Thomas Dübendorfer on Co-Investors for Angel Clubs “Why we decided to partner with VCs to co-invest with our angel investors”

SICTIC Board Members celebrating that Creathor Ventures joined as co-investor

Keti Chikhladze from EBAN spoke with Dr. Thomas Dübendorfer, Angel Investor, Co-Founder and President of the Swiss ICT Investor Club (SICTIC).

Creathor Ventures with more than EUR 230M under management and a track record of 20 IPOs recently became a preferred co-investor of the Swiss ICT Investor Club (SICTIC).

Why did SICTIC look for co-investors?

Swiss deep tech startups that pitch at our SICTIC Investor Days typically look for EUR 300k – EUR 1.5M of funding. Our angel investors were usually quick to fill smaller funding rounds of up to EUR 800k as our angel investors usually invest EUR 20k – 50k per angel and deal. However, it was often difficult to close larger Seed rounds, especially above EUR 1M. A VC as preferred co-investor is a well-known partner that trusts the judgment of our angel investors and invests at the same terms and hence the process to get the VC to fill up the round is rather quick.

How did the startups fill up the larger rounds before you had a VC as co-investor?

To be able to fill these rounds, the startup had to pitch also elsewhere to find additional investors, which sometimes delayed the closing by several months. In addition, many startups didn’t like to have more than 20 angel investors in the same deal as stakeholder management becomes an issue and the communication overhead can become quite time-consuming. Just asking for higher investment tickets of EUR 100k or more per angel investor often wouldn’t work as most angels don’t do tickets above EUR 50k in order to have a diversified portfolio.

Why didn’t you set up your own fund to co-invest?

We indeed looked at setting up our own EUR 20M Seed investment fund. While this is the classic approach, it comes with high cost, is not large enough to pay professionals to run it just from (reasonable) management fees, discourages our angels to stay active as they might just pay into the fund and requires a 10 years commitment until harvesting is done. Furthermore, managing other people’s money is not in the very nature of our entrepreneurial angel investors and most of our board members as they prefer to invest their own money and add some time to the investment as well to make it “smart” money.

Did you look at pooling money directly from investors as an option for co-investments?

The SICTIC Board did an in-depth analysis of many different co-investment schemes. We looked at so-called “investor clubs” (not to be confused with SICTIC, which is an association that itself does not invest). These are legally spoken simple partnerships of up to 20 often nonprofessional private investors that pool their money and jointly decide into which startup to invest together. The decision making is often slow and they also often manage the investments in turns, so the contact partner might change over time or per deal. Depending on who one works with, the quality might differ a lot. Then we looked at professional “club deals” where a professional deal management team scouts for investments for HNWIs in their network, which ultimately decide if they want to invest or not. This approach is rather erratic and slow as the decision is depending on mostly passive investors that are sometimes hard to reach or just slow to take a decision. Another solution would have been pooling of investments (also sometimes referred to as syndication) from a larger number of investors through a trustee, but such pooling can easily cause large liabilities for the trustee or run into major compliance issues with the Swiss Collective Investment Schemes Act (CISA) if not carefully managed. Even if done under the new Swiss Fintech Sandbox as a crowdfunding scheme that could collect the money in advance to ensure quick investments, the maximum funds holding period of only 60 days is way too short for practical reasons.

Did you also look at novel co-investment options?

We also looked at issuing a certificate through a bank that would have many startup investments as underlying assets. While certificates are somewhat cheaper than funds to set up and run, not being able to determine the company market value on a daily basis due to the lack of a daily share market price causes major certificate price distortion issues. We then also looked at doing a crypto token sale to basically mimic a fund because the proceeds would be invested into startups and the shares would have been held by the token issuing legal entity. The token would provide liquidity to investors that want to exit early, which would be very useful. However, the regulatory environment for token sales was still heavily evolving during our investigations and a lot of uncertainties and risks remained.

What else do startups get if an angel club is partnering with VCs and what does a VC get from this?

Most scalable startups will get in contact with VCs during their growth phase. VCs can often help to enter a new market, professionalize reporting or build up distribution channels. They can also be the lead investor in the next round. As Seed investments are very time consuming and the ticket sizes often small, many VCs don’t invest in Seed rounds. With SICTIC’s preferred co-investor offering for VCs, the very time-consuming deal filtering, due diligence process, and term negotiations are “outsourced” to the angels and only very promising deals that are “ready to invest” are looked at by the VC. This service is of a great value to a VC.