As promised, today we are doing a comparison of the four major approaches by which earlier stage investors make venture investments. They include the lone-wolf angel investor, the angel group, the venture fund and the syndicate. We will be looking at categories such as fees, speed, dealflow access, decision autonomy, transparency and a number of others. No interviewee today, but I hope to bring on a number of guests here in the near future to weigh-in on these factors. And, in full-disclosure, I would’ve preferred to quantify a number of these assessments instead of providing a qualitative assessment alone. However, in the interest of time, I wanted to get this analysis completed instead of spending another week trying to pull together average fee structures for angel groups and venture funds. So let’s start off by saying that this entire exercise is completed from the individual investor or LP’s perspective. This is not done from an entrepreneurs or fund managers standpoint. And I’ve included all the critical categories that should be included in an investor’s decision when deciding how to get involved in venture. I may be leaving out categories that deserve inclusion, but these are the ones that came to mind. If you have suggestions of categories to add, you’re welcome to email me or leave a comment in the comments section at any time. So again, the groups include the lone wolf vs. the angel group vs. the venture fund vs. the syndicate. And when I refer to the syndicate on this episode, I am talking about crowdfunding for equity on a platform that is done via some organized investment that has been diligenced and is completed via syndication into a special purpose vehicle.
The categories we will be evaluating each of the four against each other include:
- Decision Autonomy
- Decision Speed
- Fees Mgmt
- Fees Carry
- Rules & Obligations to LP’s
- Expertise Breadth
- Expertise Depth
- Rights & Protections (Control)
- Price (Economics)
- Lower minimums
- Access to dealflow
- Volume of dealflow
- Opportunity to Learn
- Follow-on ability
- Time Invested in Diligence, evaluation, etc.
A venture fund is a blind pool. The bet is made on the fund manager rather than the specific companies invested. For this reason, the fund is ranked last in this category. Each the lone-wolf, angel group and syndicate allows investors to select each individual deal. So, we’ll say that each of the three are tied for first on decision-autonomy.
This relates to speed of decision-making. How much time passes between first-meet and a pass or proceed? Indications are that the Syndicate and Venture fund can move very fast. There is no critical mass needed to make an investment. The leaders of each make an investment and can do so fairly quickly. The lone-wolf can also move very fast but they rank third because they often do not have the processes setup for quick initial review, due diligence, decision and financing. So decisions can be quick but a lack of process or urgency can be limiting. Finally angel groups have a reputation for moving slower than the other groups. This relates more to their ability to get the group members together for a review, often in two cycles, and herding the cats for diligence review and final decisions. Without a critical mass here, the deal will die… and from my experience consensus can take some time and lobbying.
The lone-wolf comes it at number one here. No fees with a direct investment. The Angel group and syndicate are tied for second. I don’t have the exact numbers in front of me but would like to do a more quantitative analysis that looks at average membership costs for groups and the amount one would have to commit to reduce the significance of that fee relative to investments. I pay around $1,500-$2,000/ year in membership dues to the angel group. So, in effect, I should be putting ~100k to work/year to experience lower feeds than a venture fund w/ a two and twenty fee structure. The syndicate is a little different in that there aren’t fees to join the group, but the platform, such as Angellist, will often charge an initiation investment fee on each startup investment to cover legal, overhead and such. Finally, the venture fund comes in last here as it’s very rare to find a fund charging less than 2%. This is, by no means, an egregious fee, especially when compared to fees on larger funds in other asset classes. However, it looks to be higher than the other four.
Again, the lone-wolf is best here. No fees involved. For the other categories, I’m making the assumption that they are all charging a 20% carried interest fee. That will not always be the case. There are Angel Groups that have lower carries. People are also often negative on AngelList b/c the platform takes 5% carry. But, as long as the syndicate lead is only taking 15%, the total is still 20%, so it’s not extra juice on top. But, there are syndicate leads taking their 20%, so the total will be 25%. In that case, the economics become worse. So, again, let’s assume that the angel group, syndicate and venture fund are each set at a 20% carry. In this case, the venture fund is best. Why? Because they only pay out a carry on the collective returns of the portfolio. So losers will offset winners, reducing carry amount that goes to fund managers. With the Angel Group and Syndicate the carry exists at each individual deal, so the amount is paid out at that level, resulting in better carry payouts for the organizers.
We won’t spend much time here as it’s pretty self-evident. The more organization, overhead and formal arrangements, the more bureaucracy must exist. The venture fund will have the most, the lone-wolf the least. I’ve found syndicates to be incredibly democratized and efficient so they rank ahead of the angel groups, which are not overly bureaucratic either, just not quite as decentralized.
In terms of transparency, it seems that the lone-wolf and angel group win here. Almost all of these deals involved personal relationships with in-person meetings. You know who you’re investing in and you can ask whatever questions you’d like. You also are meeting with your group and get total visibility on how the investment process works. The syndicate comes in third, not b/c of a lack of transparency, but the lead may proceed with a deal that you love but still have a question or two that may not be covered in the diligence. I’ve also been a part of syndicate groups that have incredible, transparent communication and processes. Gil’s team, for instance, participates in daily communication about every deal. It’s a really fun team to be a part of and watch how these things happen. I’d love to see his process follow a CRM or sales funnel process a little more so that we all can see deals visually in various stages and gates and measure conversion and timing through various stages of the process… but one-step at a time. His is much more transparent than other syndicate groups that don’t provide any behind-the-current access to their members. Finally the fund is not going to provide advanced info on a candidate company before a placement. The decision is theirs after the LP money is committed. It’s not a bad thing, it’s by design. Decision-making is outsourced and transparency with it.
Rules & Obligations to LP’s
This is related to Bureaucracy but has to do more with the rules and specifics that are written into a fund document. If for example, a firm sets up it’s rules to only invest in California-based bio-tech companies… the market could evolve in the 10-year life of the fund to make these stipulations very unfavorable for choosing the best investments. So the venture fund comes in last here as they typically do disclose their constructs upfront and have limited opportunity to adjust after launch. The syndicate is best here as investor group makeup, thesis and process is fluid and adaptable. The lone-wolf is also tied for best here as an individual can do whatever pleases them. The Angel Group is third. They do have significant autonomy but I’ve found that most have rules about location of startups or maybe requiring that founders present to the group in-person. While these aren’t bad rules, they certainly can be limiting when really strong opportunities are presented. If I was an entrepreneur, building a business, funding is important, but I couldn’t justify either relocating or even doing a travel circuit for a couple of months to present to investors.
The syndicate wins out here as there are no constraints on location. The syndicate groups that I’ve interacted with have incredible breadth of Subject matter experts. This is incredibly helpful for evaluating startups in a range of verticals. Angel Groups come in second here as they also have really impressive breadth. The only reason they’re second to the syndicate is that the size of these groups is more often restricted to a location so the sheer number of members is less. But, I’ve learned quite a bit from my fellow group members with great expertise in verticals of which I have no background. Venture funds are third. Seemingly they’d have a lot of breadth but, more often than not, VCs are sector-focused or business model-focused and are not trying to be SMEs in everything. Lone-wolf is last as the expertise is limited to their own.
Conversely, VC’s are the winner in depth. While is certain scenarios the syndicate or angel group may have incredible depth, the VCs are designed as professional organizations with existing depth, committed to furthering their knowledge in specific areas. Syndicates come in second as the sheer number of members provides more access to deep knowledge experts. Followed by the angel groups, which have deep knowledge experts in more limited numbers. Here again, the lone wolf is last as they’re rarely deep in the range of areas in which they invest and don’t have the same resources as the other groups to continue expanding their depth.
Rights & Protections (Control)
When we had Brad Feld on in Episode 10 to talk about the term sheet, we discussed control terms and economic terms. This is likely evident, but VCs are often the most demanding when it comes to control terms. Professionally, it behooves them to make strong investments and protect them in all scenarios. Most have seen all the crazy things that can happen and have their terms setup to protect their money… up-round, down-round, cram-down, follow-ons, liquidations, participation preferences, etc. I’ve ranked the Angel Group and Syndicate equal here. At large, they may be less aggressive on terms than the fund, but both are often professionally managed with strong awareness of down-stream risks. Lone-wolf is last again here. Most experienced venture practitioners caution against lone-wolf investing for this exact reason. Without a professional approach and expertise, lone-wolves are often watered-out, restricted from following-on and/or removed completely from cap tables.
The other component we talked about with Brad was Price. While, I initially was thinking the VC was best here, I am reminded that we are talking about seed-stage venture and often VCs that play here have artificially inflated valuation by being less price-sensitive. In many cases VCs will invest at higher valuations than the other groups just to get in, secure a position and enable down-stream financing activity. So the Angel Group is rated best here as they are often most motivated to lock-in a lower valuation. Especially when they’re not betting on unicorns and the upside of their exits may be 30-50x, they need better economics. The syndicate is second here. Usually less price-sensitive than the Angel Group, maybe less flexible on price than the VC but much more flexible on other control provisions, which is why entrepreneurs very much like the syndicate model. The lone-wolf again comes in last b/c they really don’t have any negotiation power as an individual, nor is it likely that they have the same data on market prices or comps. Negotiating a valuation w/ $25k behind me has never gone as well as negotiating with a group of investors.
Clearly, the syndicates and platform models have the most attractive minimums. In many cases, investors can get in at $1k on Angel List. I’ve slotted Angel Groups into the second position here. Again, I do not have the quantitative numbers completed on this, but anecdotally, investors can get in for pretty small amounts, say $10k, when working with an Angel Group. This can be a big advantage and allow more diversification. Remember those like David Rose and Gil Penchina recommend 10-20 investments if you’re going to involve yourself in this class at all. I’ve ranked the VC fund 3rd as one typically has to make a sizable commitment just to get into a venture fund. You won’t find many VCs taking on LPs for $50 or $100k. And the lone-wolf, again, is last on this one. Just to play as an angel and get on a cap table, you have to have some capital to commit. The least I’ve seen a Startup take, after a friends and family round, is $10k. Usually they want $20k at the least. As mentioned on earlier episodes, when I started as a lone-wolf two years ago, I was doing $50k investments just to get in and negotiate on terms. To get a diversified, balanced portfolio, this was not sustainable. I’m thankful to have studied a lot and started these interviews so that I could adjust. Whether investments go bad, the thesis was off or the terms were poorly structured, we learn, adapt and refine the approach.
As I reflect on episodes with Rob Go and Jerry Neumann, a major takeaway was that at-bats are critical in this asset class. It’s not batting average, it’s grand-slams and home-runs. The more at-bats one can get, the much better positioned. That being the case, low-minimums are crucial.
Access to dealflow
The Venture Fund and Syndicate come in as a tie here. Some syndicates are worse than others and the same goes for funds. But, generalizing, these groups have very large networks and have limited geographic constraints. The network, in this industry, is everything when it comes to dealflow. Those that are really well-connected nationally and internationally and have the ability to invest in deals across state or national borders are going to get more great dealflow than they can fund. Angel Groups are third here. I’ve found that leaders are incredibly well-networked and the good ones get tremendous dealflow. But often, they will not fund something outside of their cities. This is a differentiator for them to be locally focused and in many ways is a strength. But in total dealflow access, it is limiting. The lone-wolf, without numbers is going to have a hard time getting enough dealflow. Even if they’re the best networked person alive, they will find it hard getting the same access as the exponential network-effect of high-powered groups and syndicates.
Volume of dealflow
This is highly related to the last category but is less about access across geographies or through extensive networks and more about sheer volume of dealflow. Clearly, through platforms like Gust, FundersClub or AngelList, you can get huge volumes of dealflow. Here, the syndicate is number one, the VC fund number two, the angel group is three and the lone-wolf is fourth.
Experience has to do with depth but is more a function of deals done. While syndicate leaders may be doing more deal volume than the other categories, venture funds still come in first as often they have the longest historical track-record of deals completed over time. I’d imagine this is very benefiical when one has gone through many cycles and bubbles and understand capital expansion and retraction. Also, the benefits of patern-recognition, often cited by VCs is one that’s hard to quantify but surely exists for some. The syndicate comes in at two b/c of the volume of deals being executed. The Angel Groups often have strong experience, over time, but don’t have to deal volume or historical depth. Lone-wolves again are last here.
Opportunity to Learn
One of the better learning environments for me has been the Angel Group. There’s nothing like actually talking with experienced investors and debating the merits of a deal. The impetus for the show, in fact, was the incredibly revealing and inspiring conversations I was having with so many investors. So, due to the in-person nature of groups and the psuedo-socratic format, I’ve ranked it number one. Arguably the syndicate could be tied for first if the process were more transparent. While Gil has made tremendous progress there, we are still not at a place where the different stages (sourcing, evaluation, diligence, decision) are completely open and transparent to constituent LPs. This is making me feel a bit critical about myself as I have been running interviews to pull back the curtain and I haven’t even showed my own process. Sometimes when you’re immersed in something you don’t see what’s right in front of you. I will figure out a way in the coming months to make this more transparent and get feedback on my funnel process.
The Venture Fund I have rated as third here. The LP doesn’t have the benefit of learning from doing, but at least retrospectively they can get insight from the fund managers about key decision-criteria on the yeses. The lone-wolf is last again b/c while they get the benefit of experience, there’s no one else on the investment-side to learn from. So all learnings are happening in their own bubble, which can be dangerous in any investment class.
Both the venture fund and the syndicate are likely best positioned for follow-ons. The fund b/c they’re typically reserving capital for their pro-rata or more significant down-stream investments. The syndicate is also tied for best b/c of the crowds ability to fund follow-ons. Even if an original seed-investor forfeits their pro-rata right on a follow-on, the rest of the crowd then gets access to that follow-on. So, the volume of investors in the syndicate groups and the low minimums required, really make the double-down opportunities very efficient. Angel Groups are third here, not b/c they’re opposed to following-on but w/ more limited numbers than a syndicate, they may not have the capital or numbers to follow-on, even when it’s appropriate. The lone-wolf, of course, is going to have the lowest ability to follow-on. Even if one is very independently wealthy, when a unicorn gets to a series F and requires many millions to maintain pro-rata, that could be a difficult proposition.
Time Invested in Diligence, evaluation, etc.
For the LP, they really have a small time commitment when it comes to the venture fund. This is the major benefit of the fund… outsourced expertise and decision-making. So the fund is best here. Second best is the syndicate. Due to pretty efficient communication options over message platforms, email and such, one does not have commit inordinate amounts of time to coordinate. Also the crowds are often dividing up work for sourcing, evaluation and diligence… employing the appropriate SMEs on specific deals, so this allows processing efficiently instead of every new sector being a learning objective. Angel Groups are third. Getting together for in-person meetings and the various phone-calls required to herd the cats makes the time per member contributed to be a little higher. The lone-wolf will have to invest the most amount of their own time to do everything. All sourcing, evaluation and diligence falls to them. So they either spend a lot of time per deal or they make more risky, unprotected best.
|Lone-Wolf||Angel Group||Venture Fund||Crowdfunding Syndicate|
|Decision Autonomy||1||Best (tie)||1||Best (tie)||4||Worst||1||Best (tie)|
|Decision Speed||3||3rd Best||4||Worst||1||Best (tie)||1||Best (tie)|
|Fees Mgmt||1||Best||2||2nd Best||4||Worst||2||2nd Best|
|Fees Carry||1||Best||3||3rd Best (tie)||2||2nd Best||3||3rd Best (tie)|
|Bureacracy||1||Best||3||3rd Best||4||Worst||2||2nd Best|
|Rules & Obligations to LP’s||1||Best||3||3rd Best||4||Worst||1||Best|
|Expertise Breadth||4||Worst||2||2nd Best||3||3rd Best||1||Best|
|Expertise Depth||4||Worst||3||3rd Best||1||Best||2||2nd Best|
|Rights & Protections (Control)||4||Worst||2||2nd Best (tie)||1||Best||2||2nd Best (tie)|
|Price (Economics)||4||Worst||1||Best||3||3rd Best||2||2nd Best|
|Lower minimums||4||Worst||2||2nd Best||3||3rd Best||1||Best|
|Access to dealflow||4||Worst||3||3rd Best||1||Best (tie)||1||Best (tie)|
|Volume of dealflow||4||Worst||3||3rd Best||2||2nd Best||1||Best|
|Experience||4||Worst||3||3rd Best||1||Best||2||2nd Best|
|Opportunity to Learn||4||Worst||1||Best||3||3rd Best||2||2nd Best|
|Follow-on ability||4||Worst||3||3rd Best||1||Best (tie)||1||Best (tie)|
|Time Invested in Diligence, evaluation, etc.||4||Worst||3||3rd Best||1||Best||2||2nd Best|
The first thing I’d like to note as I look at this overview is that it doesn’t consider things from the entrepreneur’s perspective. It would be valuable to do a similar exercise where we sub out the LP investor for the entrepreneur and assess th different types of funding sources. The second thing that jumps out when I add up the scores of each category… the syndicate comes in at 30, the fund and angel group tied at 43 and the lone-wolf is 53… is that the lone-wolf is probably not a great approach. However, for the others, they can’t really be compared directly. While the Angel Group and Fund tied for the same score, they are completley different categories with different strenghts and weaknesses. Same with the syndicate, it has an attractive aggregate score, but the strengths and weaknesses are distinct. What each investor should really do, is determine the factors that are most important to them. If decision autonomy, transparency, economics and opportunity to learn are most important, you really have to look at the Angel Group Category. If decision speed, time required, protections, follow-on ability and expertise depth are most important to you, then it’s hard to beat the venture fund. If a blend of those factors, low-minimums, breadth and limited bureacracy is important, than the Syndicate becomes very compelling.
Overall, as I take a step back, I see a distinct role that each of these groups are playing and advantages of each. While I have involvement as a lone-wolf, angel group member and am exploring funds, I haven’t done nearly enough on the syndicate-side…. now that I reflect on this exercise and consider the factors that are meaningful for me. I’d imagine that some combination of these categories is going to be the right mix for the individual investor and certainly for me. What I’ll do here in the next week is put together a tool where we all can rank and prioritize these factors for ourselves and get a better calibrated ranking of the categories. So look out for a post w/ a tool or a little entry form on the website. Hopefully that provides a more thoughtful assessment of what is right for each investor rather than just saying the lone-wolf is the worst and the syndicate is the best.
And lets keep this a living analysis and document. So, if you have feedback on categories that I’ve missed or rankings that may be off, feel free to leave a comment and I’ll make sure to keep improving this over time.