If your Angel portfolio target is 20 investments over four years, that means you might see over 100 investment opportunity summary sheets, watch 80 investment presentations, and select 25 for due diligence. Each due diligence team might consist of half a dozen different co-investors, and each company will produce documentation that includes contracts, plans, share cap tables, financial scenario analyses, sales pipeline forecasts and employee resumes. That’s a lot of information!
Most beginning Angels don’t use any specific software tools but then gradually adopt a tool here and there as their more-experienced co-investors pull them into the systems they are using. Everyone seems to have their favorites. Popular deal-flow management tools include ProSeeder, Gust, Slack, LeanMonitor, Wunderlist, OurCrowd, Intercom, and Captable.io. (NACO 2015 National Angel Summit, Using Technology to Support Angel Investing)
Using an Angel Fund to Augment Your Individual Investment Portfolio
Matt Mastracci offered deeper insights into building an Angel investment portfolio. He used publicly available historical data on startup investment outcomes and ran a Monte Carlo simulation to model Angel investor ROI for different portfolios. He found that the riskiest Angel portfolio is when there are less than eight investments – what Matt calls the “Zone of Death” – when you have an over-90% chance of getting zero return from your portfolio.
He offers the following advice when building your portfolio:
Focus on increasing the number of cheques you write. The goal is to get to at least 10 investments (20 is better) before you are really investing instead of gambling. The larger the portfolio, the lower the risk, so it’s better to write a lot of small cheques then a few large ones.
Matt also found that quality of deal flow is directly proportional to the number of cheques you write. Unless you are known to be an active investor, you won’t get the best deals. So joining an Angel group or fund is a good way to gain exposure.
Once you have a sufficient number of first round investments, Matt found, the best next strategy is to focus on follow-on investments. That said, he maintains that trying to manage more than 40 investments, which is impossible without professional management. So working with other Angels, Angel groups and Angel funds makes a lot of sense.
There is significant demand by Angels to gain portfolio diversification and risk reduction by investing in an Angel fund. This is a fast-moving investment category that has
really taken off since the Financial Crisis of 2007-2008.
In an Angel fund, Angels pool their capital and invest in a fund that makes investment decisions. An Angel sidecar fund is similar, but instead of making its own investment decisions, it co-invests alongside other Angels when certain trigger conditions are met (such as at least five Angels from the group making an investment of over $500,000).
An accessible venture capital fund is similar to an Angel fund (and might call itself an Angel fund), except that the fund is professionally managed (usually by a former VC firm) in return for a fee. The professional management team acts as the General Partner (GP) and all investors are Limited Partners (LPs) with no liability other than the loss of their original investment.
According to Steven Forth of VANTEC: “I get very heavily involved in a small number of companies where I am lead investor and sit on the board. So to diversify risk and increase the number of companies in my portfolio, I augment this by also investing in an Angel fund.”
There are many differences among the various Angel funds, so a few examples will help provide you with the basics in finding one that might be a fit for you.
Angel Fund Investment
Angel investment can be time consuming and complex endeavor. As a result there is a growing trend for angel investors to act in a syndicate.
What is an Angel Fund and a Angel syndicate?
Angel syndicates allow accredited investors to pool money through a special purpose vehicle and invest it in a single company, while rolling funds basically enable the fund manager or lead investor to launch multiple funds back-to-back, according to Ken Nguyen, CEO of New York-based investment platform Republic.
An angel syndicate is simply a group of investors who agree to invest together in a particular project. A syndicate can be put together by angels or investees and be drawn from any source; often syndicates include angels from more than one investment network. While there need be no further conditions, to make the syndicate workable, typically all investors would reach a (non legally binding) agreement as to how the syndicate will operate. Any such agreement is seldom in written and kept both brief and simple.
Speaking with one voice
A lead investor is a necessary by-product of any functional angel syndicate and allows the syndicate to speak with one voice to:
Co-ordinate the syndicate – this includes the conduct of due diligence and heads of terms negotiations and may also include finding further investors if required. Following any investment, this will include acting as the conduit between the investors and the company.
Sit on the board after investment – while there are no hard and fast rules, a lead investor would typically be the investor best placed to work with the company, taking into account the time and skills he has to offer and also that he will most probably have built up a good working relationship with the investee while acting as lead investor before the investment completes.
By working together investors will be able to do more. From being able to bring a wider range of skills and years of experience to bear during due diligence to having a stronger combined negotiating position and thus being able to secure more favorable terms. They should also be able to close the deal more cheaply, as they will have less of a need for professional advice and the advice required will be more focused, and more quickly as bi-lateral negotiations are always less complex and divisive than multi-lateral negotiations.
Finally, there is a strong belief in the market that each investor significantly reduces the risk of making a poor investment when working collaboratively with other angels.
Case sample: Fonds innovexport is an Angel Fund whose managing team are a volunteer board composed of founding Angels with staff of 4. The name of fund is "Fonds innovexport" and members are accredited Investors. Its first round closed at $30 million and second round closed at $45 million in 2017.
This Angel fund is run by the founding team of 15 Angels (“the G15”) with additional professional management support and additional institutional LP partner investors, including IQ, La Caisse, FSTQ, and Foundation CSN. Since the first close of $30 million, the number of Angels has grown to more than 20. This $45 million fund targets Quebec-based startup companies having innovative products or services with high export potential. It will be a closed fund with a 10-year life but is always open to co-investment with other Angels and partners on specific deals.
Angel Sidecar Fund Investment
A sidecar fund is a pooled investment vehicle that invests alongside an angel group. In this respect, it is different from the vehicles that some groups form for particular investments or as the principal investment structure for the group.
Angel investors may also be familiar with sidecar Special Purpose Vehicle (SPVs) under the name "angel syndicate or angel fund". The Angel Syndicate structure is simply a sidecar SPV where the lead investor is an angel investor or emerging VC manager raising capital on a deal-by-deal basis instead of for a committed fund. Syndicate investors value the access to the lead investor’s deal flow and diligence and pay a success fee in the form of carried interest.
Why should an angel group consider a sidecar fund?
There are four basic reasons:
The sidecar fund opens angel investing and the activities of the group to persons who want to be passive investors or who do not feel qualified to invest on their own. The fund gives those persons access to the asset class, and may lead to new active members for the group.
The sidecar fund provides a way for members of the group to allocate part of their funds to angel investing in a balanced manner across all of the group’s investments. This can supplement their personal active portfolio.
The sidecar fund gives the group additional “critical mass” when it invests with institutional investors or leads rounds of investment itself. The ability to invest more money through the group may give it a seat at the table in negotiations with institutional investors or governance or enable the group to lead a somewhat bigger investment round than the group members themselves could afford.
Investors in the sidecar fund typically are charged a management fee with respect to capital under management. The fee can be used to defray costs of the angel group (such as salaries of an executive director and other staff or costs of group meeting) and to lower dues.
The structure of a sidecar fund has to satisfy two basic requirements: it has to provide
strong liability protection for investors in the fund, and it must be a pass through vehicle for tax purposes. No passive investor will willingly accept financial risk beyond his or her capital
commitment, and no tax should be payable at the entity level.
Case Sample: Plaza Ventures is an accessible Venture Capital Micro-Fund. The
name of the fund is PV Fund I, II, III… each micro-fund is named in sequence. They offer accessible venture capital through growth-stage micro-funds, where $25,000 is the minimum investment and it must be from an Accredited Investor.
Fees: No assets under management fee; 8–9% expense budget over the life of each fund, plus 20% carry-forward interest
Plaza Ventures has been operating as a VC firm since 2009. They are a group of principal investors that have been operating a professionally managed co-investment club for high net worth investors.
In this VC Micro-Fund, instead of Angels picking the companies to invest in, they invest in an annual “micro- fund” of $4–6 million that invests in a portfolio of around four deals. Plaza has increased these funds in 2017 to $20–25 million, investing in four new deals plus four follow-on rounds in their high-performing portfolio. Second, the target is early-growth-stage companies at Series A and Series B (a typical stage for VCs where it is hard for Angels to participate). Doing later-stage deals means the likelihood of exit is higher, and putting four new deals in a small fund mitigates selection risk while maintaining concentration. Concentration allows one exit to return a whole fund.
Matt Leibowitz explains the key differences of micro-fund investing versus traditional VC as follows: “The historical VC model is broken. Normally it would take three years to raise a $100 million fund with a 2/20 fee structure. Since a fund might last for over 10 years, fees alone eat up over 20% of the money. Most funds are lucky if they can deploy 70 cents on the dollar. Under Plaza’s micro-fund structure, we are completely transparent about our expenses and cap them at around 8–9% over the life of the fund, or less than half what a traditional VC would charge. We close smaller funds each year and invest all the money within 12 months, and we tend to know where we will be investing a majority of the funds while we’re raising them. This transparency, combined with our team being motivated only by profit, not by fees, creates alignment with our LPs and our companies.”
Plaza leverages the competencies of their Limited Partner (LP) Angel investors with quarterly meetings where investees directly update the investors and gain useful guidance and connections. The LPs are also encouraged to help out with deal flow, due diligence and other aspects of management; however, they are careful to ensure that the LPs are not involved in the final decisions made by the General Partners (GPs) at Plaza in order to protect them from liability under the VC legal structure of the fund.
Angels who invest over $200,000 with Plaza are also invited to make their own direct co-investments (with no fees) into any investee companies.
Source: Adapted from First Ed. NACO Angel Investing.
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