How To Go From Angel To Fund

Since 2007, I have been an angel.  I started up Hyde Park Angels with every intention of doing a fund.  Raising a fund is brutally hard.  It’s probably harder than raising money for a seed stage company because at least with a company the investors get all the return-and they are investing in a product.  To tell you the truth though, it’s really really similar.

In pitching, I have received some valuable feedback.  I wanted to pass it along to angels that had designs on raising a full fledged VC fund.

Specialize.  Intensely focus.

That goes in the face of what angels do.  Angels invest in lots of things.  Look at my portfolio.  As one of the founders of HPA I felt a huge responsibility to do a lot of deals.  I also felt a responsibility to delegate to get a lot of involvement from the membership.  Those two strategies bit me in the butt in different ways.

HPA was successful because we invested in what the Midwest was good at.  Not understanding the fund game, I threw money in various deals I thought were interesting. Later, I put money in deals where I thought they were interesting and I could add value. This is typical angel investing.

Fund investing is a lot different, and knowing what I know now I would have done it a lot differently.  Here is some core advice I have received.

There is no need to join/start an angel group if you want to be a fund manager.  Partnering with them is a good idea because they can round out your syndicate.  They might be able to add some value depending on how the group operates. If you only invest inside the group investors in your fund don’t know if it’s your acumen or the groups acumen that finds and picks the deals.

Did I waste 9 years of my life?  Yes and no.  Yes, because I wanted to do a fund from the first time we ever entertained the idea in November of 2006.  No, because I learned a lot met some good people and was a catalyst for the local startup scene.  Yes, because I have never received a paycheck for doing it.  No, because many of the companies I am in will pay me if they exit.

At least with me, my career does a lot of the talking.  My investing track record inside the group and outside the group is pretty darn good.  I am proud of the companies and really value the relationships I have built with the entrepreneurs.  I hope you can become customers of them because they are solving some really big problems for people.  Check out their websites.  However, because investments aren’t focused, or thesis driven it’s hard for a potential investor to rely on it.

I once had a very successful investor tell me, “do deals”.  I heard, “write more checks”.  What they really meant was “do deals that exemplify what you will accomplish with a fund”.   Invest on your own and make sure the deals you invest in look exactly like the deals you will do for your fund.  Spray and pray is not a strategy-even for a microVC.  There are no portfolio effects like Fama’s Efficient Market Hypothesis in startup investing.  Each investment only adds risk, it doesn’t diversify it.

That last point might be a bit different in Silicon Valley.  Almost everything is different in the Valley.  There is a much larger river of deal flow, more partners, more cash, more everything.  However, each investment doesn’t diversify the risk.  Spraying and praying might be a good strategy in the Valley because good seed stage investors invest in great founders.  There are a lot of great founders in different industries in the Valley.  It doesn’t work outside of the Valley.

Usually founders outside the Valley will have a lot of domain expertise.  If your focus is on their domain, you really look hard at investing.  If not, make introductions.

This brings up another point for a seed/Series A focused fund.  Geography.  If you aren’t in Silicon Valley, you better be able to show why what you are investing in is going to beat the Valley.  What unfair advantage does your geographical location have over the Valley, or another area of the country?  How is your geography going to consistently beat them?  I know plenty of investors that send 100% of their money to California and then move on.  In some ways, you can’t blame them.  But, as we know if you are right when you bet against the herd you get outsize gains.

If you want to do a fund, do deals that show investors what your fund will look like.  You might consider rolling those deals into the fund.  I could roll my existing investments into the fund, but since all of them don’t follow the investment thesis and goals we have it doesn’t make sense.  Even though they have paper gains, professional fund investors smell risk.

My advice would be build a fund around what you are really good at.  If you have accumulated enough cash to angel invest, how did you do it?  What do you know that no one else knows?  How do investors in your fund get an edge or unfair advantage?  There is a fund thesis somewhere in there.

You are going to need a partner.  Partners are really, really hard to find.  Virtually no one invests in a one person team. Your partner should have the same focus you have, but very different skills.  They need a different network, and access to some capital. Professional fund managers will not invest in your team until your team has done some deals.

Lastly, just like a good startup CEO, people don’t buy what you do.  They buy why you do what you do.  You have to take them to a mountaintop and show them a vision of what the world will look like if you are successful-and it has almost nothing to do with money-yet it has everything to do with money.