisition—and then they start investing in their friends and co-workers. They feel comfortable doing this early investing because they made their money through tech startups. They want to put it back into tech startups.
But there are a lot of false starts. Angel investors will pop up in an area and invest in a bunch of companies—but then those companies get stranded because there are too few Series A or Series B VCs there to invest in them. The VCs come in, pay low valuations and wipe out early investors by converting them to common and putting warrants on top.
So funding markets, to some extent, develop in reverse compared to other markets. The least risky investments are mezzanine rounds right before the company goes public. Next are Series Ds and Series Cs. Series Bs are riskier than that, and Series A even riskier. The riskiest is angel investing, before the Series A.
So, in a weird way, angel investing is the thing that should develop last in new hubs. But that’s not always the case. If a company can break out with just angel money, then later-stage money will find it no matter where it is—or the company can move to a mature hub with later-stage investors. But then, you have a big funding gap between the angel investment and the next investor, so the company has to get really far on just the angel investment.