One of the biggest problems as an angel investor is the lack of liquidity due to long time horizons and so few exits outside of the San Francisco Bay Area. Meaning, if you invest $25k in a startup today, and follow on with another $50k or $75k over the years, there’s a good chance you won’t see a return for 7-10 years, if ever. Who wants to invest a large sum of money and have no way to access any of it for a decade? Seems like a tall order, and is one of the reasons it’s so hard to raise angel money outside of friends and family that just want to help.
Here’s an idea for a pooled angel investor liquidity fund:
- A group of angels, say 10-20, that invest at least $100k per year, ideally in non overlapping investments, agree to join a fund that holds 20% of the equity of their investments (e.g. invest $50k for 5% of a startup and 20% of that equity, which is 1% of the startup, goes into the liquidity fund)
- Contributed equity is valued at the valuation of the most recent round with no modifications for preferred preferences, cumulative dividends, etc. so as to keep things simple
- As exits occur, which is both more likely and more frequent due to having so many more deals, especially if there are 10-20 new investments per year, everyone in the liquidity fund will see more cash cycle through the community
- Much like a mutual fund, there’s benefit in having a more diversified portfolio, but there’s still direct picking of startups and strong upside for the occasional homerun
Why not just invest in a venture fund and get the benefit of pooled capital? Venture funds make a limited number of investments and still have no liquidity in the short run, just like angel investing.
Unanswered questions about the pooled angel liquidity fund idea include who manages it, how are they compensated, and how long is the ramp up period until the fund starts seeing cash distributions on an annual basis. Regardless, there’s a desire for more liquidity as an angel investor and this is one idea to address it.
What else? What are some more thoughts on the pooled angel investor liquidity fund idea?
David Cummings on Startups 
How about one that most importantly offers maximum tax benefits to its investors? My thought is if you are looking for liquidity, you should not be angle investing. An interest I have is creating a fund that offers liquidity to private businesses that are local household names, but are looking more for liquidity versus early stage capital s the owner’s have most of their capital tied up in privately held businesses. So, kind of looking at the opposite of investing in start-ups but buying into well established local brands outside of private equity type large scale deals. Curious as to your thoughts on this?
I think that’s a great idea. There are a number of entrepreneurs with successful companies that have no liquidity, and selling the entire company, as opposed to a piece of it, is the only thing most people talk about.
This is a great idea for Atlanta. There will be several really awesome exits around the “Atlanta Tech Corridor” in the next few years. I think the community would really benefit if those funds could be pooled to help grow the next generation of successful businesses. Strength in numbers.
Hey David – I like where your head’s at. I wrote something similar to this last year: http://startupharbor.co/2014/03/24/what-if-startup-investing-was-like-etfs-credit-default-swaps/.