According to AngelList, the startup funding and recruiting platform, the number of companies being minted continues to far exceed the number of funds that can support them at the Series A and even the seed stage. Meanwhile, angel investors don’t necessarily have enough capital, particularly those who may be respected operators but haven’t yet enjoyed a major liquidity event yet, meaning their wealth continues to be tied up in their companies.
That’s the argument for a new twist on AngelList: Angel Funds, or venture funds for angel investors who will be wholly supported by AngelList on the backend, as well as provided $35 million in funding from AngelList for the initiative, via a second Maiden Lane fund. (The firm’s first Maiden Lane fund was a $25 million vehicle that was similarly created to provide some money to active angels on the platform.)
Not just anyone can create a fund on AngelList — yet. The firm has for a couple of years been quietly testing the idea with investors who AngelList has already tracked and supported and it remains focused on them, seemingly. Indeed, a new spate of so-called deal leads includes serial entrepreneur Rick Marini; social entrepreneur Shiza Shahid; and Product Hunt founder Ryan Hoover. (AngelList acquired Product Hunt last year for a reported $20 million and continues to operate it independently for now.)
Either way, creating full-fledged funds is seemingly a natural development for AngelList, which in late 2013 introduced its now-popular Syndicates program that allows angel investors to gather capital from fellow investors and plug it into companies on a deal-by-deal basis.
To date, those angels have raised $540 million and invested that money in 1,400 companies.
Now, AngelList may spin Syndicates as a product for newer angels and backers looking to leap into the world of startup investing, while marketing its Angel Funds product to slightly more sophisticated investors.
Here’s how it works: Each “fund manager” receives between $500,000 and $1 million from AngelList, along with additional venture fund partners and their own backers (if they have any). They’re expected to invest that capital over a six- to 12-month period, though AngelList co-founder Naval Ravikant tells us it’s fine if it takes these mini general partners longer than that to deploy the capital.
The deal leads will then earn 15 percent of the profits from any deal, and another 5 percent will go to AngelList. If a deal lead brings in a significant amount of capital from investors other than AngelList, AngelList will take a percentage as small as 2.5 percent, says Ravikant.
AngelList also has venture firms as partners in its experimental initiative, including Accomplice, Foundation Capital, Crosslink Capital and Bain Capital Ventures.
Bain Capital, for example, says it will invest $2 million to $5 million per year to sponsor Angel Fund deal leads, in effect “acknowledging, participating in and enabling the gradual disruption of the venture capital industry,” says managing director Salil Deshpande, who will lead the program on behalf of his firm.
Deshpande says Bain will pick and choose the operators it wants to back. In other words, the aforementioned venture firms aren’t expected to fund exactly the same operators as AngelList chooses to back.
He also says Bain hopes to convince “great angel investors who we already know and will find in the future to get set up as microfunds on AngelList.” He adds that in some cases, Bain might even be the sole limited partner in an angel fund, underscoring the flexibility of AngelList’s new product.
Asked what he’s telling his own investors about why Bain is getting involved in Angel Funds — you could see some firms viewing the development with apprehension — Deshpande says it’s actually pretty simple. “We — I, my firm, and venture capitalists as a class — are always looking to fund disruptive models in every industry. Why not apply the same logic to the venture industry?”