Today, we’re going to talk about offline versus online angel investing.
You might be thinking about making some investments in startups locally – or offline. That’s great. But I must inform you about how much more difficult and involved offline investing is.
It really makes sense to do offline (real-world) angel investing only if…
- You can do it full time, or practically so
- You’re okay with meeting about 50 companies for every check you write
- You’re a great networker
- You can secure great “deal flow“
- You have a good lawyer to review deals
- You live near San Francisco or can travel there regularly
- You can cut $25,000-plus checks for each deal (though minimums are often significantly higher).
There are very few people who check all those boxes.
The beauty of online investing on accredited platforms like AngelList is that most of the hard work is done for you. These deals are legally reviewed and screened by expert investors. And you can do it all online. To top things off, minimum investments start at just $1,000 and typically don’t go over $5,000. So it’s easy to build a big, diverse portfolio of high-quality startups.
The downside to online angel investing is the fees. You give up 20% of any potential profits (carried interest). In addition, investors’ funds are typically “pooled” into SPVs (special purpose vehicles). The SPV is a limited liability company that holds the shares in the startup. Everyone who invests in the deal online gets an ownership percentage of the SPV. The end result is the same – all investors own a piece of the company. But there are costs associated with the SPV.
Costs to set up the SPV are split across everyone in the deal and range from 1% to 8% of the total amount invested. They vary widely because some deals are raising only $100,000 and some are raising $3 million. The costs are split across all investors in the deal, so the larger the deal, the smaller the setup fees (generally).
Still, even with fees, I consider online investing to be an amazing deal. Where else in the world can you get access to world-class early investments? These things are not easy to come by. The chances of any one of us finding AngelList-quality deals in our local area are very slim.
There’s a reason I’m primarily focusing on online angel investing. Because for the vast majority of my subscribers, it’s probably the way to go. I certainly spend most of my time looking at online deals. Choosing online allows me to invest in around 20 amazing startups per year. If I were doing things offline, I’d be able to invest in only a handful.
That said, there are perks to investing offline. For example, if you’re looking to network in your own area with entrepreneurs, there’s really no better way to do so than through angel investing. You’ll meet with really interesting people who are building cool businesses.
It all comes down to what your goals are. If you’re looking to hit home runs, I think online angel investing is the way to go. If you’re looking to expand your network locally, offline angel investing can be a fine option too.
Choose the Right Sites
My goal in this service is to help you find the absolute best private deals available online. A huge part of that is introducing you to the right sites.
There’s a good reason I introduced you to AngelList – and not a site like Crowdfunder – in “The Angel Investing Bible.” AngelList simply has much higher-quality deals. Its syndicate system sets up the right incentives for great investors to share their deals. AngelList was founded by some of the best angel investors in the world, and its networks are simply incredible.
It takes a little effort to get comfortable using AngelList, but once you figure it out, it’s well worth the effort.
I have nothing against Crowdfunder, by the way. I’ve watched both Crowdfunder and AngelList for years, and AngelList simply has higher-quality deals on a consistent basis. Crowdfunder has a lot of deals in “hot areas,” but not necessarily a lot of “hot deals.”
On the pre-IPO (late-stage) side of things, there’s a reason we introduced you to MicroVentures. We’ve seen it operate for more than five years now, and it now puts out amazing deals on a regular basis. It also has the lowest minimum investments and some great early-stage deals too.
That’s it for this week. If you have any questions, comments or issues you’d like us to address going forward, please email us at mailbag@earlyinvesting.com.