Lastly, carried interest. For those unfamiliar with the concept, it is essentially a share of the profits from investments – in this case, the (long-term) capital gain from successful investments in early stage companies.
(This isn’t the place for a discussion about the philosophy of carried interest. Let’s just say we don’t subscribe to the NY Times’ view that it’s an unjust privilege for hedge fund financiers; in the real world, it’s a sensible approach to taxing capital gains which are already lowered by corporate-level tax.)
Our members pay a "carried interest". This means we receive a proportion of the gain on a successful exit. We earn nothing if the investment fails to return more than the total contribution (including the additional contribution we discussed earlier) for the investor. This is why we are doing this, and, we believe, a good “incentive plan” to help our groups make good investments, monitor and assist them thoroughly and consistently, and shepherd them to positive exits.
Is that a large fee?
Well, a typical "alternative asset" fund (like a private equity, hedge fund, venture capital fund, or SBIC fund), charges a 20% carried interest (as part of the “2 and 20 rule”); ours is considerably less than that. The discount is because the success of any investment depends partly on the investors – who make their own investment decisions, contribute to the due diligence efforts, and provide assistance to companies as board members, mentors, or contact-makers. This isn’t the case in most funds, where managers are solely responsible for the success or failure and thus get a 20% interest.
(This gets a bit wonkish, so apologies. It’s also discounted because angel group carry is American style not European style. We have different investors in different deals, so a “fund level” carry isn’t possible. The relative impact of deal-level vs fund-level carry varies depending on the success of the fund. Angelist provides an interesting model to help estimate the impact, and concludes that deal level carry makes a fund-level carry 25% higher (i.e. a 20% deal-level carry is equivalent to a 25% fund-level carry on their assumed "typical" (pretty successful!) fund). We think this is broadly true.)
We don’t think it’s an onerous fee structure, and the 230 members that have invested at least once so far presumably agree.
When the fees are all added up, there is certainly an impact on returns, as there is in other asset classes. Making a couple of small investments doesn’t make much sense when paying an annual membership fee – though for many the education, networking, and intellectual challenge alone is worth the admission price. But if you get a diversified set of investments over a couple of years, these kinds of returns are possible even after fees.