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Sidecar funds primer: Why might someone invest in a sidecar?

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

We’ll skip the reasons for angel investing in general, as hopefully we’ve covered the potential for making money, having fun, and doing good enough already!

The advantages of using a sidecar fund for angel investing include:

  • Passive: early stage investing can be hard work and time consuming. Sidecar funds are designed to be minimal work (for the investor), and are ideal for those without the time
  • Automatic diversification:
    • As we’ve mentioned many times before, a single early stage investment is, on average, going to lose money. Diversification is critical. Sidecar funds are designed to create diversified portfolios.
    • For example, VentureSouth Angel Funds I-III invested in 18, 22, and 18-and-counting companies respectively.
  • Smaller exposure and per-deal allocation: angel investing probably requires less capital than you think, but still the total allocation (of say 20 deals at $5,000 per deal - total $100,000) might be more than you are comfortable with. If so, you could significantly reduce it via a $25,000-$50,000 allocation to a sidecar fund.
  • Administrative ease: one set of investing documents to sign, one K-1, and you’re not bothered by ongoing consents or all the other minutiae of early stage deals.