I’ve recently been thinking about the best method to help angel investors make pre-seed stage investments to invest funds into startups. I’ve concluded it’s more beneficial than joining an angel organization.
Angel groups are investor groups that pool funds and manage. In 1994, when the angel groups were first formed, it was an important innovation for organizations in the early stages of finance. By combining their efforts, investors could access a better deal flow, analyze and evaluate companies better and negotiate better deals than by themselves. Since business accelerators, organizations that provide funding and mentorship to companies in pre-seed stages, were established in 2005, Angels have been redistributing their funds from angel groups to accelerator funds for three reasons.
The Benefits Of Investing In Accelerator Funds
The investment in accelerator funds drastically decreases the cost that angel investors have to pay for their investment. The Halo Report for 2016’s Annual Halo Report shows that the median value of the startups funded with an angel fund in 2016 is $3.65 million. The typical accelerator gave $25,000 in exchange for 6 percent of the company’s equity. It is a value of around $417,000. Even after the 20 percent carried interest, the worth of the average angel group is 7.3 times higher than the typical accelerator business. (It is also true that the accelerator receives common stock while the angel group may receive preference stock.)
To convince a rational investor to invest in a business through the traditional angel group rather than the standard accelerator fund, they must be convinced that the company has an increase of seven times the likelihood of a positive exit. Or an exit seven times more favorable. It isn’t a lot of chance.
Accelerator funds are a good investment that boosts the number of diversification angels can enjoy. It is reported that the American Angel Survey is a report of data of just a little less than 1700 angels, indicating that the median size of the portfolio is that of an angel as is. Based on data analysis on angel investments, this is a small portfolio to ensure an investor will earn a satisfactory financial return. The Monte Carlo simulation of return data suggests that investors have to create a portfolio with at least 50 investments to be more than a 90% chance of earning a two-fold investment yield.
Through accelerator funds, angel investors enjoy an extensive amount of diversification. Accelerator funds invest around 12 times annually, five times more than the average angel. When investing in an accelerator fund, an investor in business is more likely to attain the diversification needed to earn a decent return from angel investing.
Investing in accelerator funds drastically decreases the time angels must spend making investments. When angels invest as a part of an angel organization, they are required to attend meetings where founders pitch, take part in due diligence to determine whether they would like to invest in the venture, negotiate terms sheets with founders, and track their investment. When investing through an accelerator fund, angels do not need to perform anything of the above. The director who manages the accelerator will be responsible for these tasks in exchange for the possibility of earning accrued interest. Thus, the investor’s time cost is much lower for accelerator funds than for angel groups.
In essence, angels use less time investing, pay less cost, and can gain more diversification from making investments in accelerator funds rather than by joining angel organizations. A more diverse portfolio for less and with less effort is an effective way to invest in companies just starting.