Ever considered investing in startups but don’t want to be a full-time VC? There are other paths and this post will touch on the five main ones.
0) Definitions — Before a deeper discussion we need to level set, so briefly:
- Angels — Invest their own money.
- VCs — Invest primarily others’ wallet. Caveat: “primarily” because in most funds the VCs themselves put their own money also, in the US it’s typically 1%.
- General Partners (GPs) — The actual full-time employees managing the VC fund.
- Limited Partners (LPs) — The investors in a VC fund. Caveat: almost always LPs are passive but some funds give some of them formal decision-making power. When this happens it’s typically just the “anchor investor,” which is typically at least 20% of the fund.
1) Angels — Top motivations to be an angel: financial return, keeping abreast with innovation, networking within the startup ecosystem, and eventually taking a larger investing role. Angels typically come in the early stage, which most people would define up to and including series B. It used to be angels would come in the seed, have no prorata (ability to put more money in future rounds), and often get bought out in subsequent rounds. All of this is more fluid these days, especially on the first criteria of stage since seed is increasingly split into “pre-seed” followed by “seed” or “seed” followed by “seed extension.” In either case angels are primarily coming into the earlier round and VC funds increasingly playing in the latter round.
2) Angel Syndicates — Angel syndicates are collections of individuals investing together. In many of them all angels have their own decision-making power, although some pool capital and do all-or-nothing in an investment if a certain percentage of the angels consent to the deal. Various platforms, especially AngelList (angel.co), have made the process of being an angel and forming angel syndicates far easier. That said, syndicates are definitely more effective if at least one person takes a central role in coordinating all the individual investors.
3) Special Purpose Vehicles aka SPVs — SPVs give an individual investor the flexibility to form syndicates on demand, negotiating terms on a case by case basis. Setting up a SPV these days has also become far easier, either through various law firms with a strong startup practice or once again AngelList. The persons coordinating a SPV often charge a 2% management fee and 20% carry, modeled after the most common VC compensation. The biggest advantage of a SPV is naturally flexibility, the biggest disadvantage is dealing with potentially different parties in each specific deal.
4) Limited Partner — Being a LP in a VC fund gets you at least a passive position in a multitude of investments, but can also get you more direct deal flow. Large funds may pass on a deal for now and instead share with their LPs. Small funds will often syndicate with their own LPs to increase their footprint. In the latter case, a firm might put in say half through the fund and share the other half directly with their LPs who want more allocation. Most firms syndicating deals will charge some type of management fee and/or carry in setting up a SPV as such, but not all do. Accelerators will often also invest some monies in their companies and having a larger role with the accelerator (employee, mentor, formal LP) can also give you investor access.
5) Actual Fund — In mature ecosystems increasingly individuals are getting consent from their employers and part-time creating their own microfund. This particular category has a high ratio of entrepreneurs who are running their own company but want to invest in other entrepreneurs typically in their own field. In the US microfund implies today <$10M and most running such funds bind together capital from a group of 10-20. That said, in recent years “crowdfunded” funds have started becoming more common — the SEC puts stricter regulation with >99 LPs but if the fund is <$10M you can still qualify with 250 LPs. An actual fund implies the person behind it is devoting a significant amount of time investing and is often a stepping stone to becoming a full-time VC.
This post is inspired by a conversation with Cynthia Yeung. Originally published on “Data Driven Investor,” am happy to syndicate on other platforms. I am the Managing Partner and Cofounder of Tau Ventures with 20 years in Silicon Valley across corporates, own startup, and VC funds. These are purposely short articles focused on practical insights (I call it gl;dr — good length; did read). Many of my writings are at https://www.linkedin.com/in/amgarg/detail/recent-activity/posts and I would be stoked if they get people interested enough in a topic to explore in further depth. If this article had useful insights for you comment away and/or give a like on the article and on the Tau Ventures’ LinkedIn page, with due thanks for supporting our work. All opinions expressed here are my own.