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:

A Startup Accelerator Business Plan

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As part of my Queen’s MBA we don’t do a thesis, each student crafts a new venture business plan.  Because I’ve been excited by the potential of the startup accelerator model, I created a plan for an accelerator based in Vancouver and inspired by Bootup, Y-C, and TechStars.  I believe, and I know I’m not alone, that when dealing with very early stage teams it’s IMPERATIVE that the investment be paired with a strong mentorship presence and a lot of coaching and learning.

I’m proud to publish the full business plan here, I’ve redacted a few names that I included without their permission pending a response from them.

What I’m especially proud of are a few innovations that I think are necessary:

  • The investor portal (pp 6 and 16) – in Canada, the biggest issue is raising the funds for investment.  I want to create a lightweight and very public system that allows many small investors to participate, which does three things:
    • Fulfill the capital requirements with a MINIMUM of partner time spent, especially in subsequent rounds
    • Communicate clearly and frequently with investors, increasing their satisfaction at participating, and creating a lot of engagement with investors and potential investors, leading to higher repeat investment
    • Generates a lot of publicity and attention, creating a high level of investor awareness and participation
  • The creation of an endowment fund (pp 11, 12), which receives a portion of the exit funds on behalf of both the investors and the management, so on an ongoing basis the reliance on additional fundraising is reduced, and the management and investors who worked on one round will have a limited participation in all future rounds.
  • A focus on coaching startups as high-performance teams.  Mentorship on product development and pitching is valuable, but as I say on page 7:

Our initial education program will be significantly different from those of other accelerators in its inclusion of content for improving personal effectiveness and coaching high-performance team practices in the startups. The short length of the program means that one of the most effective things we can do to improve the success rate of our graduates is to improve their ability to perform both individually and within their team long after their graduation. We intend to outperform our peers in this market in part through helping to launch more productive, better performing, and emotionally healthier teams.

Why aren’t I starting this?  This plan has one significant weakness, which I included intentionally for the purposes of this as an academic project: even with the innovations around investor attraction and retention, it’s probably not possible to operate an accelerator as a going concern in Canada that requires annual fundraising.  The successful American accelerators and angel funds are backed by $30+million endowments that remove the uncertainty of funding next year’s cohorts and the partner time required to go fundraising.

Here it is, in all it’s glory.  I must give significant credit to Boris and Danny of Bootup Labs for their knowledge and assistance, to Jed Christiansen for his thesis analyzing the accelerator model, and to Ben and Mack from Compass Engine who helped with the founder perspective.

Startup Accelerator – Business Plan