In the world of angel investing, a syndicate is a term used to describe the temporary alliance of businesses that essentially join forces, working together to manage a large transaction that would be difficult, if not downright impossible, to manage on their own. In other words, it’s a venture capital fund created for the express purpose of making a single investment and is typically led by experienced investors, financed by sophisticated angels for the purposes of making sure that the job gets done properly.
Entering into this type of agreement makes it easier for companies to not only pool their resources but to also share risks equally as well. Syndicates were originally launched in 2013 by AngelList, in an effort to further the company’s goal of democratizing the investment process as much as possible. Naval Ravikant had previously stated that he wanted more “innovation on the infrastructure for innovation itself” by helping quality startups with money, talent, and customers at the exact same time, and syndicates have always been seen as an opportunity to accomplish exactly that.
Another example of this idea in action takes the form of the recently introduced rolling fund – an opportunity for fund managers to now accept new capital in the form of auto-renewing quarterly commitments. This allows fund managers to raise a fraction of a traditional fund and start investing right away, all while leveraging portfolio markups to accept new capital at any time. Plus, managers can continuously increase the fund size so that they never need to raise another fund again.
Overall, syndicates are investment vehicles that allow an angel investor to co-invest with relevant and reputable leaders in some of the best startups operating anywhere in the world today. Typically, this is done with multiple companies operating in the same industry. Note that in this context, syndicate leaders are those angel investors that have significant experience in not only selecting ideal investment opportunities but also with regards to the types of technology sectors and dealflow that most standard investors simply don’t have access to. These business leaders are usually successful startup founders or angels who have been part of a particular industry for many years, thus giving them access to insight and experience that would be difficult to find anywhere else.
The Qualities of an Excellent Syndicate Leader
According to Naval Ravikant, the co-founder of AngelList, there are three core characteristics that any syndicate leader needs to be able to meet. Chief among them is access to capital. More often than not, this usually involves A) business angels that already have a good track record under their belts, or B) successful startup founders that have access to the capital necessary to invest in more startups moving forward.
Another important quality comes down to a proprietary dealflow. That is to say, the rate at which investors receive their business proposals or larger investment offers. Provided that this dealflow is exclusive to the investor in question, the chances of identifying and capitalizing on quality deals increases exponentially.
Finally, any good syndicate leader needs to have equally good judgment. They need to have both the knowledge and finely tuned market experience necessary to make the right investments at exactly the right time.
Of course, a syndicate leader could meet all three of these qualities easily and still not guarantee success. Investing in startups of any kind always brings with it its fair share of risk, though co-investing through this type of syndicate structure can help decrease and mitigate it as much as possible.
The Major Advantages of Syndicates for Investors
As stated, syndicates bring with them 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.
Likewise, by investing more money on a per deal basis, they’ll likely have access to better investor rights than they otherwise would. Finally, thanks to the nature of syndicates, these leaders will also get paid a carry – meaning capital gains that are generated by an exit or by dividends paid – on something that they would have invested in regardless.
From the point of view of investment backers, they get access to better dealflow by having access to high-quality investment opportunities that they likely wouldn’t have been able to get on their own. In addition to aligning their interests with syndicate leaders at the start of the deal and a highly transparent negotiating process, they also take on less risk because those leaders are in a better position to quickly separate a good investment from a bad one.
At AngelList, the syndicate leader is the human filter, or curator, for a particular deal. Small investors don’t have to worry about what will be the next major startup in their industry because leads do the work for them, getting in return the aforementioned carry on the profits from any successful deals. Those syndicate followers or smaller investors, who can invest as little as $1,000, benefit from the lead’s experience in both picking and managing investments.
But really, the major benefit that syndicates through AngelList bring to the table is one of peace-of-mind in addition to risk mitigation. Those smaller investors don’t have to worry about their investment at all, as syndicate leaders have a proven track record and are accredited in exactly this type of process. Overall, AngelList goes out of its way to make sure that there is mutual trust in place with all parties. This also comes with the added benefit of making sure that startups cannot be “strung along” in the process thanks to the presence of accredited investors.
All of this helps investing as easy as possible across the board. Even families can become successful investors because syndicate leaders act as the “gatekeeper” in the deal. Investors don’t have to keep track of all the hot new startups, because syndicate leaders are already doing that.
Syndicates for Entrepreneurs: The Benefits
Even the startups themselves (and the entrepreneurs behind them) benefit a great deal, especially since they have access to higher sums of capital than they otherwise would have. This can be a great way for entrepreneurs with high potential to jumpstart their businesses, dramatically accelerating the growth process and allowing them to scale faster than a lot of their competitors.
Plus, they don’t have to go through the time consuming and often stressful process of dealing with many different investors. There’s only a single “investor” in the form of the syndicate in the startup’s cap table, dramatically simplifying what can often be a convoluted and time consuming experience.
Likewise, syndicates represent a great opportunity for entrepreneurs in that they don’t really have to be as involved in the fundraising process as they would otherwise need to be. Syndicate leaders are responsible for the fundraising process itself, and for managing relationships with backers. This frees up the valuable time of entrepreneurs to do what they do best: focus on running the successful, innovative company that they’re now at the head of.
In the end, syndicates really do create a perfect storm in the best possible way. Not only do leaders, backers, and the startups themselves benefit enormously, but this also distills the process down to its bare essentials and makes things easier than ever before. All of this is in service of the most important goal of all: allowing people to invest in the next generation of startups, paving the way for the innovation we need when we need it the most.