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TLDR
- Startup syndicates are quick and easy ways to raise capital for your startup by getting access to funding from numerous investors – without having to account for investors individually on your cap table. Talk about the best of all worlds – funding with less paperwork and legal concerns.
- A startup syndicate – or an investment syndicate – is a special purpose vehicle (SPV) created for the sole purpose of making one investment. Although syndicate investors are typically high-risk (high-reward) investors, through syndicates, they can invest in more deals with small amounts of capital, as little as $1,000 per syndicate.
- Through co-investing with other reputable investors, investors can focus on the best startups in a particular region or market. Additionally, with co-investors in a syndicate, startup founders can connect with many accredited inventors, all with diverse experiences and backgrounds.
- An identified investor leads each syndicate, often called a syndicate lead or a lead investor. These investors are typically part-time investors and are not devoting all of their time to one syndicate. However, a syndicate lead should have experience raising startup capital.
- Most syndicate leaders get paid through a “carry,” meaning they charge a percentage of the syndicate’s profits. Although it’s up to the investment lead how much to charge, sites like AngelList charge a standard 20 percent carry rate for startup syndicates.
- Investors can apply to participate in startup syndicates on sites like AngelList or The Syndicate. Once approved, investors will set up an account, enabling them to browse syndicates and lead investors. Investors can also receive deal memos via email and attend webinars or other informational sessions with founders themselves, helping decide which syndicate they’d like to invest in.
- Startup founders can also apply to be a part of an investment syndicate. To do so, founders can select a syndicate and apply to be included. Suppose the syndicate platform decides to invest in you. In that case, the syndicate platform will share your company’s details with potential investors, enabling you to access capital and use talented investors as a resource. Note that some syndicates are by invitation only for both investors and startups.
- Syndicate funding falls on the shoulders of the syndicate lead. Since the syndicate’s lead has access to capital, such as through relationships with angel investors or venture capitalists, they should “sell” the potential success of your startup to other investors, attracting enough capital for your startup’s continual growth. Since syndicate leads are well-connected (and experienced) in the startup world, they’re continually exposed to new startup opportunities, enabling them to share these options with other investments looking for a successful return.
As a startup founder, raising money is a paramount concern. You may have explored family and friends’ funding or thought about taking out a bank loan. However, you may not have yet explored a startup syndicate.
Startup syndicates are quick and easy ways to raise capital for your startup by getting access to funding from numerous investors – without having to account for investors individually on your cap table. Talk about the best of all worlds – funding with less paperwork and legal concerns.
This article will explore what a startup syndicate is, how it functions, and its benefits for startup founders.
What Is a Startup Syndicate?
A startup syndicate – or an investment syndicate – is a special purpose vehicle (SPV) created for the sole purpose of making one investment. Although syndicate investors are typically high-risk (high-reward) investors, through syndicates, they can invest in more deals with small amounts of capital, as little as $1,000 per syndicate.
Through co-investing with other reputable investors, investors can focus on the best startups in a particular region or market. Additionally, with co-investors in a syndicate, startup founders can connect with many accredited inventors, all with diverse experiences and backgrounds.
The Securities and Exchange Commission (SEC) defines an accredited investor as either an individual with $200,000 in gross income in each of the two most recent years or joint income with a spouse exceeding $300,000 in gross income for the same time period. Additionally, investors with an individual or combined net worth of $1 million (excluding any equity in their home) can also qualify as accredited investors. Accredited investors must expect to earn the exact income in the current year.
Syndicates help open investment to more investors, democratizing the startup investment process. Created in 2013, startup syndicates pool funds, helping quality startups to access money, talent, and market, all at the same time.
What Is a Syndicate Lead?
Let’s now look a bit more at how startup syndicates work. First, each syndicate is led by an identified investor, often called a syndicate lead or a lead investor. These investors are typically part-time investors and are not devoting all of their time to one syndicate. However, a syndicate lead should have experience raising startup capital.
Most syndicate leaders get paid through a “carry,” meaning they charge a percentage of the syndicate’s profits. Although it’s up to the investment lead how much to charge, sites like AngelList charge a standard 20 percent carry rate for startup syndicates.
Here’s an example. Suppose you’re a startup investor and invest $25,000 in a syndicated fund. The lead investor takes a 20 percent carry. The startup is acquired, and your distribution is $250,000. The syndicate leader takes 20% of your profits or $225,000 (your realized profit) multiplied by 20% equals $45,000. Your total “take-home” is $205,000 (after paying the syndicate lead). Note that this example does not address taxes.
Good syndicate leads often have access to capital, such as a good track record with angel investors on other startups. Additionally, they understand and can effectuate proprietary deal-flow, meaning the rate at which investors receive startup proposals or more extensive investment offers. Finally, syndicate leads should be savvy yet detailed business leaders, understanding all of the in’s and out’s of growing and investing in a startup.
How Does an Investor or Founder Participate in a Syndicate?
Investors can apply to participate in startup syndicates on sites like AngelList or The Syndicate. Once approved, investors will set up an account, enabling them to browse syndicates and lead investors. Investors can also receive deal memos via email and attend webinars or other informational sessions with founders themselves, helping decide which syndicate they’d like to invest in.
Startup founders can also apply to be a part of an investment syndicate. To do so, founders can select a syndicate and apply to be included. Suppose the syndicate platform decides to invest in you. In that case, the syndicate platform will share your company’s details with potential investors, enabling you to access capital and use talented investors as a resource. Note that some syndicates are by invitation only for both investors and startups.
How Do Syndicates Attract Investments?
Syndicate funding falls on the shoulders of the syndicate lead. Since the syndicate’s lead has access to capital, such as through relationships with angel investors or venture capitalists, they should “sell” the potential success of your startup to other investors, attracting enough capital for your startup’s continual growth.
Since syndicate leads are well-connected (and experienced) in the startup world, they’re continually exposed to new startup opportunities, enabling them to share these options with other investments looking for a successful return.
For example, a successful syndicate lead has many investors backing them. When the lead accesses a new startup opportunity, they share the opportunity with those backers, who then decide whether they want to invest in the opportunity. If the investors choose to invest, then their capital is pooled into a particular purpose vehicle (SPV) to invest in that single startup.
For startup founders, connecting with a successful syndicate lead is a great first step to getting your startup the attention it deserves.
What Are the Benefits of Syndicate Investing?
For Startup Founders
For startup founders, syndicates provide fast, accessible capital. Through syndicates, founders can avoid lengthy, ongoing discussions with potential investors and the difficulty of gradually increasing investment rounds together, such as Series A, Series B, and Series C rounds, as the startup grows. With the backing of the syndicate lead, founders have immediate access to qualified investors but with only one entry on their capitalization table.
Further, with syndicates, startup founders don’t have to chase investors for corporate signatures when significant startup decisions are made. Instead, they only need to contact the syndicate lead, making investment administration easier.
For Investors
Startup syndicates give individual investors more power for investors since they are combined in a syndicate. This gives smaller investors more significant deals since investment funds are pooled.
Let’s look at an example. Suppose an investor wants to invest $10,000. Most founders don’t have enough time to meet with every investor wishing to invest a small amount. However, if 20 investors with $10,000 pool their investment assets, the founder is talking to investors willing to invest $200,000, giving the inventors better access to deals with more favorable negotiated terms.
What Are the Disadvantages of Syndicate Investing?
For Startup Founders
The main disadvantage of syndicate investing is the lack of privacy for startup founders. When a startup becomes part of a syndicate, the startup’s participation is public knowledge, with pitch decks, executive summaries, financials, and other information distributed to multiple potential investors. Additionally, the funding that the startup founder is seeking is also publicly disclosed.
Depending on your startup, the founder may not want this information shown publicly. For exam[ple, if you have a unique product, you may not want details of your business shared as it may tip off competitors to your intellectual property. In this case, founders will need to weigh the pros and cons of syndicate funding.
For Investors
For investors, one downside to startup syndicates is “too many cooks in the kitchen.” With larger syndicates, you have more investors with differing interests. Perhaps too many investors want board seats on one startup, or differing expectations emerge, including various preferences for startup structures or milestones. Misalignment of interests may lead to bottlenecks in decision-making or general frustration.
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