Back to Basics: why a network?

Types of angel groups

In our last post, we outlined the different kinds of angel investor structures.

Next, we wanted to explain why we chose VentureSouth’s structure – a network of angel membership groups, run by a professional team, whose members meet in person to help individuals invest their own capital in early stage companies across the southeast.

So over the course of a few posts, here are a few reasons why we think this approach is effective – and where it has room for improvement. We’d love to hear where we’re wrong!

Why a network (not a single group)?

1) Economies of scale. Operating a single stand-alone group is hard work. When Matt was running UCAN as the only group in South Carolina outside of Charleston, he was working more-than-full-time screening, reviewing, diligencing, negotiating, structuring, and executing investments – investments that were only partially-funded because a single group has limited firepower.

As part of the VentureSouth, the 13 groups and funds create more work, but not 13x as much work as 13 single groups. And importantly, by multiplying the investment firepower we can fully fund rounds more often. This lets the entrepreneurs get back to building businesses, not get stuck fundraising for longer, which leads to better results for companies and investors.

2) Makes small groups feasible. Similarly, because of the “fixed” minimum amount of work, an angel group needs a certain number of people to be feasible. (There aren’t many single angel groups with less than 40 members according to ACA data.) However, most communities can’t bring together 40 investors, which is why angel investing tends to be concentrated in larger cities. However, a 15-person group is feasible if it uses the same infrastructure as another group – which is how we can operate Electric City Angels in Anderson, for example.

3) Varied deal flow. Our network model requires investors to be interested in funding the best deals wherever we find them. A single “local” group typically has fewer relationships outside of their home town, so has a lower volume and less variety of deal flow. This, often coupled with a focus on home-grown deals, can lead to weaker returns that make single groups unsustainable.