VIENNA, Va. – Two Washington, D.C.-area entrepreneurs in August held an initial close on their second hybrid angel club/venture fund, aiming to take advantage of early-stage deal flow neglected by a VC industry that is awash in capital and increasingly focused on later-stage investments.
By creating the eMedia Club and its more generalist older sibling, the Dinner Club, John May and Cal Simmons have set out to “maximize the benefits and get rid of the inefficiencies” of angel clubs, May said. While traditional angel clubs offer members autonomy in their investment decisions, the eMedia and Dinner clubs invest as a group, eliminating the headache of having to convince several disparate investors of the merits of a particular deal.
The “club” is a limited partnership led by the two entrepreneurs and composed of high-net-worth individuals, each of whom must pony up a set amount of cash to become members – $80,000 for the Dinner Club and $90,000 for the eMedia Club. When either club makes an investment, it does so as one entity. Investors, however, are given the opportunity to co-invest alongside the clubs. For instance, if the club negotiates a $600,000 piece of a deal, the partnership will invest $300,000 of the club’s money and reserve the remainder for individual members to co-invest, May explained.
Entrepreneurs and VCs like the model because it simplifies early-stage investing, May said. “One of their big frustrations is they have to meet 20 angels to get four checks,” he explained.
For their efforts as club managers, May and Simmons receive a 15% piece of the carried interest split and 2.5% of management fees, which are applied toward administrative overhead costs. The two men do not receive a salary.
The eMedia Club, focused on Internet content, “Silicon Alley-type” deals in the Mid-Atlantic region, closed on $3.78 million from 42 investors in early August and expected a final close on an additional $1.62 million from 18 investors in September, May said. The Dinner Club, focused on information technology, Internet and telecommunications companies in Maryland, Virginia and Washington, D.C., closed on $4.8 million from 60 investors in May.
The burden of providing seed- and early-stage financing in many cases has fallen upon angel investors as venture funds have grown larger, forcing firms to invest bigger bulks of capital and driving the VC industry’s average deal size upwards of $5 million. In response to this trend, angels have become more sophisticated in recent years, finding new ways to pool their money and take on larger roles in early-stage financings (VCJ, May, page 40).
One way individual investors have tried to fill the growing void of professional investors focused on seed-stage deals is the broker-dealer approach, typified by firms such as New York-based Spencer Trask Securities and Stonegate Partners in Boston. Another approach is to raise small venture funds that aggregate angels under one vehicle and act like a typical limited partnership, such as Venture Strategy Group in San Francisco and VIMAC Corp. in Boston. The Dinner and eMedia clubs attempt to merge the best of both worlds.
“We wanted to have a fund vehicle that used the brain power of angels,” May said, adding that he studied many of the above models while developing the Dinner Club.
The Dinner Club has closed two deals, a $573,000 investment in Tyson’s Corner, Va.-based authentication application software developer BioNetrix Inc., and a stake in a $6.15 million first round in Arlington, Va.-based Internet marketing research company Cyveillance Inc. New Enterprise Associates, Lazard Technology Partners, B. Perry Investments Ltd., Capital Investors and Graystone Venture Direct Equity also invested in the round.