De-Risking Risk Capital: A Lightweight Angel Fund

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This discussion springs from Boris Mann‘s post today, which touches on the need for “fail money” in Canada.  I agree with nearly everything he says, and it can’t be disputed that more active capital is required to continue the growth of the startup economy in Canada and build our web and digital media industries.

My reaction though is centred around (1) I hate the term “fail money”, but I know what he means is that we need more capital going to companies to TRY, and half will fail, which needs a high risk tolerance and (2) I’m a small-time angel investor myself, and at my level this concept makes me very nervous as an investor.

The issue is that I’m not investing enough to create a portfolio effect to counteract the high risk of any single investment.  I know others in the same boat, people with tens of thousands to spend, which only enables 1-3 investments, which gives you a really high risk.  We need a mutual fund of angel investing.  While startup accelerators and angel funds or super-angels come close to this, it’s not working well in Canada right now.

I talk about this quite a lot in my MBA thesis, which is a startup accelerator business plan (posted on this blog earlier today).

What I’d like to create is an investment vehicle that is very public about the status of its fundraising rounds, through an investor portal.  Any investor with at least $5,000 to spend can create an account, see the status of any rounds being raised by the fund or its portfolio companies, become accredited, and commit funds to any of the rounds.

The benefits of a very open, public, and broad approach include:

  • Creating a valuable contact database of interested potential investors
  • Remove barriers to participation for small investors
  • Significantly de-risk startup investing by allowing portfolio approach
  • Remove fundraising risk by casting a wide net
  • Open approach will generate significant attention and interest
  • Open and frequent communication keeps investors and prospects engaged with our companies and efforts
  • Open and requent communication also increases investor satisfaction, leading to high rates of initial and repeat investment
  • Ability to offer rounds being raised by portfolio companies and other unrelated startups to this investor portfolio, perhaps in return for fee or equity

This structure is a modification of the currently popular super-angel approach, and would obviously require one or two active investing partners to be doing the legwork.  The innovations here are around the broad community of investors and the unusual level of openness and transparency.

From my business plan, here’s a mockup of how I imagine the investor portal looking:

3 thoughts on “De-Risking Risk Capital: A Lightweight Angel Fund

  1. Awesome. I kind of knew that “fail money” would really raise some hackles. You can call it “win money” if you like!

    There is the secondary effect of, no matter if people succeed or fail, we are creating more experienced entrepreneurs.

  2. Jeff

    “Win money” might be more like it but there’s some expectations involved 🙂 Risk Capital keeps sounding more appropriate. I agree with the secondary effect, but my point is that no investor will make risky decisions on the basis of providing secondary benefits to society should their ventures fail. We need a structure like this to generate the secondary effects while ensuring investor security and return. We can’t just say that we need more capital flowing, we must make it attractive to potential investors.

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