Tech Coast Angels Forms New Fund to Make Collective Startup Investments

8/3/10Follow @bvbigelow

Southern California’s Tech Coast Angels (TCA) says today it is forming a new fund that will allow non-members to collectively participate in startup investments, a move that should add some firepower to TCA deals and could smooth out the funding process for entrepreneurs.

The formation of the Angel Capital Entrepreneurial Fund (ACE Fund) comes at a time when venture capital firms have been contracting—especially in San Diego—and angel investors have emerged as an increasingly critical source of seed stage capital. Former TCA chairman Dave Berkus, who spearheaded the effort, says the new fund offers individual, corporate, and institutional investors an opportunity to join in the wisdom of the TCA crowd—while at the same time providing low management expenses, a faster payback scheme, and improved liquidity.

In designating the first fund as “ACE Fund 1,” Berkus, a prolific angel investor in the Los Angeles area, obviously aspires to follow with a series of ACE funds.

Investing collectively through a fund, though, represents a departure from the way the Tech Coast Angels has operated since 2000, when the San Diego “Band of Angels” combined with the Tech Coast Angels, which was then operating in Los Angeles and Orange County. The organization, which is technically a nonprofit mutual benefit corporation, has expanded over the past decade to Santa Barbara and the “Inland Empire” of Riverside and San Bernardino, and counts more than 250 individual investors as members.

Usually, TCA members invest only as individuals. Members of each chapter typically meet once a month to hear startup presentations and conduct other business. With the ACE Fund, however, TCA members also can pool their resources and invest collectively in the same deals that are presented at chapter meetings. In other words, TCA members now can invest individually in a startup, or collectively through the ACE Fund, or both.

For the first time, the ACE Fund also will be open to investments from TCA non-member individuals (who qualify as high net-worth investors) and institutional investors.

At a presentation last month in San Diego, Berkus said the ACE Fund already had 19 investors and had raised about $1 million. Of roughly 400 angel groups throughout the country, Berkus says he found about 30 that invest collectively through a fund rather than as a loosely affiliated group of individual investors.

The ACE Fund requires its investors to put in a minimum investment of $30,000 over three years. Yet Berkus says it represents a much more diversified investment than putting $25,000 or more into a single startup, because the ACE Fund will invest its capital in a minimum of 10 deals. He says investing from one fund also should be a more predictable process for entrepreneurs than the current, stop-and-go process that requires multiple TCA members to agree to make individual investment decisions—and which one reviewer compares to “herding cats” on TheFunded.com.

Berkus outlined other key aspects of the fund, including:

—A liquidity provision that allows an ACE Fund investor, in the event of a hardship, to sell his or her shares back to the fund, to other TCA members, or to a non-TCA investor (in that order).

—Operational expenses for managing the fund will be limited to 1 percent.

—Carried interest of just 10 percent for non-TCA Fund investors—so if there’s a return on investment, non-TCA members would get 90 percent of the return and TCA-member investors would get 110 percent.

—An active investment period of only three years for each ACE Fund, with no evergreen investment clause—meaning any liquidity event is immediately paid to ACE Fund investors.

The new fund is organized in California as a limited liability corporation, which Berkus says limits the number of investor “members” to 100 in each ACE fund, which may be one reason why he expects to form a series of funds. Only TCA members will be allowed to vote on the proposed investment decisions (which require a simple majority) to be made by the fund. Berkus explained that non-voting membership allows accredited private and institutional investors to participate in the fund without triggering bylaws that require the institution to actively supervise active investments.

The TCA will elect a board of trustees to oversee each fund, and startup deals seeking funding will be screened and brought before the membership by an elected, five-member deal committee. The arrangement ensures that the membership of each ACE Fund benefits from the deal committee’s investment experience, while still providing voting members the opportunity to vote on each proposed investment—but as Berkus put it, “We’re going to have to rely on the due diligence of the five-member deal committee.”

The TCA says anyone interested in participating in the ACE Fund or in becoming a TCA member should visit the Tech Coast Angels website.

Bruce V. Bigelow is the editor of Xconomy San Diego. You can e-mail him at bbigelow@xconomy.com or call (619) 669-8788 Follow @bvbigelow

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