In the world of startup financing, angel syndicates have emerged as a vital mechanism for pooling resources and expertise, much as VCs do for later stage businesses.
For new and experienced investors alike, understanding the dynamics of angel syndicates can be the key to maximising returns and minimising risks. At Connectd we actively support members to promote syndicates of which they are members, and we help angel investors to source opportunities in syndicates through our dedicated investor community and syndicate directory. To help you decide whether joining a syndicate could be the next step on your investment journey, we examined the concept of angel syndicates, how they operate and what the benefits, and challenges of joining one can be.
What is an Angel Syndicate?
An angel syndicate is a group of individual angel investors who pool their financial resources and expertise to invest collectively in a startup company. This collaborative approach allows investors to mitigate risks, leverage each other's strengths, and access a broader network of opportunities. Unlike a single angel investor who invests alone, angel syndicates offer a more structured and diversified investment strategy.
Angel syndicates differ from angel clubs in a couple of fundamental ways. Angel Groups are formal organisations which find investment opportunities, perform diligence and circulate these potential investments to their members, with the ultimate aim of collectively investing into a company on one cheque. Angel groups will have defined minimum investment levels in order to gain entry, and will controla and determine the collective investment thesis, especially with regards to sector and stage.
Angel syndicates are less formal and have fewer barriers to entry; similarly, the kind of opportunities unlocked by joining a syndicate are likely to be much more varied, with various members of the syndicate being encouraged to share investment opportunities from within their own portfolios and wider networks.
How do Angel Syndicates work?
While Angel syndicates are less ‘formal’ than Angel clubs, there is still the necessity to have someone who heads up the group. The syndicate leader will be an experienced investor with a wide network of valuable connections; their role is primarily to source investment opportunities and conduct due diligence, drawing on their skills and experience to select strong investments. Once the syndicate decides to go ahead with the investment, the leader will negotiate deal terms and coordinate the investment process on the behalf of other syndicate members.
And what’s in it for the syndicate leader? In return for leveraging their expertise, leaders charge carried interest (or ‘carry’ for short) of the syndicate’s profits, with the standard being between 15% and 20%.
Benefits of Angel Syndicates
Angel syndicates offer many benefits that lone angel investors do not enjoy, and especially for those without deep investment experience, a syndicate can provide guidance, assurance and expertise through both the lead investor and other members. Some of the main benefits are as follows:
- Access to a broader network and expertise: Syndicate members can tap into a diverse range of skills and knowledge that individual investors may lack. More importantly, there’s no better way to build your network, and your access to further investment opportunities, than by joining an angel syndicate.
- Time-saving: syndicates take the heavy lifting out of the massively time-consuming process of finding deals and the subsequent due diligence required before considering investment. Syndicate leads should provide detailed overviews of the terms of the deal, potential risks and opportunities and justify their view that the deal in question will be a good investment. This level of insight can be invaluable, especially to investors who are still wet behind the ears
- Co-Investment Opportunities: Syndicates enable investors to participate in larger deals and access opportunities they may not be able to afford on their own; similarly, individuals can share opportunities from within their own portfolios.
- Enhanced Reputation and Credibility: Collaborating with other experienced investors can enhance an individual's credibility and reputation within the startup ecosystem.
- Shared Administrative and Legal Costs: Syndicates distribute the costs of legal and administrative tasks, reducing the financial burden on each member. What’s more, the Lead will handle all of the complicated aspects of closing the investment, agreeing terms, working with lawyers and founders, taking the stress out of what many investors find to be the most onerous aspect of investing.
- Enhanced Negotiation Power: Collective bargaining power allows syndicates to negotiate better terms and secure favourable deals. Ten people investing £350k as a syndicate have far more negotiating power than one angel investing £35k; this will be reflected in preferential agreements around information rights, pro rata and various other terms.
- Pooling of financial resources and diversified risk: Sharing financial resources and risks across multiple investments helps to mitigate individual losses and maximise returns.With many startups looking for minimum investments, angel investors looking to invest, for example, £50,000 might only stretch to a couple of rounds. By putting smaller figures into a greater number of companies, the chance of getting good returns increases.
Challenges and Considerations
Like any collaboration, joining a syndicate has its own set of challenges, often deriving from the different perspectives, aims and objectives of the various players within the group. Ironically, what can be seen as many of a syndicate’s strengths can also be the cause of potential issues. The diversity of opinions and interests within a syndicate can lead to issues such as:
- Dilution of Influence: Individual investors may find their voices diminished in a syndicate due to the collective decision-making process.
- Possible higher valuations: Larger investment sums from syndicates may lead to inflated valuations for startups.
- Complexity in Exit Strategies: Coordinating exit strategies can become challenging due to differing objectives and interests among syndicate members.
It is important to fully investigate the track record of the lead investor, ensure you feel included and heard in any discussions, and that you are satisfied with the due diligence that has been performed before agreeing to investment through a syndicate. While there is power in the collective, it's important to maintain your individual perspective and challenge the consensus when and where necessary.
Best Practices for Collaborative Angel Investing
All syndicates will have their own particular way of operating, very often strongly influenced by the syndicate lead. However, when taking the leap to start investing collaboratively, we suggest adhering to best practice in the following areas:
- Establish Clear Investment Criteria: define your collective objectives, risk tolerance, and investment criteria to align across all syndicate members' interests.
- Open and Transparent Communication: foster open communication channels to ensure all members are informed and engaged in decision-making processes.
- Defining Roles & Responsibilities: clearly outline the roles and responsibilities of each syndicate member to prevent conflicts and promote accountability. Generally speaking, the syndicate lead will be the main driver but there may be particular roles or tasks that other members undertake, depending on the structure of the syndicate.
- Decision-Making Process & Consensus Building: establish a structured decision-making process that allows for consensus-building and efficient deal execution.
- Diversification Strategy: diversify investments across sectors, stages, and geographies to spread risk and optimise returns is key to success. Be mindful of the syndicate lead being proactive in this regard in order to safeguard your investment.
Legal and Structural Aspects of Angel Syndicates
When setting up an angel syndicate as a lead, or joining an existing one, it is crucial to consider the legal and structural aspects required to ensure frictionless and compliant operations. While the lead will handle these matters, it is critical that all members have clarity and understanding on these matters.
Syndicates execute their investments through a Special Purpose Vehicle (SVP), generally through the drafting of a Limited Partnership Agreement (LPA), which provides liability protection and flexibility in governance. This LPA will contain critical information including:
- The terms of investment
- How and when profits will be shared
- Members’ Rights, clarify voting rights and decision-making processes
- Exit Strategies and terms for potential liquidity events.
- Confidentiality Agreements to protect sensitive information shared during due diligence.
How to join an Angel Syndicate
If you want to take the leap and start investing through a syndicate, identifying the right one for you takes clarity, research and patience. Before you start actively searching for syndicates, make sure you understand what you want from your investments. High risk-high reward, or something a little safer? Specific sectors or totally agnostic? A large number of very small investments or a couple of heftier ones? This will help you to narrow the search for a syndicate that tallies with your values and your aims.
Many angels find syndicates through recommendation or referrals, learning about opportunities from others within the early-satge ecosystem. Connectd's dedicated Investor Community allows syndicates to create dedicated public channels to post updates about opportunities, while community groups offer a great way to discuss a range of topics pertinent to syndicates including due diligence and terms.
The community syndicate directory also allows members to browse through various syndicates to find those which align with your investment preferences. You can then message the syndicate leader or representative though our platform to ask questions, get more information and move the conversation forward.
The Connectd Investor Community, which is also available as a mobile app, can only be accessed by those who have signed up to the Connectd platfom as an investor. The great news is that It's completely free to join - why not sign up now to kick start your investment journey with Connectd!
