The Evolution of Syndicated Investment  

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What is a syndicate?

A syndicate is a group of investors who pool their resources to invest in various ventures as a unit. Typically, syndicate investors won’t invest directly in a company. They invest in a special purpose fund that is created specifically to make the joint investment in a company.

Angel investors have turned to syndicates as their new forum of investment. Syndicate platforms such as AngelList and Syndicate Room provide an informed marketplace where investors, or leads, share their deals with other accredited investors, or backers.  As they locate the investment and support it, leads provide more capital and acquire a portion of the profit generated by the company. All the makings of a sound investor stay the same, however, the rigmarole involved in creating a venture capital (VC) fund is simplified by the syndicate process.

A good Angel needs capital access, proprietary deal flow, and judgement. They must have a believable investment thesis to buttress their track record of sound judgement. Creating a sound investment thesis is more difficult than it sounds – the idea must be unique but easily relatable to prospective backers.

“AngelList offers a bunch of channels that help surface information about great deals — the social network dynamic on the site means that when someone invests in a company, follow them, or like their progress, any investor following that person sees the activity.”

– AngelList

Just as the syndicate system easily synthesises the dynamic between leaders and backers, so too does it eliminate much of the difficulty of startups approaching VCs for early-stage investment.

Syndicates’ Evolution

Syndicates have evolved in recent years to match the proliferation of startups owing to three key reasons.

Firstly, by linking themselves to an experienced investor, investors tap into his/her sound choice of investment. They can also invest from amounts beginning at $1,000.

Secondly, the leads in syndicates receive the carry from their investments. Carry, short for ‘carried interest’, is a share of the profit of an investment that is paid to the managers of the investment. By investing 5 or so times more than their typical investment, they gain major investment rights and access to more deals.

Thirdly, startups are able to more easily zero in on capital without the cyclical, perpetual need for pitches – they tap into a network of investors, and have a pool of small investments they can possess easily.

The absence of bureaucracy on all sides is appealing, and represents the new model for this kind of investment. As the market is dominated by startups hungry for venture-sized cash, and angels are ambitious to uncover noteworthy startups, the model provides a needed connection between the two.

“As a SyndicateRoom member you have access to everything from private seed rounds to Initial Public Offerings (IPOs), with SEIS, EIS, growth and pre-IPO rounds available on the private side of things, and share placings on the public – all through a single open and transparent platform.”

– SyndicateRoom

AngelList posits itself as “the world’s largest marketplace for startup investing”, having raised $205 million in two years, with 650 startups funded, by a total of 4,400 investors. As online venture funds, populated by experienced angel investors often close to the startup community, syndicates cover exciting new territory for startups and investors alike.

Cheers, Richard and the Equitise team.


 

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