Tuesday, February 9, 2016

Five kinds of Angel groups: From Networks to Active Angel Funds

Angel Investors gather together into groups as a way to create some specific benefits. By gathering together they are able to reduce the amount of work to create meaningful deal flow. They are able to reduce the overhead costs of managing a diversified portfolio. And perhaps more importantly, they are able to reduce the amount of time and effort involved in making investments. 

The structure of the Angel group can change the process and cadence of a set of Angel Investments. There are several different forms of Angel Investment groups: 

Angel Network - Angel groups which bring together investors for pitches and company reviews , but which then let each investor decide if they want to be part of each deal separately. This is a Pitch then Invest format. More than 90% of the US Angel Groups are in the form of a network. 

Funds -  While all Angel Groups are seeing presentations and pitches of some kind, Funds take a commitment for investment ahead of time. Sometimes the checks are collected first and sometimes the funds has a commitment and then when funds are needed the group will place a capital call with the members. The key distinguishing feature between the types of funds below are Who makes the decision to invest and When they make the decision to invest. 

Passive Fund - The most common form of a fund, the passive fund has some mechanism for triggering an investment following some rule. In sidecar funds, If a specific number of Angels in an Angel Network decide to invest together on a company and a specific amount of money is investment by them, then the Sidecar fund will automatically match the investment in some way. The triggers can have many different forms. In all cases, the investor are passive in the selection of which companies to invest in. Essentially, the passive fund relies on some other group or agency to do the fundamental due diligence and investment selection. 

In Seattle, there are passive sidecar funds at Alliance of Angels, Element 8 and Keiretsu

Fund - When you have specific partners who you want making the investment analysis and investment decision, a managed fund provides for General Partners who manage the decision process. The passive investors are limited partners providing funding, but not being part of the decision making process. This structure is essentially the same as a Micro Venture Capital Fund.  

In Seattle, Founders Coop  is structured as a MicoVC firm, with key people in the General Partner (GP) role with Angel investors as the Limited Partners (LP). In most Venture Capital funds, the majority of Limited Partners would be institutional funds instead of individual Angel Investors. 

Active Fund - In contrast, an Active Angel fund has a significant portion of the member investors actively involved in the screening, deal flow, due diligence and investment decision. Both a  financial contribution and a significant amount of time is required by the members of an Active Angel Group. 

The Seattle Angel Fund and the Oregon Angel Fund are examples of Active Angel Groups. Member participation is fundamental to the Angel Angel Group process. 

Event Fund - Most Angel groups meet on a monthly or quarterly basis, regularly looking at deal flow and doing evaluation of the companies that are available. The decision to invest is dependent on the deals that are seen and the results of the due diligence. In an Event Fund, the investment is taken up front before the companies are known. The date of when the investment will be decided is also defined up front before the companies are known. 

Based on the Angel Oregon event by OEN , the Seattle Angel Conference is one of 6 Angel conferences which have a structured many week process of evaluating a cohort of companies. This process has been described as the "American Idol" format for Angel Investing.  These events gather 40-50 applying companies who are evaluated by a group of 20-50 angel Investors, where all of the companies are reviewed, filtered through a series of Quarter Final, Semi Final and Finalist phases. In the end, there is an event, where all of the investors and all the finalist companies present and at the event the investor group selects which companies will get an investment. The whole group of investors votes together on which company they want to invest in. 

This is in contrast to "Pitch Events", where the decision of who gets an investment is either made individually, or by someone other than the investors. It is also contrasted for Pitch events which have no due diligence and evaluation of the company fundamentals. 

Summary -  The style of each of these groups impacts the experience of the investors and the companies in the process. Depending on the amount of engagement, the stage of investment and the types of investments you are interested in, you should select the type of group that matches your needs. 

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