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A trial balloon: How large corporates can coinvest with their employees’ angel investing

Many large corporations face three seemingly disconnected challenges; they want:

–       Better returns on their balance sheet and underfunded pensions;

–       Access to the innovation economy to stay on top of the early-stage companies attacking their business; and

–       Unique employee benefits to retain and excited senior talent.

So, I have an idea which addresses these 3 seemingly unrelated challenges.  

It is common for large corporations to provide matching of 401(k) contributions.  Why couldn’t a large company offer 1:1 or greater matching of the angel investing of their senior management?  The match could accrue to the benefit of the executive or the company, with advantages and disadvantages to each.  Pro rata follow on investment rights could roll over to the firm, if unexercised by the individual executive.  

This helps execute against the three goals above:

–       Provides a chance at high returns.  Angel investing is an exceptionally high-return asset class; I have collected twelve studies on angel returns in the US and UK, which show median internal rate of return (IRR) between 18 and 38 percent.  But, it is inherently laborious and requires large numbers of investments to be remunerative after the inevitable losses.  This matching structure takes advantage of the industry knowledge, proprietary deal flow, and network of senior executives.

–       Gives executives more incentive to track relevant startups, which helps inform the firm’s strategy, and gives the executives credibility and influence when they consider investing

–       A unique employee benefit which helps corporations maintain a long-term relationship with their current and past executives.  This could be structured as an increase in compensation, or just as a different currency by which to pay employees.

Adam Carver of AngelList observed that this is parallel to late-stage funds’ scouts programs, some of which have 50-150 scouts (e.g., Sequoia).  The process I envision is:

–       Firm creates an internal interest group of angels.

–       Firm provides educational programming for employees on angel investing.  I have posted content from some of Harvard Business School Alumni Angels past educational programming here.

–       Employees source angel investments in their areas of interest, at their leisure.

–       If an employee wants to invest at least $25K in a private company, she can nominate it to the Syndicate VC (“SVC”).  This could be a firm-provided pool of capital, and/or an outside VC which has a close relationship with the firm.

–       SVC conducts its own due diligence and invests alongside the angel.  It may invest the same or much more than the angel, depending on the situation.

Compared with a traditional corporate VC model, this takes direct advantage of the entire firm’s network and expertise, not just the network and expertise of a small number of focused corporate VC professionals.

I don’t know anyone who has created a model like this within a corporation, although AngelList’s syndication platform proves the basic logic of the syndication model works well. My proposed model looks a bit like the way many VC funds operate internally, except with far more Partners than normal.

Trevor Bond, former CEO of CEO of W.P. Carey Inc and Principal at Maidstone Investment Company LLC, observes, “If the employer creates a pool of capital for this purpose, considerations should include:

“1. How to manage shareholder concerns that arise in connection with conflicts of interest, e.g., if company funds are invested in the personal pet project of someone in the C-Suite. This would be especially important in public companies. Those involved with approval authority should be excluded from benefiting in the match.

“2. Messaging the appropriate use of shareholder capital. The further afield such investments are from the company’s core competence, the more exposed the company will be to charges of “mission drift” by analysts/ large investors who may not want the balance sheet cluttered with a hodgepodge of non-core assets. Therefore the most optimal deployment of capital would be toward investments in related sectors. But for employees, this would diminish the benefit by narrowing the field of potential matching investments they could pursue.

Trevor continues, “For optimal alignment, I like the corporate VC model best: internal VC team, funded with firm capital, that sources and screens its own sector-related deals. Employees could be offered the chance to invest in the fund (which would enhance retention) as well as to introduce potential ideas (which goes to your idea of broadening the pipeline). “

Alex Vassilev observes that another issue is managing employee attention.  Such a program incentivizes senior executives to spend considerable time (vetting ideas) and put significant effort (assisting the startups post angel investing) in a process that falls outside their potential core competency. Such distractions, although potentially lucrative for both parties, are likely to negatively impact internal productivity.

I’ve been brainstorming this idea and would love to hear if anyone has done this.  What do you think?   

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