How Angel Investors Can Benefit Better with Accelerator Funds vs Direct Investing

by | Nov 8, 2020 | 0 comments

Angel investors that take a financial stake in pre-seed, seed, or emerging companies, often turn to accelerator funds as an alternative to direct investment.  

Angel groups (investor collectives), that pool funds and management, have been an important organizational innovation which started in the early 1990s. The theory went that by pooling their efforts, investors were able to get access to better deal flow, evaluate and monitor companies better, and strike better deals than they would on their own.  Now, business accelerators (organizations that provide capital and mentoring to early-stage companies) are in vogue and angels have been allocating their capital into accelerator funds.

Accelerator Funds

crowdfunding

First, and most important, investing in accelerator funds dramatically reduces the price that angels pay for their investments. Currently, the median valuation for a start-up by an angel group is $3.6 million. A typical accelerator investment averages $25,000 into these startups in return for 6% of equity. That’s a valuation of about $417,000. Typically, even after a 20% carried interest, the valuation of an angel group would be 7.3 times that of an accelerator. Therefore, an angel who invests with an angel group would have to believe the startup will have a 7x probability of a positive exit. That is unlikely.

Second, investing in accelerator funds increases the chances the angel will generate an acceptable return. Simulations indicate that angels need to build portfolios of 50 investments to have a greater than 90% odds of a 2x ROI. A typical angel, on their own, averages 7 investments.

Diversification

Normally, an accelerator fund makes approximately 12 investments per year (about 5x the rate of the typical angel investor). Therefore, by investing in an accelerator fund, the angel has a much higher chance of achieving the diversification necessary to generate a worthwhile return.

Third, is time. Investing in accelerator funds significantly reduces the amount of time an angel must spend on analyzing each investment. Usually, an angel must spend time attending pitches, participating in the due diligence process, negotiating term sheets, and so on. As an accelerator investor the angel does none of this. The managing director of the accelerator undertakes these very time consuming tasks.

In summary, angels spend less time, invest at a lower price point, and get more diversification by investing in accelerator funds vs. joining an angel group. So, by default, the accelerator is a much better investment vehicle for the angle vs. direct participation.

4M Performance takes the fear out of the future…

Next stop the future

We provide our members reliable insights that you can instantly implement for your business success. These include how-to’s, tips, and take-aways based upon the 4Ms of business acceleration: Management, Marketing, Money, Momentum. It’s the information you need to help boost your business to the next level.

Please let us know what other types of articles or resources will assist you in your business. We want you to survive and thrive through these uncertain times. We’re here for you!

4M Performance

By Jim Lavorato

Jim Lavorato is the founder of 4M Performance which is designed to assist businesses to survive and thrive in these uncertain times. Jim launched an entertainment-related company in 1988. He was at the forefront in cinema technology and helped spearhead the movie industry's transition to digital presentation and distribution. He also co-founded the Arboreal Group, an environmental consultancy. He has published articles on the motion picture and media industries and is a contributing editor for ScreenTrade magazine and writes a blog "Cinema Mucho Gusto". He is a certified SCORE Mentor in the SCORE Greater Phoenix Chapter and lives in Scottsdale, AZ. Learn more about Jim in his "About" page.

Check Out These Related Posts

0 Comments

0 Comments

Submit a Comment

%d bloggers like this: