Who pays the fees in early-stage investing?

Whether you’re investing via a Venture Capital Fund (VC), an Angel group nominee or directly into a startup, resourcing is required for deal making and post investment management: undertaking due diligence, facilitating the investment, supporting the startup, reporting to the investor, and reporting to regulators (FMA, IRD etc).

Different types of investment organisations have different business models to pay for this resourcing and ‘get the work done’. An easy way to break it down is by who pays (the startup or the investor) and whether they pay in cash or time. In New Zealand there has been a lot of debate over this topic, particularly in recent years as we have seen more international investors arrive on the scene.

In this blog Nina Le Lievre will shed some light on some of the business models of different early-stage investment organisations and how Enterprise Angels fits into the scheme of things and what we are considering as we evolve our business model. It’s worthwhile noting that simple economic principles apply, where there is a scarcity of something it costs more, where there is an abundance, it’s cheaper. The same applies with capital and currently, there is an abundance.

How are Angel groups resourced?

Angel groups are networks of experienced business angels who invest capital and time to help startups. Angel groups rely on experienced business angels to help on a voluntary basis with everything from screening deals and undertaking due diligence to sitting on boards of startups and/or the angel group board/committees.

In addition to the fun stuff (working with and investing in companies) there is a lot of administration and organization that is required, particularly if the individual angels invest via a nominee (more details of the benefits of using a nominee can be found here). Sometimes this work is done by staff and sometimes it is managed by the angel investors. There are also several costs to cover including events, education, legal, professional memberships, accounting and general operations of the angel network which is typically structured as an incorporated society in New Zealand.

I’ll explore the fees vs no fees models below, noting there are many variations in between the two models.

Total volunteer model – no fees

Some angel groups have models where their members are very active and there are no paid staff to provide any administrative support. As an example, Flying Kiwi Angels is completely fee free, but the key ’catch’ is that, in addition to the work involved in investing in startups (including screening, due diligence, deal development and post investment management), members do all the functions of the group including network group administration, managing the nominee, reporting to regulators and managing network group communications and processes. It is a group of dedicated angel investors who are prepared to give a lot of time to the worthy cause of growing startups.

High net worth individuals and family offices also fit into this model. Where these investors don’t outsource any of the due diligence or deal development to professional advisors, the workload would be quite high, assuming they are professionally managing their investments.

Professional staff and member volunteers – fees

Since angel investing spread its wings in New Zealand back in 2006 and the first angel groups were formed, all other angel groups have charged a capital raising fee of up to 6% to the startup as well as membership fees (charged to members/angel investors/industry partners).

The founding New Zealand angel investors worked closely with US angel investors and it really is a wonder that such fees were part of the process given it’s illegal to charge startups a fee in the US without becoming registered as a broker-dealer (a costly, lengthy and involved regulatory process). Unsurprising that, fast forward 15 years with US VC investors becoming more interested in our innovative nation, they look with disdain at how our angel groups charge fees to startups.

Larger angel groups with more diversified revenue are fortunate to have paid professional staff to facilitate the investments (sourcing deals, arranging pitch events, providing guidance in due diligence and deal development) and ongoing management of holdings (compliance, reporting etc). This means that the angels do not have to do so much of the legwork – the boring stuff like compliance management and ‘cat herding’ (an affectionate term used in the angel investing space to describe corralling investors). Enterprise Angels fits into this category.

Active management of portfolio companies is provided on a voluntary basis by angel investors, typically investors that have invested their own cash into the business, or by staff of the angel network, particularly if the network has its own angel fund. The angel network also provides ongoing support in reaching out to its members and broader networks for relevant support to boost the growth of its portfolio companies.

Founders should always do due diligence on the angel group and see how they are resourced and what extra support they will be able to provide (voluntary, professional, regular, adhoc etc). Make sure you leverage the broad group of businesspeople that the angel network brings with it.

Enterprise Angels business model

At Enterprise Angels, we run a lean model. We pride ourselves on being as efficient and professional as possible. For about $700k per year we manage an angel network of around 200 members, a nominee company with 60+ portfolio companies (over $40m funds under management) and three funds. We also provide administration and compliance services to Purpose Capital Impact Fund.

We have a professional staff of seven (a total of six FTEs) and in addition to the above core services, we support angel investing and growing startups through:
• Event management – pitch events, education and networking
• Education support for investors and founders
• Investor Rep/Director and Exit Committee programmes, where members meet regularly to learn and share ideas and connections to support our portfolio companies’ growth
• Connecting mentors to startups
• Community hub with professional partners to support startups
• Collaboration with next stage funders/VCs

Our professional services are funded by a combination of membership fees including individual members and corporate and strategic partners, fund management fees (for the EA side-car funds and other funds we provide administration services to), transactions fees (charged to startups), administration fees (charged to investors) and nominee fees (charged to companies for nominee services).

Of course, our operational budget and professional team is supported by hundreds of volunteer hours by our members – a critical part of the model.

How are VCs resourced?

Another important source of capital for startups is Venture Capital (VC) funds. A VC fund typically focusses on Series A stage companies and later, when the startup has achieved product market fit. However VCs may also invest a small parcel at an earlier stage, the seed stage – this typically helps with their deal pipeline. VCs are a good source of early capital as, depending on the size of the fund and the resulting management fees they earn, they can typically provide substantial amounts of follow-on capital and are well-resourced.

VCs are funded by management fees and their operating partners and staff are paid to undertake the active management of the portfolio. Whereas a VC won’t charge an early-stage company a transaction fee, it receives management fees of 2% per annum of committed capital (this could be up to 2.5% for smaller funds). This fee is paid by investors but included in their investment commitment and deducted from the fund’s bank account.

By way of example, a $100m fund will receive $2m per annum in management fees to fund its activities (assuming it charges a 2% fee), a $50m fund that charges 2.5% will receive $1.25m per annum to fund its activities.

Funds also typically charge ‘carry’ – this is a fee to the fund manager on the return of your investment once a specific IRR hurdle is reached. A typical hurdle would be 8 or 10% with all returns above this hurdle split 80% to investors 20% to the fund manager. This aligns funds managers with investors to ensure that returns are maximised.

Over the life of a fund, typically 10 years, as an investor you would expect to pay a total of 15-20% in management fees.  Obviously carry varies depending on hurdles, rates and performance. The goal of the fund manager is to provide very high returns through diversification and active management which should offset the amount paid in fees. Your risk is reduced and therefore your net returns are lower to reflect that reduced risk. This is a very effective way to invest in a diversified portfolio of early-stage companies without investing a huge amount of time. Diversification is critically important when investing in startups as there is a high failure rate and you typically receive most of your returns from a small number of your investments. You can read more about diversification in startup investing here.

Founders should also do due diligence on VCs. It is important for a founder to fully understand the milestones and growth trajectory their startup will need to achieve to secure follow-on capital and ensure the return expectations of the VC align with the strategy for their company. If a VC on the cap table does not participate in your follow-on capital raise, this could be a red flag to other prospective investors.

VCs and Angels – similar processes, different business models

There are some good correlations between the two models – in a VC fund, Limited Partners (LPs) are experts that the fund leverages for connections and expertise to help its portfolio companies. The LPs are invested in the success of the companies by virtue of their investment in the fund.

By comparison, an angel group has expert members it reaches out to for portfolio companies for connections and expertise. They may not be invested in the portfolio company, but the reason they join the angel group is to share the knowledge and skills they have acquired. An angel group is akin to a Limited Partnership fund, but with a bad business model, revenue isn’t recurring and is aligned to investment quantum rather than results. There are examples of angel groups in the US where you invest a lump sum to become a member – this money is invested in a portfolio of startups through the angel group’s processes. This model aligns even more to a VC model.

Where to From Here?

Even when the company pays a transaction fee, it’s essentially coming out of the investor’s pocket and reducing the capital the company has available to grow, potentially meaning the company will be asking the investor for more money sooner.

Both angels and VCs are critical parts of a healthy startup ecosystem and the ecosystem in New Zealand is going from strength to strength. We already have a solid and growing foundation of angel investors, and VCs are flourishing since the government committed $300m to grow this part of the market in 2018. The key will be ensuring that, regardless of who pays, angel groups continue to support young innovative companies all over New Zealand. The importance of startups in our economy cannot be underestimated and VCs can’t grow them alone.

In the current market, we are seeing many companies that simply do not need to pay transaction fees for capital raising, particularly SaaS and software companies that are in high demand from investors. This is not so prevalent in deep tech and manufacturing companies that typically take longer to grow and require more capital so may have an increased risk level which can reduce demand from investors – again market forces are at play with supply/demand and cost pressures.

With this in mind, we don’t want fees to be a driver for whether a founder will come to us or not; that would negatively impact our dealflow – our investors have a strong appetite for software companies. Therefore we are working on a few different strategies to positively change the way “EA plays the game”. Our goal – sustainable support into the future for startups and the angels that help grow them.

Think about your involvement, would you rather pay with time or money? Email us here to let us know your thoughts.


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We welcome engagement from anyone interested or involved in the early stage investment market – Investors, Angel Members, Strategic or Corporate Partners, Founders, Incubators or Accelerators, Deal Referrers, Acquisition Partners etc.