How to Start an Angel Syndicate

Introduction

A syndicate is a group of individuals who join together to accomplish a goal, usually a business transaction. With an angel syndicate, angel investors pool funds and share the risk of investing in one or more startup companies. 

A syndicate may consist of new angels or seasoned investors. Either way, each participant will invest on the same terms as the other members. 

If you’re thinking of starting an angel syndicate (or participating in one), read on to find out more. 

Step 1: Define Your Investment Focus and Strategy

Angel syndicates are a powerful way for angels with similar outlooks, goals and experiences to pool their resources when investing.

So, whether you’re starting a syndicate or picking one to invest in, the most important task is to understand whether the vision and strategy for the syndicate is clearly articulated. 

Since the hallmark of a winning syndicate is a laser-like investment focus, being clear about investment goals and strategy is vital. This could include a focus on particular sectors, growth stage, industry or geography. 

Step 2: Build Your Network of Investors

Successful angel syndicates are typically headed by an investment lead who picks out and engages with potential investors who share their vision for investing. The best way to do this is by reaching out to members of your network. 

These could include present or former teammates, industry leaders or networking group members. 

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If you’re a syndicate lead, developing your own pitch for the syndicate is essential. Emphasize the upsides of investing in a syndicate as opposed to solo investing. Benefits include risk sharing and economies of scale – the larger the syndicate, the more money there is to invest.  

Step 3: How to Structure the Syndicate

The Lead Investor

If you want to set up a syndicate, you’ll need to nominate a lead investor or investment manager to structure and manage it. Responsibilities include deciding on the correct legal framework and putting the right documents in place. 

Lead investors also source and qualify deals, communicate within the group and coordinate decision-making. While lead investors invest on the same terms as other members, they will often charge carried interest as an additional reward for their efforts. 

Legal Structure and Agreements

The investment syndicate will pursue and execute its investments through a Special Purpose Vehicle, which can be set up as a partnership and will require the drafting of a limited partnership agreement that includes:

• The members’ rights
• The terms of investment
• How and when profits will be shared
• When members will exit

Step 4: Sourcing and Vetting Deals

Once a syndicate is in place, you’ll again need to mine your contacts to identify and qualify suitable investment opportunities. This is known as dealflow. Start with your contacts who are already involved in the startup community and looking to fund new rounds, or seed-stage businesses keen to attract investment. This is where incubators and networking events can prove crucial. 

Think about setting up a defined process for onboarding and vetting potential targets. Ensure your due diligence procedures are comprehensive, and include input from the angels, market and sector analysis, and financial and technical evaluations. 

Step 5: Investment Criteria and Decision-Making

Investment Criteria

As well as a vetting process, your syndicate will need clear and transparent criteria for choosing which businesses to invest in. These can include factors such as risk rating, potential upside and strategic alignment. Members will then decide whether they wish to participate.

Investment Decisions

Your syndicate agreement will set out a decision-making mechanism that members will use to choose to invest.

One such mechanism is simply to invite all investors to invest the amount of money they wish to invest for each deal: if they’re not interested in the deal, they will simply pass.

Step 6: Syndicate Operations and Support

Your syndicate will be most efficient and productive if you establish seamless communications channels from the start, including:

• Periodic member meetings and record-keeping
• Regular reporting and updates to members
• Performance reporting 

If your syndicate strategy features ongoing support from members to target businesses including mentorship or expert guidance, make sure it’s clear how your businesses can draw down that support. Offering these resources can be a key USP of a syndicate, so make sure everyone knows how to access them.  

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Step 7: How to Manage Exits and Returns

Profit-Sharing

Part of your syndicate strategy will focus on generating maximum returns for your members, and your agreement will set out how and when these returns will be distributed. Make sure the way you do this is fair and transparent. 

Exit Strategies

There are several ways that an investment can come to an end. These include the business being acquired, going to market via an IPO or otherwise changing hands. Your investment agreement should spell these out, as well as the ways the returns will be split, depending on the type of exit. 

Conclusion

Becoming a syndicate lead is a great way to become more deeply involved in the angel investment scene. Here are some reasons why this might be right for you:

Expanding your Network and Reputation

Becoming a syndicate lead will consolidate your reputation and influence among the angel investment community. Not only will your contact book expand exponentially, but you’ll also build experience in constructing compelling deal memos to attract investors. You’ll get hands-on experience in picking the best deals and competing for the right to participate.

Better Terms, Data and Voting Rights

Furthermore, since funds are pooled, syndicates can attract better terms than solo investors. You may get more voting rights, better access to data and improved access to founders. In addition, lead investors typically earn carried interest in return for their management role. 

If you’d like to understand angel syndicate investing in more depth, check out Roundtable to find out more.

References

[1] https://www.hustlefund.vc/post/tips-on-starting-a-syndicate

[2] https://www.goingvc.com/post/everything-you-need-to-know-about-angel-syndicates

[3] https://auptimate.com/resources/a-guide-to-building-and-running-an-angel-syndicate/

[4] https://learning.unique.vc/lead-a-syndicate/

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