National Angel Sidecar Fund

Definitions (in this context):

Sidecar Fund – These are kind of like the “index” fund of the private equity world.  Instead of having a dedicated professional manager picking which companies to invest in (like a venture capital fund), a sidecar fund invests in a deal automatically (or close to)

if certain criteria are met.  Example: The Acme Sidecar Fund will match up to 20% of the funds committed in any deal that has secured at least $100k from two professional angel groups and contingent on the full amount needed being raised.

ACA – The Angel Capital Association (www.angelcapitalassociation.org), the official association of professional angel investor groups in North America. Angels are members of Groups.  Groups are members of ACA.

Problem/Opportunity:
  • Entrepreneurs & investors are always seeking more funding for their deals (especially of late!).
  • If a company needs more than a few $million, right now they pretty much have to go to the venture capital community.  Many angels and entrepreneurs wish they had an opportunity to “stay angel funded” all the way.
  • Angels are usually quite happy to add additional investors who bring significant domain expertise and/or contacts.
  • There are few incentives to reward someone for doing all the work needed to pull a syndicated deal together.
  • Angel groups tend to operate in small geographies, yet in many cases opportunities for co-investment across regions are possible.  Also, many angel groups operate with few possible syndication partners close by.
  • It is theorized that if a deal is “hot”, then investors will swarm it and crowd out a sidecar fund because the fund brings ONLY money, no domain expertise nor contacts.  This would leave only “luke warm” deals open to the fund :(.
  • Raising enough money to create a viable fund is pretty darn hard!
Solution:

Create an incentive for someone to do all the legwork needed to make syndication run smoothly.

How?  Create a national sidecar fund who’s manager’s would organize syndication events. This fund could try to partner with the ACA (probably giving them a piece of the action) to get credibility and to allow the fund to hold its big syndication events co-incident with regional and national meetings of ACA member groups.

If this could be pulled of then angels interested in syndicating a deal would face two choices:
A) do it on their own and retain complete control of who invests how much an when or…
B) Work with the sidecar fund manager.  If the deal gets funded thanks to the syndication event(s) AND meets the fund’s criteria, then the sponsoring angel group agrees to reserve up to X% of the round for the sidecar fund.

How this addresses the need:

If the fund could partner with the ACA, then they would have a hell of a carrot to offer other angel groups – the chance to syndicate nationally and know that the heavy lifting will be handled by someone else.  So long as the X% is not too large (and for diversification reasons you wouldn’t want it to be) angel groups might think it worth while.

How do we ensure the “hot deals” stay open?  Participating groups would be contractually required to let the fund co-invest.  Also, as no one else is organizing something on a national scale, there is no way for a hot local deal to get in front of a national audience without syndication.  And while Boston has enough angel groups to usually find syndication partners without having to go National – many parts of the country have a low density of angel groups – and so few local syndication opportunities.

The national scope would hopefully attract better deals, and offer a much wider array of potential investors in the sidecar fund, making it easier (I hope!) to raise money than if one were limited to only the Northeast.

The national scope would hopefully (given time and success) become large enough to offer a viable alternative to small and medium sized venture capital firms as a source for follow-on rounds.

And finally, if a partnership with ACA made sense, this fund could provide a nice stream of revenue to help support that organization’s mission.

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