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Until recently, "angel" investors were regarded as detached from the companies they backed, wealthy amateurs who dropped in between rounds of golf to cut checks and rub elbows with entrepreneurs. No more. Increasing numbers of angels around the U.S. are forming organized investment groups, while others are starting formal funds. The Angel Capital Association, a trade group for these investment networks, has grown to 140 member organizations from 46 in 2004, the year the ACA was founded in Lenexa, Kan. Although only 8% of its members have separate investment funds, 27% of the groups were interested in forming such "sidecar" funds and 18% were interested in forming an entirely new fund, according to a recent ACA survey. Although angel groups structure their funds differently, a sidecar fund generally consists of a separate investment vehicle funded by the individual angels to make investments alongside the angel network. Sidecar funds in the U.S. today contain more than $100 million under management. One of the oldest sidecars, a $50 million fund the Band of Angels in Silicon Valley founded in 1999, operates like a venture capital firm, with the fund overseen by a professional manager who makes investments alongside individual deals struck by participating angels. Other sidecar arrangements, such as the Seraphim Fund, which Tech Coast Angels operates, automatically invest in every company in which the Southern California-focused group invests. By contrast, CommonAngels, a group in Boston with two funds totaling $20 million, invests with a hybrid approach. The funds automatically make first-round investments in companies, but a full-time manager decides whether to make follow-on investments, as well as works with individual portfolio companies to help get them off the ground. Another investment structure is that followed by Ohio TechAngel Fund LLC, which in September closed a $4.6 million sidecar earmarked for investing in technology companies in Ohio, a region frequently overlooked by venture investors. Ohio TechAngel head John Houston, who manages the fund, describes this approach as backward because the sidecar vehicle makes the investments and angels are free to invest alongside the fund in whatever amount they wish. Driving the trend among angel groups to start sidecar funds is a wish to diversify their investments. On average, angel investors puts money toward only two deals annually. Sidecar funds might make 10 or more investments in a given year, reducing portfolio risk and exposing investors to a wider range of opportunities. Another benefit is that sidecars keep participating investors focused on the angel group and its portfolio. "I've frankly had a number of people say that it feels good when you go home and you've invested in a company even if the angel hasn't invested alongside the fund," Houston said. In recent months angel groups in Detroit, Kansas and rural areas of North Carolina have all explored creating sidecar funds. However, Marianne Hudson, executive director of the ACA, said that while the interest is real, sidecar funds remain a rarity. "Perhaps that will change in the coming 18 months or so, but it looks like angel groups are in the early stages of this type of evolution at this time," she said. As more angel groups raise sidecars, they are operating more like conventional venture capitalists, investing money in more mature companies while avoiding some of the risk historically associated with investing in early-stage startups. James Geshwiler, managing director of CommonAngels and manager of the group's sidecar, said having a fund "professionalizes" an angel network, which some angels dislike. "It does further institutionalize the angel group, and some investors say they don't want their group feeling like a venture capital fund," he said. "We have a full-time, paid person to chase success, an annual plan and a database that tracks deals and returns. That's not for everyone." The Atlanta Technology Angels would agree. It tried a sidecar fund, but its members ultimately decided against a more institutional investment approach, said ATA executive director Knox Massey. "The experience was OK, but it remains to be seen what the final returns are," he said.  Deal Video
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The Houston Angel Network (http://www.houstonangelnetwork.org), one of the most active and largest in terms of membership and deal flow is seriously considering a sidecar fund as well. It is a natural progression from individuals investing in parallel to making collective investments and managing them more like an early stage VC fund. The recent Kaufman study was the impetus for this renewed interest in the sidecar fund because those returns are hard to beat in any asset class.