The advantages of investing in startups through an angel syndicate
When it comes to startup investing, there are a lot of options to choose from. You can invest in a startup as an individual angel, or you can join an angel syndicate.
Similarly, as a startup founder, you can raise money from individual angels or an angel syndicate.
So what’s the difference? And which is the better option for you?
What is an angel syndicate?
An angel syndicate is a group of investors who come together to invest in early-stage startups. A syndicate can be organized by angels or people requesting investment for their startup, and it can come from any number of places.
Although it is not necessary, typically all investors in a syndicate come to a gentlemen’s agreement about how the group will operate. This understanding is informal and usually unwritten, kept both short and uncomplicated.
Platforms like Angelist and Lets Venture (India) are a few places you can form syndicates and raise funds from syndicates.
The benefits of an angel syndicate include:
- Multiple sources of deal flow and knowledge sharing
- Access to better deals – Because angel syndicates have more resources, they’re able to get better deals on investments. This means that you’ll be able to invest in startups at a lower risk, and with the potential for higher returns.
- When multiple people invest smaller amounts of money into one venture, the risk is diffused and limited for each individual.
- The ability to develop a system that can be used over and over again to grow your business and get better deals.
- The potential to hire staff and assistants to handle operational work.
- Greater expertise – Angel syndicates are often led by experienced investors who have a lot of knowledge and expertise when it comes to startups. They can provide valuable guidance and support to the entrepreneurs they invest in.
- Shorter waiting time – When you invest in a startup individually, you may have to wait months or even years before you see any return
Many Angel groups and syndicates offer little value because they are loosely tied together. If you want to increase your chances of success, invest in a professionalized Angel Group that has great communication between members, experienced professionals, and an extensive screening process.
There are several reasons why Angel Investors may choose to collaborate with others, such as forming an Angel Group or investing together as part of a syndicate.
Difference between angel groups and angel syndicates
Founders benefit from having an entire network to tap as across the group, there is likely experience across every industry, market, and challenge.
Typically, founders will engage with a select group of Angels (generally those sourcing the opportunity) and may pitch to the entire group.
The Angel group will then run through its diligence process and effectively vote as to whether or not to invest, how much, and under what deal terms.
Angel Syndicates, on the other hand, are informal occurrences where Angels can invest smaller amounts into a deal that is ‘syndicated’ by those interested individuals, not unlike crowdfunding.
Angels can leverage platforms such as AngelList or Assure to get information on the investment opportunity, and these platforms facilitate the collection of invested capital and transfer to the startup. This takes out many of the administrative headaches that Angels either face or choose to ignore (introducing operational risk into their process).
By centralizing all key documents, communications, and sources of information, Angel Syndicates can offer a real advantage when compared to operating independently — while retaining the flexibility to choose which companies and how much to invest.
To Syndicate Or Not to Syndicate
The choice of whether to invest as part of a Syndicate, Angel Group, or independently often comes down to an investor’s level of experience and access to tools.
If you have the ability to write $50,000 checks, a developed pipeline of deals, due diligence process, and time to commit substantial amounts then you may want to operate as an individual angel investor. Investing larger amounts comes with benefits such as more ownership, higher potential returns, and more control but also higher risk.
Writing large checks and having complete control of the investment process is ideal for experienced investors who want to gain a larger ownership stake in the company.
In contrast, investing together with a group or syndicate can make the process less complicated and let Angels spend more time providing value and fewer administrative tasks.
Although, these are not mutually exclusive so keeping your options open may present the best risk-reward tradeoff.
The advantages of raising money through syndicates
When an entrepreneur is raising money for their startup, they will typically turn to either friends and family, VCs, or angel investors. While all three have their advantages, raising money through an angel syndicate has a few key advantages.
- First, when you raise money through an angel syndicate, you are tapping into a larger pool of potential investors. This means that you are more likely to find investors who are a good fit for your company.
- Second, raising money through an angel syndicate gives you access to more investors and more money. These investors can provide valuable feedback and guidance as you grow your business.
- Finally, raising money through an angel syndicate can help you build relationships with other entrepreneurs and investors. These relationships can be invaluable as you grow your business.
Angel syndicates are a great way to get funding for your startup because they offer a lot of money and they are more likely to invest in your company than a single angel investor.
There are a few disadvantages to raising money from an angel syndicate:
- Most investors of a syndicate will be inactive investors
- The syndicate may take a success fee or equivalent equity for helping you raise money
- As a founder, you have to update the investors and answer tonnes of questions from a large group of angels
Overall, they are a great way to get funding for your startup company.
Check out some of our other posts on angel investing and venture capital.
- How do VCs evaluate early stage startups?
- Difference between startup capital and working capital
- Why do startups need funding?
- How to get into angel investing & be an angel investor?
- How to become a VC startup scout and make money on the side?
- What are the different roles & job titles in venture capital?
- What’s the role of a Venture Partner?
- What is dry powder in venture capital & startup investments?
- What are the different kinds of financial instruments available to angel investors and VCs for investing in startups?
- How VCs are controlling the narrative of what constitutes as a good business?
- Startup term sheets: Everything you wanted to know
- How to choose & approach the right investors for your startup?