Finding the top angel and venture capital fund managers for alternative investors just got easier.
The institutional alternative asset classes, such as Venture Capital and Private Equity, can be opaque. Nevertheless, a few financial technology (Fintech) firms are helping to lower costs, provide transparency and empower co-investment. That’s important as more retail non-accredited investors gain access to alternative investments with laws like Title III of the JOBS Act.
The lack of transparency in the industry and ability of fund managers to promote their positive performance, coupled with the ability to hide poor performance, can create selection bias when trying to analyze results.
The methods to analyze fund managers’ portfolio performance across asset classes evolved in recent years. The growth in accessibility to data makes it possible to measure angel and VC fund managers more objectively via algorithms.
This review of top 10 lists of fund managers intends to help alternative investors select the right asset class to invest in and improve the performance of their portfolios. Below, we compile everything in one place for you to review. You’ll find an analysis of the ranks and evaluation methods of the angel, venture capital, private equity and hedge fund rankings from:
Comparing the performance of a manager in one asset class to another in a different investment sector is difficult as performance metrics, the timing of cash flows, and window of analysis differ between each firm that performs the analysis. Venture Capital often uses multiples like a return of 2x capital invested and Private Equity often uses Internal Rate of Return (IRR). There is little insight into compounded annual rate of return over an extended period. Therefore comparing these alternative asset classes to one another becomes difficult and trying to index against public benchmarks like the S&P 500 doesn’t make much sense.
There are also other important factors like the highly leveraged nature of private equity funds, whereas angel and VCs are rarely leveraged. Timing of cash flows also becomes an issue. When an individual or institution commits to a fund the money gets invested over time, sometimes 10 to 15 years, which places more weight on the earlier cash flows. Fund Managers will invest or enter companies at differing stages in company growth. One must also ask what performance window is observed. Some rankings only look at one-year performance; others look at three years.
Angel investors primarily put money in startups at the stage entrepreneurs first look outside friends and family for capital. Angels do not always invest in the seed round but wait for later rounds like Series A, B or some as late as C. With a lack of data on compounded annual return firms rank based upon a number of other factors, like network strength and rate of follow-on investment. Below are the rankings of individual angel investors and funds from CB Insights, Forbes and Fund Wisdom. (Editor’s note: Financial Poise did not independently research and does not endorse these rankings.)
CB Insights created the Investor Mosaic, which leverages a multitude of variables into an algorithm to help select top performers. The measures are based on network strength, the rate of follow-on investment, persistence, discipline, selection aptitude, illiquid performance, the number of exits and brand. Investment discipline is measured by focus of continued investment on stage or industry. Performance persistence is based on the time since successful exits took place. Selection aptitude is a measure of selection prowess, or ability to consistently identify winners. The illiquid performance focuses on currently un-exited private companies’ performance. Brand measures the visibility and reputation of an investor. The
Performance persistence is based on the time since successful exits took place. Selection aptitude is a measure of selection prowess, or ability to consistently identify winners.
The illiquid performance focuses on currently un-exited private companies’ performance. Brand measures the visibility and reputation of an investor. The data are collected by 75 percent scraping – or the use of software that parses data sources and extracts key pieces of information, such as company and investor, acquirer, amount of funding, valuation, date, stage and board of directors. The other 25 percent comes from direct submissions along with partnerships with Silicon Valley Bank and the Angel Resource Institute.
CB Insights’ Top 10 using the Investor Mosaic
Notes about this ranking: Angel Investors associated with institutional funds and investing in a secondary market round for a private company are excluded.
Forbes and 1000 Angels did an analysis back in 2013 using CrunchBase, RockThePost, Venture Deal, Forbes, BusinessInsider, BusinessWeek and AngelList, among others. Forbes stated that year friends and family financing were estimated to be a $100 billion industry and angel activity estimated at $20 billion by the Angel Capital Association. We requested an update from the author but were told there is no plan to release an update.
AngelList syndicates have been noted as one of the most significant innovations to hit the venture capital and angel investment industry. Angel investors can create their own funds with many of the same resources of a Venture Capital fund. Through this structure lead investors, or the fund managers, get access to more deals and later stages. These lead investors also receive carried interest, getting paid when the syndicate performs well. Startups get more capital with fewer meetings.
Syndicates offer diversification through access to a high-risk asset class. Investing in a single Syndicate can diversify your early-stage, high-risk bets. Investors can also invest as little as $1K. Leads get carried interest, may also get major investor rights, and get access to syndicate investors who are often experts in the startups. These managers can also invest five to 10 times their typical investment amount, which gives them access to more deals and allows them to lead more deals.
CB Insights ranks top syndicate leads and what they do to outperform peers. It leverages the same scoring algorithm from above via the Investor Mosaic with a few additional variables. Syndicate investment can be influenced by popularity, where well-known individuals, star profiles, can garner greater capital. It provides insight into the difference in backing for Angel List versus the Mosaic Score and call it the Mosaic Expected Value Delta (MEVD). Scott Banister scored very well on Network Centrality, which buoyed his Mosaic score. CB Insights also provides a social graph analyzing network overlaps to help with achieving diversification across syndicates.
CB insights’ top Syndicates – April 2014
Notes on this list: It just looked at single angels and not any investment groups and it did not include Naval Ravikant.
In order to get the latest data, one must pay for access to CB Insights’ Mosaic Tool. Fund Wisdom offers real-time free reports on several factors by leveraging the AngelList API, or the open data connector that AngelList provides for free with a data visualization tool like Silk. One could then build an algorithm to parse each individual rating. The ranks include the number of backers, deals per year, confirmed investments, and amount backed.
For more about other options for accredited investors, check out this webinar.
Michele has been a director with Financial Poise since 2012. View her LinkedIn profile here: https://www.linkedin.com/in/michele-schechter-46b9824a/
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