Sidecar funds primer: Why might someone invest in a sidecar?

We’ll skip the reasons for angel investing in general, as hopefully we’ve covered the potential for making money, having fun, and doing good enough already!

The advantages of using a sidecar fund for angel investing include:

  • Passive: early stage investing can be hard work and time consuming. Sidecar funds are designed to be minimal work (for the investor), and are ideal for those without the time

  • Automatic diversification:

    • As we’ve mentioned many times before, a single early stage investment is, on average, going to lose money. Diversification is critical. Sidecar funds are designed to create diversified portfolios.

    • For example, VentureSouth Angel Funds I-III invested in 18, 22, and 18-and-counting companies respectively.

  • Smaller exposure and per-deal allocation: even though angel investing requires less capital than you might have heard, the total allocation (of say 20 deals at $5,000 per deal – total $100,000) might be more than you are comfortable with. If so, you could significantly reduce it via a $25,000-$50,000 allocation to a sidecar fund.

  • Administrative ease: one set of investing documents to sign, one K-1, and you’re not bothered by ongoing consents or all the other minutiae of early stage deals

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