Angellist: infinite profits with no capital – pros and cons

Angellist: infinite profits with no capital – pros and cons
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Can you imagine a hotel that does not own a single piece of property? Or a taxi business with no cars in its fleet? Ten years ago it was nigh but impossible. Nowadays it is a reality. So it is possible to become the most profitable venture fund without a cent of capital? The answer is Angellist.

To explain how Angellist, supposedly, works, one should elaborate how a traditional venture fund works.

Angellist: infinite profits with no capital – pros and cons

So, there are limited partners who invest and general partners or management who run the whole thing. For example, limited partners invest $500 million for 10 years. General management gets 2% management fee which is $10 million a year and 20% share of profits which is called carried interest, or carry. The fund invests all the invested capital, which is $400 million and gets 500% profit which is $2 billion. Net profit is $1.5 billion. The management gets 20% of the net profit which is $300 million and is a measure of the effectiveness of the fund.

Now, Angellist works differently. Note that the following is not official Angellist information, rather than a probable business model. 

Angellist: infinite profits with no capital – pros and cons

First off, the whole system is virtual. The investors no longer pay for rent or expensive social events. They invest in a company that keeps the whole system running online. That company is Angellist.

Secondly, instead of general investors there are syndicates that are going to receive 15-25% share of profits from every investor while Angellist gets 5% of listed profit, thus making money out of thin air while investors still have to invest something to get a thousandfold back.

Last of all, syndicates are comprised of startups that register on Angellist website. Say, Angellist gets 5% of profits from 1000 startups. But there is still something to consider. 90% of startups fail and only 10% result in success and are the source of those 5%. Nevertheless, Angellist loses nothing since the whole system is online and the only costs they pay to keep the software and hardware running are too small to care.

This business model sounds great indeed. Still, there are some risks to consider. Angellist works in a strictly regulated field, which requires the company to spend money on legal support from lawyers and public officials and be very careful about where the money goes to and comes from. Also, in a case of syndicate failure it is Angellist who will undergo the trial in court, not the syndicate. It is hard to estimate these costs while traditional venture funds are very clear on them.  All these factors do not work in favor of Angellist.

Thus, Angellist has a revolutionary idea of a venture fund with zero capital, which enables it to be a part of pretty much every deal and make money out of it. But there are many legal risks that work against this business model. Only time will tell if Angellist is going to revolutionize venture capitalism or sink into oblivion. 

 

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