ver the last ten years, technology has reduced entire catalogs of consumer goods to devices that fit in the palms of our hands. Phones are smarter, networks are faster, and more people have access to more information than ever before.
That democratization of access has affected different industries in different ways. Take venture capital, for example. It was once reserved mostly for institutional investors backed by endowments and pension funds.
In recent years however, we’ve seen a major shift as investing in startups is no longer limited to venture capital firms who can write big checks. It increasingly includes individual investors who are using technological tools and data to steer capital directly into the startups they care about and believe in.
And even more recently, we’re seeing individual investors ditch the solo act. Instead, Angels are now banding together into groups and forming what is now known as angel syndicates.
What Are Angel Syndicates?
An angel syndicate is a private group of accredited investors who agree to invest together in a particular project. A syndicate can be put together by angels or investees and can really be drawn from any source.
Often times, syndicates are led by a syndicate leader. The syndicate leader is typically an experienced and well-connected investor that holds two very important functions; finding and evaluating deals. Thus, they need to have both the knowledge and finely tuned market experience necessary to make the right investments at the right time.
Syndicate leaders make money by charging carried interest, which represents the percentage of profits that are paid to lead of a fund. Leads can choose the amount of carry they receive when they launch a fund (20% is usually the standard).
How do Angel Syndicates Work
To start, the syndicate lead must secure allocation or a piece of the round. They do this from their source of deal flow – either from inbound interest from a founder or via cold outreach. Once a lead finds a deal they deem worthy, they will then bring it to the syndicate members.
The members of the syndicate then can choose to collectively invest in the startup. These investments are made through a Special Purpose Vehicle (SPV). In startup investing, an SPV is a separate company with its own balance sheet. SPVs can be set-up as a trust, a corporation, a limited partnership, or a Limited Liability Company (LLC).
An angel syndicate’s average total check size into one SPV is $100-350K, which means each of the ~150 investors will help come up with that $100-350k. The required minimum investment will range, but it’s usually around $1,000-$2,500 – while some are as high as $10k.
From beginning to end, the entire syndicate process can be broken down into five steps.
1. Opening
The lead investor chooses a startup that he considers a great investment opportunity. He opens the opportunity to other investors, offering relevant data related to the deal (valuation, amount to be raised, etc) and he specifies the amount of time available to close the investment.
2. Investment
If an investor is interested in a deal, it can request more info (milestones reached, business model, market size, team, financial data, etc), as well as the term sheet that will determine and regulate the relationship between investors once the investment vehicle has been materialized.
One unique thing about syndicate investing, members can pick & choose which deals they want to invest in. Don’t like a particular company that the syndicate is raising money for? Then don’t invest! Save that money for the next one! This optionality is fundamentally different than investing in a VC fund, where you rarely get a say in which startups the VC’s management team picks.
3. Closure
To make the deal happen, the SPV will be created, which will be the party that will execute the investment in the startup. The important decisions will be made by the leader, The expenses related to the creation of the investment vehicle are usually equally paid by the investors, regardless of the amount invested.
Once the vehicle is set up, the investors wil transfer the money and the vehicle will make the investment.
4. Monitoring
From that moment on, the syndicate leader will manage the investment, meeting with the startup and providing information related to the performance of the startup.
5. Liquidation
If the investment does not go well, the vehicle will dissolve. But if there are benefits (dividends, buyback, or partial or total acquisition of the startup), each investor will receive their earnings; after of course the Lead is paid their carry.
Benefits for Investors
Angel syndicates bring a wide array of advantages that would be difficult to achieve through other means. From the perspective of syndicate leaders, this structure puts them in a position where they can not only invest more money per deal, but they can also reach the types of startups that may have high minimum commitments that they wouldn’t be able to match on their own.
Syndicates also allow participants to engage in angel investing without the massive, time-consuming search for deals and the extensive due diligence required to avoid costly mistakes.
All of this is in support of the most important goal of all -- allowing you to invest in the next generation of startups and paving the way for innovation.
How to Get Started with Angel Syndicates
If you’re just getting started with syndicate investing, one of the best places to start is AngelList. AngelList has over 200 active syndicate leads to pick from, and the platform as a whole has invested $2B into startups (way more than Sequoia’s latest fund).
Once you create an account, you’ll be allowed to browse syndicates and apply to join the ones they’re interested in. However, ultimately it’s up to the syndicate lead to determine which investors are the right match for their syndicate.
Overall, AngelList takes out many of the administrative headaches that Angels either face or choose to ignore (introducing operational risk into their process). They also maintain a great support page about syndicates that you should read if you’re considering becoming a Lead.
you’ll want to be closely involved with the types of startups you want to invest in. This helps you add value as an investor, and enables you to create synergies between companies you invest in.
Angel syndicates are quickly becoming the most accessible & flexible gateway to the private market. They are all about unlocking deals for the “average accredited” investor, whereas traditional VC funds have been more of an exclusive club with each of the VC’s backers typically investing tens of millions into a single VC fund.
A note of caution, however, angel syndicates might make the process of launching a “fund” much easier, but they don’t change the fundamentals of what makes a good investor. If you’re thinking about launching a syndicate, you should have a good reason why people should back you.
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