One might not expect rural burgs like Mankato, Minnesota, Mason City, Iowa, and Fargo, North Dakota to be hotbeds of angel investing activity. Nor might one expect really good innovation around the challenges of angel investing in small groups to come from the same areas. Think again!
The RAIN Source Capital network has put together a really interesting program for small angel groups to form funds, and provides these funds with “a process for due diligence, legal templates, management support, access to deal flow and other resources.” Bravo! This is a great way to help angels organize effectively without a lot of overhead. So far they have 23 affiliated funds in six states. These also host annual get-togethers for networking and educational purposes.
One thing I like about this approach is the focus on local interests: unlike a number of the high-profile emerging angel activities which are centered only on sexy Web 2.0-ish technology plays, RAINs investors have supported medical devices, enterprise software, industrial fabricators, and a woodworking tools company. These companies may not have the stratospheric exit potentials of a SaaS developer, but they are the companies that fuel the local economies.
One concern I have (as I do with all angel funds) is the process for selecting investments. I don’t know anything about the specifics of the RAIN model, but having looked at fund structures over the past few years, there is the inevitable potential for political stalemate trying to make selections; i.e., if a majority or super-majority vote is required for a GO decision, it can stall pretty easily. I’d be interested in hearing from entrepreneurs or investors with direct experience.
On a related note, I’ve heard rumblings that one of the angel groups I really respect from the Northeast is putting together a sidecar fund. I’m convinced that groups driven by individual decision-making but supported by a sidecar fund that diversifies risk and increases upside potential for the members are going to become the norm. Among other things, the fund structure helps with long-term sustainability. More on that later.