Angel Funds

Startups that desire to raise angel funding can approach three types of potential investors: individual angels, angel groups and angel funds. Individual angels are wealthy individuals who invest in startups. Angel groups are groups of angel investors affiliated with a particular banner, such as the The Angels Forum, and through which members invest individually in the selected startups. Angel funds are pooled investment funds established by angel groups and are also called “sidecar funds.”

The investors in angel funds often expand beyond the individual angels in the angel group (and there is no requirement of any overlap). Many of the larger, well-known angel groups, such as Band of Angels, have angel funds and perhaps 20% of angel groups overall have angel funds. Angel funds invest usually discretionarily alongside the individual angels in the angel investment group and are always subject to room being available in the financing round after the angel group members have personally invested.

Development

Why do angel funds exist?
1. The angel fund gives the organizers of an angel group another source of income from their organizing efforts through the management fees and carried interest charged with respect to the angel fund assets (which are typically 2.0 – 2.5% annual management fees and 20% carried interest).
2. Investors who do not want to participate in an angel group can still invest passively in the angel group’s deals through the group’s angel fund.
3. Angel funds give the angel group “critical mass” in negotiating with the startup or venture capital firms. Angel funds are more often represented on a startup’s board of directors than individual angels and have capital to re-invest in later financing rounds to maintain ownership positions.

Structure
Angel funds are typically either Delaware limited partnerships or Delaware limited liability companies, similar to venture capital funds. The structures are in all material respects identical to the structures for venture capital funds.