Equity financing comes in different shapes and sizes for startups. The most common form is a traditional venture capital firm. However, there are other instruments and organizations that will fund startups in exchange for equity.
Related Resource: All Encompassing Startup Fundraising Guide
One of the more common alternatives to venture capital is a syndicate. Learn more about startup syndicates and how your company can raise funding from a syndicate below:
What Is Syndicate in Startup Terms?
An investment syndicate is an investment vehicle that allows a group of individual investors to pool their money and make an investment in a single company led by a lead investor. Syndicate investing is used in multiple asset classes including startups, private equity, real estate, and others.
Syndicates have risen in popularity due to the ease created by tools like AngelList. As the team at AngelList puts it, “A syndicate allows investors to participate in a lead investor’s deals. In exchange, investors pay the lead carry.”
Related Resource: The Understandable Guide to Startup Funding Stages
What is a Syndicate Lead?
A syndicate lead is generally a well-established investor that has a pulse on the market. They are the individual dedicated to deploying the capital and investing in individual startups. This allows the lead, who may not have enough capital to keep up with their deal flow, to pool money from other individuals and ideally generate returns for the group.
How Does Syndicate Funding Work?
Syndicates function differently than a traditional venture capital firm. It is important that you understand how they work as a founder to improve your pitch and odds of closing a syndicate plus to make sure they are a fit for your business.
Check out a quick overview of how syndicates work below:
1) The Lead Investor Chooses a Startup
As we mentioned earlier, a lead investor is generally someone with strong dealflow or a presence in a particular industry. They might be a venture capitalist themselves or closely associated with the market.
To kick things off, a lead will find a startup they would like to invest in via their syndicate.
2) An Investment Vehicle is Created
Next the lead investor pools money from a series of backers to help fund the company via their syndicate. This can be created in tools like AngelList or StartupXplore. Backers, or individual investors, can serach through and find the syndicates that they are most interested in and invest within the syndicates parameters.
The lead investor they will need to help distribute materials and data that show why LPs or backers should join their syndicate and make an investment. This is typically done within one of the tools mentioned above. Once the syndicate is fulfilled they can move on to make the actual investment into a company.
3) Monitor Investments
Naturally, everyone invested in a syndicate will want to understand how their investment is performing. Generally, it is on the startup founder to inform the lead investor who will distribute the necessary information with the investors within the syndicate.
4) Liquidation or Exit
Of course, syndicate investors are partaking in a round because they believe there is an opportunity for upside from the investment. Eventually the investment will be faced with a successful exit or a liquidation event. For an example from StartupXplore,
“If the investment does not go well, the vehicle will disolve. If there are benefits (dividends, buyback or partial or total acquisition of the startup), all the investors will receive the amount they invested and 89% of the capital gains generated. Of the remaining part, the leader will receive 10% and Startupxlore 1%.”
Related Resource: Down Round: Understanding Down Round Funding and How to Avoid It
On the flipside, AngelList lays out a successful exit that looks something like this:
“Here’s an example: Sara, a notable angel investor, decides to lead a syndicate. The syndicate investors agree to invest $200K total in each of her future deals and pay her 15% carry.
When Sara makes her next investment, she offers to invest $250K in the company. She personally invests $50K and offers the remaining $200K to her syndicate.
If the investment is successful, the syndicate investors first receive their $200K, after which every dollar of the syndicate’s profit is split 80% to the syndicate investors, 15% to Sara and 5% to AngelList Advisors. AngelList Advisors is a venture capital exempt reporting advisor with the Securities and Exchange Commission, and a subsidiary of AngelList.”
How Can an Investor Become a Part of Syndicate Investing?
Syndicates are open to any individuals that are considered accredited investors. As put by the team at Investopedia, “An accredited investor is an individual or a business entity that is allowed to trade securities that may not be registered with financial authorities. They are entitled to this privileged access by satisfying at least one requirement regarding their income, net worth, asset size, governance status, or professional experience.
In the U.S., the term accredited investor is used by the Securities and Exchange Commission (SEC) under Regulation D to refer to investors who are financially sophisticated and have a reduced need for the protection provided by regulatory disclosure filings. Accredited investors include high-net-worth individuals (HNWIs), banks, insurance companies, brokers, and trusts.”
Related resource: Accredited Investor vs Qualified Purchaser
The 3 Types of Syndicate Investors
Syndicates offer an opportunity for an array of different individuals to make their way into startup investing. Learn about the most common types of syndicate investors below:
Funds
Some funds may use syndicates as a way to diversify their portfolio and make their way on to additional cap tables.
Full-Time Investors
Another common syndicate investor is a full-time investor or angel investor. This is someone that might not be attached to an individual fund but has a portfolio of startup investors.
Related Resource: How to Effectively Find + Secure Angel Investors for Your Startup
Regular Individual Investors
Lastly, there could be any individual who partakes is accredited and is interested in diversifying their investments by investing in startups.
Related Resource: How to Fairly Split Startup Equity with Founders
Benefits of Syndicate Investing for Startup Founders
On top of being an additional funding option for startups, syndicates offer a few benefits that might make them intriguing to a founder. A few benefits below:
- Large LP base with a single investor. Founders can tap into the individual investors in the syndicate but is only treated as a single investor on their cap table.
- Speed. Founders can move quickly when raising from syndicates as most of the diligence and effort is done upfront on behalf of the syndicate lead.
Benefits of Syndicate Investing for Investors
On the flip side, there are plenty of benefits to individuals that back a syndicate as well. A few of the benefits below:
- Access for smaller investors. Syndicates give individuals that write smaller checks the ability to back larger deals and rounds.
- Diversification. Syndicates give individuals the ability to make investments in more companies that might not be available to them as an individual investor.
For More Fundraising Help Contact Visible Today
Raising a syndicate is one of the many funding options available to a startup. As you kick off your raise and pitch different investors along the way, let us help. With Visible you can find investors with Visible Connect, add them directly to your Fundraising Pipeline, share your pitch deck, and track your round’s progress.
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