Pros & Cons of Investing in an Angel Syndicate

Traditionally in ASEAN, Angel Investors meet with startup founders via personal referrals and trade connections. If they like the startup, angels frequently cut sizable cheques of S$50,000 and up. However, with the development of the ASEAN tech ecosystem, angels have started to band together and angel networks have gained more tractions over the last 5 years. There are now easily more than 10 active Angel networks in ASEAN that regularly fund 1-10M annually into 10-30 startups each.

Each angel network can have anything from 50 to over 300 members and they usually organize pitches, curate dealflow and more recently have started to support angels who want to syndicate deals formally. This article focuses on the last service as it is the newest and is growing quickly in our region. We estimate there are easily 50 proper angel syndicates being formed annually in ASEAN. This is equivalent to the funding capability of 5 to 10 seed VC funds. For example, AngelCentral angels create 5-8 new syndicates annually funding S$5-6M into startups. 

NB : I use the word proper to differentiate between syndicates that have no legal entity but are just based on trust or a simple contract between friends and those that are setup legally as an entity. The former is much riskier as there is limited recourse if the person who holds the shares  or money in trust runs away or chooses to behave contrary to the intention of the informal syndicate.

What is an angel syndicate?

A syndicate is a special purpose vehicle – SPV (usually a SG pte ltd or BVI) whose sole purpose is to invest in the startup. The syndicate has no operating activities. 

How does a syndicate get started?

Usually, angels go through the evaluation process for a particular startup. Then they each decide they are keen to invest. Next, they appoint a vendor to help them incorporate the SPV, set up a constitution and subscription agreement to invest in the SPV and open a bank account for the SPV. The angels also decide who among them will sit on the board of the SPV and represent them collectively with the startup. Frequently, this person is a very experienced angel and understands that there is a fiduciary duty as the director of the SPV. This role can be compensated and is frequently compensated in the form of a carry on profit made by the SPV.

Once the SPV is up and running, the SPV can sign the investment agreement with the startup and make the investment. So the SPV now is the shareholder or noteholder of the startup.

How does a syndicate function post investment?

The syndicate functions like any corporate shareholder. The same vendor is usually appointed to help maintain the syndicate in terms of admin work, corporate actions, government required filings etc.

What are the pros and cons of investing in an Angel Syndicate?

Pros of Angel Syndicate

There are 4 main benefits for syndication which accounts for why they are growing in such popularity here.

  1. Lower bite sizes. By pooling 5-30 angels together, the SPV is able to invest a sizable sum of  $50K to $1M into a startup. Yet at the same time, each angel can be investing as little as $10K. This enables more people to participate as angels.
  2. Following experienced angels. Assuming the syndicate lead is an experienced angel, syndication allows angels to learn from how more experienced angels handle founders and allows angels to tap on each others expertise and knowledge to make decisions collectively on what to do.
  3. Secondary sales. Because the angel investment is within an SPV, it is possible to sell your investment without triggering any pro-rata or right of first refusal clauses on the startup side.
  4. Strength in numbers. Because the collective funded sum is larger, many SPVs are able to hold onto rights like pro-rata and information rights when Series A comes. This is unlike direct angel investment where frequently the angel will lose some rights from Series A onwards.

Cons of Angel Syndicate

Of course, syndication is not the magic pill to everything. There are some key issues to consider and think about before joining a syndicate.

  1. Added Costs. Besides the obvious cost of incorporation, corporate secretary and legal documents at setup of SPV, there is also the cost of ongoing maintenance and the carry that is paid. These items will eat into your overall return but it should be less than what you pay a VC fund as management fees and carry (2% per annum + 20% carry).
  2. Lack of direct decision making. As you are in a syndicate, you technically are not a direct investor in the startup. What this means is that the startup will view the SPV and its director(s) as the investor. In practice, this usually has not much impact as most founder engage their angels on a “value to startup” basis anyway.
  3. Poorly designed SPV or bad governance on SPV. This is linked to point 1. It is theoretically possible to set up a SPV very cheaply but the problem will come in its running and decisions made. In my opinion, it is critical that the SPV has a well written constitution and/or shareholder agreement, has the right SPV directors and appoints quality vendors to help with admin work.

The ideal SPV will have a clear constitution that spells out how decisions are made, how share transfers can be done, how carry is paid and who are the directors for the SPV. It should also have its own bank account for transparency. The vendor selected should ensure government filing is done, accounts are kept and corporate action project management is timely. Finally, the SPV director(s) should be clear on his or her duties to the SPV/angels and engage with the startup in a professional manner as the corporate representative of the SPV.

In summary, I expect syndication to only grow even more in the years ahead as the startup ecosystem matures even more and more angels come into the scene. However, while syndication offers great benefits in bite size, governance, collective angel expertise and joint bargaining clout, there are large downside risks if angels don’t join professionally run syndicates or worse still, run informal syndicates on their own based on trust.

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