New Model for Angel Investment

Yesterday, I had coffee with Marc Dangeard, a friend from Institute for the Future's FutureCommons.

He's working on a brilliant project. (And he is still forming if you want to investigate if this is right for you.)

Identifying the issues that start-ups have finding angel-level funding as well as the issues angels have with the volatility of their returns, he is bringing a structure that has been successful in Europe to the United States.  In this structure -- a mutual guarantee society (how insurance began) -- a capital pool is formed by angels and debt is loaned to startups. Inclusion is by invitation.

There are many things I just love about this:

(1) It is focused on the importance of entrepreneurialism in community development and health. This is the best of the financial market mechanism: find a need, and create a product or service to fill that need.

(2) Issues in funded startups can arise for many reasons. One challenge for investors is to mitigate the risks that they will arise.  The best way to mitigate risks is to look at non-financial types of assets: social, intellectual, and physical.  So, many investors already do look for people who are well-connected, good problem-solvers and conflict-resolvers, have domain knowledge, communicate effectively and inspiringly, and are healthy enough to endure the "extreme sport" (long hours, mental will, etc.) that is forming a startup. 

But that all goes out the window when we have typical VC / Start-up constraints: VCs need to make a large investment, receive a high return, and need to do that quickly in order to have a liquidity event. The entrepreneur suddenly faces more risk: the risk of not having a grandiose enough vision to get initial funding; the risk of having funders dally in order to structure a higher return; and the risk of employees collapsing because, frankly, there should just be more employees to do the work faster AND more thoroughly.

The entrepreneur has to make decisions geared towards meeting exit goals; the funders of course try to maintain a healthy environment, but by its nature, this design leads to a pressured outcome. (And I would challenge VCs to correlate the pressure they exert for exit with their failure rate. I would be happy to have a discussion about what metrics make sense here.)

However, debt removes the issue of liquidity event pressure, which means it partially mitigates the risk of perverse incentives for CEOs! There is no "next round," and while the company needs to be profitable enough to service its debt, that is relatively modest. Meanwhile, the VCs have a constant revenue stream.

(3) Clearly, this also opens the door for more investment opportunities. It's a microfinancial solution to how to fund entrepreneurial activity when "micro" isn't $100, but more closely $100,000.  Because of the nature of companies that seek smaller amounts of capitalization, it also implies a more robust and resilient financial economic picture.

(4) While the vast majority of investors whom I know personally are rigorous and reasonable people, there are still VC's -- particularly inexperienced ones -- simply looking for a "strong leader" as a proxy for legitimate risk management: someone who went to the right schools, has a personality cult, was on a team that did something impressive in the past. This is supposed to show intelligence, useful social network, and experience in managing difficult practical situations. Of course it doesn't work that way: such investors are as likely to invest in sociopathic narcissists as dyed-in-the-wool entrepreneurs.

But by creating a mutual guarantee society, just like in smaller-scale microfinance, the entrepreneurs who are selected are already embedded in an environment that is designed to encourage them to express constructive behaviors.

So it's all a very exciting way to approach these issues. 

This is, effectively, lower-financial-risk / lower-financial-return VC.  BUT! It's higher social capital return (shared society), higher return of knowlege and experience (more trials, more people), and I think probably supports higher mental and physical health as well (more personally sustainable growth).

I love the implicit community development component, and I'm very curious to see how this method of monetizing non-financial returns plays out.

Comments

[David]

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Good angels have the following traits: they have funded companies before and they have good contacts and industry and entrepreneurial experience. It is easier to work with a seasoned angel investor than with a novice. You can find these angels through networking, business groups, and investors’ associations.

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