One of the more exciting developments in the startup and early stage investing scene is the launch of a syndicate funding program from Angel List. Founded in 2010 by Naval Ravikant, and Babak Navi, Angel List is a platform for connecting investors and startups. Open to the general public, Angel List allows startups to post information about their firms and achievements, as well as use the site to connect with approved accredited investors using the site. Notable startups to raise money through Angel List include, Uber, Leap Motion, as well as Angel List itself, that used its own platform when raising part of its recent $24 million in funding. Overall, according to the latest figures from the firm, over 1300 startups have used Angel List for funding.
For investors, Angel List provides not only the ability to reach startups from across the globe, but also social network benefits. The site allows users to view who has previously invested in a given startup, as well as its mentors. Using that information angel investors can connect with other investors to share thoughts about specific startups and industries. In addition, equity investors are seeing value in viewing funding information to learn which existing public companies may see a lot of competition in the near future.
Leveraging the established combination of social networking and investing, the new Angel List syndicate product continues the path of funding innovation. Similar to the social and copy trading, which allows Forex customers to follow and automatically execute positions of other traders, the syndicate program applies this model to angel investing. Using Angel List, accredited investors are now able to follow other users, and elect to automatically participate in deals that they are investing in.
The program is based on established angel investors creating a funding syndicate, where they provide part of a startup funding, with the remainder provided by syndicate backers. Providing an explanation, Angel List provides this example, “Sara decides to invest in a startup and asks for a $250k allocation in the company. She personally takes $50K of the allocation and decides to syndicate the rest. She shares the deal with investors and specifies that she is charging a 20% carry on of the remaining $200K of her allocation. Sara’s capital and her co-investor’s capital is pooled into a $250K fund which is invested in the startup.”
For their effort of organizing the syndicate, choosing startups and accepting backers, syndicate leaders are compensated by receiving a greater share of the equity. Currently, Angel List investors are individually selected by Angel List before they can become syndicate leaders.
Not Much Different than eToro and Others
Comparing Angel List syndicates to social trading from eToro and others, there is much in common. Both use a system of leaders and followers, as well as providing compensation to leaders. Also, risk-wise, both Forex trading and angel investing fall in the category of ‘not for the faint of heart’, and are high-risk proposals. In addition, at the heart of each system is the utilization of a crowd sourced social approach for classical investing.
In terms of where the products are different, beyond simply being two different asset classes, they deviate on the duration. While social copy trading is focused on short term trades, the Angel List syndicates are multi-year investments. Also, syndicate leaders have more control, as they approve which investors can become backers, as well as the total amounts available for the deal.
Providing thoughts about the syndicate program on Angel List and resemblance to social trading, Yoni Assia, CEO of eToro, explained to Forex Magnates that they are seeing an emergence of social within multiple areas of finance which are transforming the entire industry. This includes social investing but also expands to P2P lending, crowd funding, crowd investing, and crowd-based currencies.
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In regards to the importance of the syndicate program, Assia added that, “The Angel List syndicate, and other crowd investing platforms provide a unique opportunity for both investors interested in startups, and more importantly for founders around the world to find funding opportunities more easily. I believe that social finance in all its forms including crowd investing will keep growing exponentially in the next coming years.”
What about equities?
One area that still hasn’t seen much of an entry into social trading is with equities. There are plenty of social forums and dedicated stock sites such as StockTwits and SeekingAlpha, where users can share and comment on different trade ideas. Virtual social trading also exists in the form of mobile gaming app TradeHero. However, for pure social style stock copy trading, the pickings are slim. Among existing products, eToro recently launched stocks within its OpenBook social trading platform. However, the product is only a synthetic equity instrument that follows the percentage change of stock prices, without purchasing the actual shares.
When asked about the lack of equity social trading products, Dinesh Bhatia, CEO and Founder of TradeHero, stressed that what non-trading social equity products provide is the ability to gamify the education process of trading. In regards to TradeHero, Bhatia stated to Forex Magnates that “TradeHero is very much focused on building the best possible financial literacy and experimentation tool for current and aspiring traders, and was created with traders’ demands as the key driver for the roll out of features within the app.” As an example, he mentioned a partnership the company has with the Macquarie Group in Singapore, where the mobile app is used to educate Macquarie’s clients about new trading products. However, when asked about integrating real trading within their apps, Bhatia again focused on education and knowledge rather than on social stock trading.
One possible reason for the slow adoption is the trading condition difference between stocks and Forex. While Forex trades in minimum 1000 unit sizes, share prices are different for each stock. As a result, when allocating funds to copy traders, it is more likely to lead to odd lot orders. In addition, without the leverage available in Forex, equity trades are more likely to trigger rejections due to unavailable funds. For example, for accounts of a $1000, buying much more than one share of Google at a recent $850 will hinder much more future activity from taking place.
In this regard, Assia told us that in terms of trading of real shares that, “While we did consider this in the past, we believe that our CFD offering is a superior product to stocks.” He pointed to the advantage of being able to offer fractional shares, low minimum trade sizes, and no stamp duties as reasons why equities are better served to investors via CFDs than as real stocks. The main drawback though, is the inability to offer such a product in the equity centered US.
Following Angel List
Despite the existence of impediments, it doesn’t mean social trading isn’t headed to equities. Similar to Angel List, social stock trading could flourish if it focuses on the long term. In addition, due to the existence of sites like StockTwits and apps like TradeHero gaining users, it is raising the likelihood that social stock trading will become requested features from traders to their brokers. While not wanting to comment on any technological road-map to bring live social stock trading, Bhatia did infer that there was interest from brokers for such a product and stated, “TradeHero is also in discussions with various international financial institutions keen to leverage the app’s wide reach and platform.”
As such, it seems like it’s only a matter of time that Forex becomes the leader and stocks the copier, in the social trading world.