Syndicates are a quick, clean way to raise capital for your startup. You get access to funds from a wide variety of investors, without having to track them individually on your cap table. That makes later funding simpler, and reduces legal work.
Syndicates can also connect you with a large network of backers who have varied backgrounds and expertise, without dealing with them one-on-one as investors.
However, syndicates do have their drawbacks, too. How do you know if raising funds from a syndicate is right for you?
What is a syndicate in startup investing?
A syndicate is a special purpose vehicle (SPV) created for the purpose of making one investment. It’s a VC fund specifically put together for the purpose of backing your startup.
Syndicate investments are typically high-risk, high-reward. Backers must be accredited investors.
At the same time, syndicates make it possible for investors to back many deals with small amounts—investors on AngelList can contribute as little as $1,000 to a syndicate.
What is a syndicate lead?
Each syndicate is headed by a lead investor. The lead is typically a part-time investor, someone with experience in the startup world—often a founder or former founder.
Rather than being paid a large management fee, like a venture capitalist, a syndicate lead earns most of their money by charging carry. Carry is a percentage of the syndicate’s profits. It’s up to the lead to choose how much they charge, but on AngelList, 20% is a standard rate.
Example: You invest $10,000 in a fund, and the lead charges 20% carry. After a successful exit, your distribution is $100,000. The lead takes 20% of your profits—total distribution, minus initial investment ($100,000 - $10,000), or $90,000. Since 20% of 90,000 is 18,000, you walk away with $72,000 profit.
How does an investor participate in a syndicate?
In order to participate in syndicate investing, an investor first creates an account on an investing platform like AngelList, or Jason Calacanis’s Syndicate.
Once their account is set up, they’re able to browse syndicates and apply to join the ones they’re interested in. It’s up to the syndicate lead to determine which investors are the right match for their syndicate.
Leads may also send deal invitations directly to investors, in which case it’s up to each investor to decide whether they’d like to participate.
Some syndicates are private, and investors are only able to join if they are invited.
Who are syndicate investors?
Syndicate investors can be broken down into three categories:
- Funds. Some funds do all of their investing on behalf of limited partners through syndicates. Typically, these are smaller VC funds, focused on pre-seed or seed investing, as opposed to investing in later-stage startups.
- Full-time investors. A small percentage of individuals are full-time investors in syndicates.
- Regular individual investors. Most individuals don’t invest in startups full-time. These investors are often involved in the startup world, and can offer skills and expertise as a value-add to their investment.
How do syndicates source deals?
The syndicate lead is responsible for sourcing deals. Since this individual is likely already involved in founding startups, investing in them, or both, they already have a network of investors and founders.
Leads have extensive contact lists in the startup world, and their own deal flow. A “deal flow” is a stream of investment opportunities that a VC or angel investor feeds on. Because of their contacts in the industry, and their reputation, they’re always learning about new startups, meeting with founders, and hanging out with investors.
Leads continuously have new opportunities to invest in startups. And by forming syndicates, they share their deal flow with potential investors. Beyond that, it’s up to the investor to look into the success of prior investments made by the syndicate before investing.
As a founder, connecting with successful syndicate leads can be a significant first step toward getting your venture funded.
James Hottensen explores the origins of Venture Capital and how VC's make money on each investment. Portfolio construction and logic is also covered with quotes from top-tier venture capitalists from the United States.
Syndicate success story: Zach Coelius and Cruise Automation
As a syndicate lead, Zach Coelius oversaw the first billion dollar exit on AngelList Syndicates.
Coelius, a seasoned founder, learned that Cruise Automation was struggling. The startup was developing self-driving car technology, but had difficulty getting buy-in from major auto manufacturers.
Recognizing that Cruise represented the only significant challenge to Google’s burgeoning autonomous car technology, Coelius saw an opportunity.
He led a relatively modest, $100,000 syndicate funding round on AngelList, as part of Cruise’s $12.5 million Series A. Coelius got in at the ground floor—and brought his investors with him: It paid off later, when GM acquired Cruise for $1 billion.
Betting on Cruise was a risky choice, but the syndicate system helped Coelius put together funding quickly and take advantage of a unique opportunity.
Coelius had this to say about syndicate investing:
A lot of people still think of AngelList as a “Kickstarter for startups”, where a startup can list itself on the platform and raise money. Especially startups that can’t raise money elsewhere.
I’ve found it to be the total opposite. In my experience, it’s become a place where value added investors who don’t have access to capital, and aren’t full time VCs, can access capital and enable investors who are outside Silicon Valley to join these high quality deals.
It’s a symbiotic relationship between guys like me—who don’t have a fund but have access to good deals and can add value to these companies—and backers—who don’t have access to deals but have capital and can do these deals.
The advantages and disadvantages of syndicate investing
The greatest advantages of syndicate investing are speed, ease, and accessibility. The greatest disadvantage is a lack of privacy.
Syndicate funding can save you the trouble of negotiating with multiple investors and trying to put a round together. Once you get buy-in from a syndicate lead, you’ve got backing from many smaller investors—but just one new item on your cap table. Bringing on a syndicate investor is clean, easy, and simple.
The main drawback to syndicate investing is lack of privacy. When your startup is picked up as a syndicate investment, it becomes public knowledge what kind of funding you’re looking for, and what stage your product is at. You can expect your pitch deck or executive summary to be shared widely by many small investors considering whether to buy in.
In a sense, you’re “showing your cards.” If you have a totally unique product that’s relatively far along in development, and you aren’t worried about competitors overtaking you, this may not be an issue. But if you’re in a vulnerable stage of development—entering a highly competitive space with intellectual property that hasn’t been patented, for instance—and you want to fly under the radar, syndicate funding may not be the best choice.
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