Introduction
The startup ecosystem is a dynamic and competitive landscape. As a founder, one of the most critical tasks you have is to secure capital to scale and grow.
Traditionally, businesses used loans for finance, whereas now they look to investors to provide funds in return for a share of the upside of business growth.
Investment syndicate funding is becoming an increasingly popular way for startups to source the capital they need. In this article, we unpack the role of syndicates, and examine how founders can leverage them to secure financing.
Understanding Investment Syndicates
What is an Investment Syndicate?
A syndicate is a collective of individual investors operating under the banner of a single entity and led by an experienced lead investor who usually earns a fee or ‘carry’ for their management role.
How do Syndicates Form and Operate?
Syndicates form when individual investors with common goals decide to invest jointly rather than going it alone. Members can gain access to better or more rewarding deals than they would do if they were operating solo. Syndicates are a good option for founders too, since they can tap into a larger group of potential investors.
Syndicates are managed by a syndicate lead. The lead’s function is to source new investors, generate a deal flow of potential targets, conduct due diligence and negotiate investment terms.
You can join a syndicate by browsing websites that advertise membership. You may be invited to join one directly by a syndicate lead.
Once a syndicate is operational, the lead will offer members potential opportunities to invest after having carried out due diligence on the target company. Members will be given updates and regular reports on the progress of their investment.
Brief Comparison to Other Investment Methods
When a syndicate – rather than a single business angel – invests, the founder has access to a wider spread of expertise. However, a single business angel might expect greater involvement in business strategy than a founder is comfortable with.
The Role of Syndicates in Startup Funding
The typical business seeking syndicate investment is at a pre-seed, seed or Series A stage, having exhausted bootstrap funding. Examples of successful companies that leveraged angel syndicate funding include Uber, Dropbox and Reddit. [1]
Comparing Syndicates, Business Angels and Venture Funds
Investment Syndicates Versus Business Angels
Individual business angels bring a single sum to the table, offer expertise and provide investment. In return, they expect a larger involvement in the business.
In contrast, each individual investor in a syndicate will offer smaller amounts that may add up to a larger total overall. Founders can tap into a wider pool of expertise, and syndicate members acting as a group have more leverage over founders than they would if they were acting alone.
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Investment Syndicates Versus Venture Funds
Venture capital funds are professional organizations that generally target later-stage investments, from Series A and beyond, and involve larger sums of money. And, while VC firms may offer their target businesses help and advice, their involvement is less hands-on. VC firms tend to be more risk-averse in their investments, and more structured and conservative in their investment approach.
Pros and Cons of Raising Funds from a Syndicate
Benefits of Investment Syndicates
From a founder’s perspective, the advantages of syndicate funding include a simplified capitalization table (fewer individual investors acting alone), less upfront effort, since admin is handled by the syndicate lead, and access to a wider pool of capital and investors. Syndicate funding can also enhance a business’s reputation and founders can build a network of investor contacts.
Disadvantages of Investment Syndicates
The downsides for founders can be exposure to data loss since pitch desks are circulated to a larger team. In addition, founders may not receive the deal terms they’d like because syndicates have more leverage than individuals. Founders may be pressured to perform and will need to take a structured approach to pitching and reporting.
How to Raise Money From Investment Syndicates
Founders looking to get syndicate funding need to be clear about their goals and timeline for investment. They need to compile a compelling pitch deck and understand their audience, whether that be a lead or a selection of investors.
They will need to carefully research and build relationships with potential investors in advance of any potential pitch.
Preparing to Raise Funds From a Syndicate
If you’re gearing up for syndicate funding, research the syndicates first. Different syndicates have different strategies and target varying market sectors, so approach the ones that are right for you. Prepare to forfeit some of your equity and negotiate on terms. On the other hand, be clear about the percentage of your company you’re prepared to give up.
Navigating the Investment Process
Here are the typical steps from pitch to funding:
- Founder and lead discuss terms and agreement of term sheet
- Founder and syndicate agree potential funding amount
- Syndicate lead circulates the pitch deck and their analysis to the syndicate
- Founder and/or syndicate lead answer questions from syndicate members
- Investors indicate their potential interest and subsequent commitment
- Round closes and funds are wired to the founder
Before you go into negotiations, make sure you understand your position in the market and therefore the strength of your negotiating position with the syndicate.
Familiarize yourself with the term sheet and understand what will be expected post-deal.
Conclusion
Raising funding from syndicates can be a good move for founders of early-stage businesses. They can obtain valuable expertise, achieve funding relatively quickly and leverage larger amounts than they could from individual investors. However, founders need to consider whether a syndicate’s objectives align with their own and prioritize syndicates based on their reputation to enhance their business’s chances of success.
References
[2] https://fastercapital.com/content/Tips-for-raising-money-from-angel-groups-and-syndicates.html
[3] https://auptimate.com/resources/when-should-startup-founders-raise-syndicates/
[4] https://www.a2dventures.com/post/the-major-differences-between-vcs-and-angel-syndicates
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‘It’s more interesting to me to lead a syndicate because you deploy more capital. You are more important to the founder. You can ask for pro-rata rights, and you’re pretty sure to stay informed if something goes bad. Deploying more capital boosts your reputation, and you should attract better deals.’
