Investing in Funds vs Investing as an Angel
A month ago, I wrote about the basics of investing in a venture fund, but I didn’t go into detail about why I chose to.
At a high level, my reasoning was that I wanted to create additional impact (and generate returns) by investing in a venture capital fund. After getting some questions about what exactly I meant by that, I wanted to take the chance to summarize how I viewed the trade-offs of making my own angel investments in early-stage startups vs investing in a VC fund.
Angel Investing
As an angel investor, I was writing $25K to $50K checks here and there to the earliest stage companies, typically pre-seed. My process was ad hoc and generally guided by my personal interests.
Pros
- Angels are often the first money into a company, and with that comes bragging rights
- Angels are often able to build close relationships with founders by backing them early
- Angels typically have more concentrated returns (average portfolio is 11 companies)
Cons
- With concentration, angels are generally less diversified compared to a fund
- Angels see a more limited number of startups in comparison to funds
- Angel investing takes a lot of time to source and diligence opportunities
- Angels are typically limited by their individual skill sets, access, and resources
Venture Fund Investing
As a venture capital fund LP, I’m making commitments of a similar size as I would as an angel investor ($200K to $400K LP commitments, typically over 4 years). Investing in a fund gave me exposure to early-stage startups without taking a lot of personal time, but at the trade-off of being less hands-on.
Pros
- Fund LPs benefit from the dealflow of an entire firm and its extended network
- Fund LPs typically have more diversification (typical funds have 15 to 30+ companies)
- Funds can be larger platforms for impact (e.g. AI focused funds or women focused funds)
Cons
- Fund managers curate the relationship between portfolio founders and LPs
- It can be hard to access funds as an LP since funds aren’t publicly advertised
- Funds have a layer of fees to cover the management of the funds
Some of the pros and cons I listed may be reversed depending on investor circumstances and preferences. For example, the concentrated approach of a typical angel investor may be a pro for those seeking greater risk but a con for those seeking diversification.
Having now invested in startups as an angel and through a fund, it’s clear that there’s no one size fits all. I encourage investors interested in early-stage startups to learn more about both approaches. At the end of the day, our goal as investors is to bolster the innovation ecosystem and bring game-changing ideas to reality (and to make some money while doing it)!
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