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Sidecar funds primer: The entrepreneurs perspective

Paul Clark
Paul Clark
Last updated: June 4, 2024
Venture south fallback

As we wrap up this series, a quick post for entrepreneurs to ask: should I care about whether an angel group has a sidecar fund?

As an entrepreneur, you should diligence your investors just as they diligence you. This is likely a long journey, and one filled with more than the occasional challenge, stress, disagreement, and disappointment. This diligence is wider than sidecars, but we’ll skip for now the things to look out for in investors in general.

Specifically on sidecars, here are a couple of considerations:

  • Firepower: VentureSouth’s firepower is essentially doubled by its sidecar. If you can get a $250,000 investment from our members, your check is for $500,000 if a VentureSouth sidecar angel fund matches. Double the firepower for the same amount of pitching, roadshow, and diligence effort.
  • Signing authority: Pooled investing means delegating some authority to the fund managers. Are you confident that these managers have the authority to make decisions you need them to make, and will be around to make those decisions?
  • Compliance: Back to my soapbox, if your investor is not compliant, the downstream cascade can impact you, even through no fault of yours. For example, if the fund has a bunch of unaccredited investors that are, ultimately, your investors, you need to know that!
  • Cap table complexity: A sidecar means a separate investment vehicle, and so two different entries on your cap table. You probably don’t mind that - two $250k checks is a lot tidier than a bunch of individuals! - but cap table complexity is always something to minimize.

What else? What other things do entrepreneurs need to ask their investors that are using sidecar funds?