Continuing from here and here.
Why a membership group (not a fund)?
Our lives might be easier if we had committed capital funds waiting for us to invest them. Instead, we have a membership group structure. Why?
1) Encouraging new investors. We operate in markets with limited histories of angel investing. It’s too hard (and, aside from that, not a good idea) to persuade people to invest $25,000+ upfront to become an angel investor if they have no idea if they’ll like angel investing.
2) Blind pools. Similarly, people generally like to know what they are investing in before they invest. (Crazy, right?) A committed capital “blind pool” is harder to raise as a result, particularly in markets like ours that do not have much history (and even less positive history) of successful venture capital funds investing.
3) Getting started. Related to those first challenges, raising a fund is not only harder but it has to be bigger to get started. To make an investment in a group, we need to pass the hat and find (say) 10 investors investing $10k each to fund the first $100k investment in a company. To do the same through a fund, the fund would need to raise $1MM to reach a minimum level of portfolio diversification for its members – so much harder to get started.
4) Individual autonomy. We want our members to make their own investment decisions, not to rely on an advisor or fund manager (like in a private equity fund). We also like people to invest proactively in things they like – and not feel compelled to invest in what they consider bad ideas simply because of the structure they’re investing through. Each of our members decides to invest, or not, on each time; they are never forced to.
5) Decision making. In a fund structure, there needs to be a decision-making process. A fund manager, investment committee, or voting thresholds determine when and how much to invest. Our structure (you decide if you want to invest in any deal) is easier, eliminates potential conflict, and never leaves anyone feeling “forced” to invest in something they think is crazy.
6) Flexibility. Turn out that you didn’t like angel investing after all? In our groups, you can leave any time. In a fund, you are “locked in” possibly for multiple years – and potentially funding capital calls for investments you aren’t interested in. The penalty for not funding a capital call obligation in a fund is high; there is no penalty to not investing in a group model.
So although a few committed capital funds would be nice, for both practical and philosophical reasons we prefer the group model.
(You might note, having said all that, that VentureSouth also operates two funds (the Palmetto Angel Fund and the VentureSouth Angel Fund II)! Guilty. Our funds face some of the same challenges as other funds – it is hard to raise these blind pools that need $1MM+ to get started, particularly is areas unfamiliar with angel investing. However, as “index funds” that automatically invest when “triggered” by an investment from our active angel groups, they have no “decision making” issues that can impact a “group fund.”)