Angel investors face 3 choices when getting into venture investments: investing as an independent angel, leveraging syndicates or investing in VC funds.

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This article breaks down the characteristics of each of these choices to help newer Angel investors decide which best fits their needs.

TLDR:

1. Angel investors face 3 choices when getting into venture investments: (a) investing as an independent angel, (b) leveraging syndicates or (c)investing in VC funds.
   
   
2. These options can be characterized using these 8 traits:

1. Dealflow volume
2. Deal filtering/curation
3. Deal access
4. Diligence received
5. Decision control
6. Time commitment
7. Minimum investment
8. Costs: Fees and carry
   
   

1. By understanding each of these 8 traits, angel investors can make an informed choice of which investment vector makes the most sense for them.
   
   

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If you need help with terminology, here’s Angel School’s Ultimate Glossary of VC terms.

You may also find this article useful: Why investing with syndicates makes sense for Angel investors. 

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Introduction

In 2021, $621BN was invested in startups, 50% of which in the US. At the earliest stages, these companies rely on Angel investors. Venture investing is growing in popularity among angels driven by a number of factors. 

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We’ve been living in a ‘zero yield’ world since the 2008 Global Financial Crisis triggered by the collapse of Mortgage Backed Securities. Quantitative Easing (QE) became the norm for central banks worldwide, driving down returns on traditional financial instruments. Capital has been searching for yield for over a decade.

Startups have drawn attention as a possible source of asymmetric returns with many 10-figure valuations. The ecosystem around startups have also matured; it has never been easier to find and deploy capital into startups.

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We’ve written this article as a guide to help new Angel investors understand and navigate their options.

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1. Three Investment Vectors

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Angel investors have 3 choices when it comes to making venture investments: (a) investing as an independent angel, (b) leveraging syndicates or (c)investing in VC funds.

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Each of these options can be characterized by 8 different traits:

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2. Dealflow Volume: 

Dealflow volume describes the number of companies that an angel investor would have to assess.
 

• Independent Angels: can choose from unlimited deal flow assuming you have the time and networks to access them.
  
  
• Syndicates: Moderate deal flow. You only see deal from syndicates that you are part of.
  
  
• VC funds: None. The fund manager finds and makes investments. LPs do not get any vislibility.

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3. Filtering/Curation: 

Filtering describes the screening done to remove startups that fail to meet your criteria or quality standards.
 

• Independent Angels: Perform own filtering which can be extremely time consuming. With experience, investors develop their own mental models for filtering deals.
  
  
• Syndicates: Good syndicates have the bandwidth and experience to screen startups and only diligence the ones that are a fit.
  
  
• VC funds: None. The fund manager has responsibility to screen companies.

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4. Deal Access: 

Deal access describes the ability to make an investment if you so choose. We see this as a function of capital availability and reputation.
  

• Independent Angels: invest $25,000 - $50,000 per company. Many startups require a $50,000 minimum commitment. This precludes many opportunities.
  
  
• Syndicates: As a minimum, I consider $100,000 as the minimum viable amount otherwise it simply isn’t worth the effort. (Angel School syndicates attract ~$500,000 on average). This gives syndicates greater access though not quite as much as VC funds.
  
  
• VC funds: have the highest access to dealflow. They have committed capital, can move quickly, write bigger cheques than syndicates and startups perceive ‘prestige’ from being VC-backed. 

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5. Diligence Received: 

Diligence received describes information prepared in order to inform an investment decision.
  

• Independent Angels: None. Independent angels need to perform their own diligence beyond receiving company materials to reach an investment decision.
  
  
• Syndicates: Investors should note that there is a wide degree of diligence performed by syndicates. It’s our belief that good syndicates should prepare full, high quality diligence for investors to decide on an investment.
  
  Angel School prepares datarooms for every single company we syndicate (Here’s the investment memo for GroWrk.com - a portfolio company that is growing 20+% MoM and raised their next funding round in 3 months. (Access request required).
  
  
• VC funds: keep diligence prepared internal. LPs do not typically have visibility over diligence done.

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6. Decision Control: 

Decision Control describes investors’ ability to decide which companies they want to invest in.
  

• Independent Angels: 100%. Independent angels are in full control of which startups they invest in.
  
  
• Syndicates: 100%. On top of deal access, curation and diligence performed by good syndicates, investors remain in control of investment decisions.
  
  
• VC funds: None. Fund managers make investment decisions.

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7. Time Commitment: 

Time commitment describes the time (and effort) needed to reach an investment decision.
  

• Independent Angels: This requires the highest amount of time and effort since you are solely responsible for everything- from deal sourcing to filtering to diligence even if you ultimately decide not to invest.

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• Syndicates: Moderate. Syndicates save investors a lot of time and effort by curating deals and preparing diligence. Angels will still need to study the diligence and arrive at an investment decision on their own.
  
  
• VC funds: Low. Once you have committed capital, the fund runs on its own without your involvement.  

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8. Minimum Investment: 

Minimum investment describes how much capital is invested into each startup.
  

• Independent Angels: The average angel cheque per startup is $25,000 - $50,000.
  
  
• Syndicates: Each syndicate sets its own minimum investment amount for each deal (Angel School’s minimums are $10,000). The average on Angel List is around $3,000. Syndicates therefore, can allow more for diversification than investing directly as an independent angel.
  
  
  
  
• VC funds: High! At a minimum, new, smaller VC funds will require a $250,000 commitment. It will be in the $ ‘MNs for established funds.

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9. Fees and Carry: 

Fees and carry describes the monetary ‘costs associated with making and maintaining an investment.
  

• Independent Angels: Low. There are no costs beyond your wire transfer to make the investment.
  
  
• Syndicates: fees and carried interest varies from one syndicate to another. Angel School’s structure is that ~5% of capital (one time) goes to fees. Upon exit, we apply 20% carry.
  
  
• VC funds: generally comply with the 2/20 model. This means they charge 2% of capital in fees a year. Upon exit, they charge 20% carry. Over a 10-year fund life, 20% of capital goes towards fees. 

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Conclusion

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In this article, we’ve described the 3 choices Angel investors have when getting into venture investing- staying as an independent angel, investing through syndicates and investing in a VC fund.

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We’ve characterised each of these choices by 8 different traits: dealflow volume, deal filtering/curation, deal access, diligence received, decision control, time commitment, minimum investment, and costs (fees and carry).

This should serve to give angel investors a better understanding of their choices in order to make an informed choice of what suits their needs best.