Angels provide pre-seed fundings to startups to aid their early stage developments. Angels can come together to invest as a group for various benefits. For one, it is a great vehicle for angels to learn from the each other (typically the lead) and also allow angels to cut smaller cheques especially if they are dabbling into new areas. In addition, syndications are a great vehicle to help you lower your bite size and start building up your portfolios (Asset Allocation and Portfolio Strategy for Angel Investors by William Payne)
Benefits of a syndicate
1. Learning from experienced angels – syndicates are usually led by a lead angel who knows the industry very well, or is someone who is seasoned angel investor.
vs. new angels trying to figure out and no one to show the ropes.
2. Less oversight required – again, leveraging on the lead investor (as you would in a VC investment situation) to get the update and share with the SPV shareholders.
vs. chasing down individual founders to get their business updates. It’s a MUST DO kind of best practise that we at AngelCentral advocate. You need to know how your investments are doing!
3. Smaller cheque size allowed – Startups typically would have a minimum cheque size requirement, to manage the administrative work on their end. For SG market, it’s usually 50K to 60K. But with a syndicate, you may be able to invest with as little as 10K, up to the lead to set.
4. Further, lowering the “bitesize” allows individual angels to invest in more deals for better risk diversifications.
5. As a group, syndicated investors could have a higher bargaining power when need be.
6. Plausibility of future secondary market sale.
Cons of a syndicate
1. Cost — a syndicate is usually structured as a Private Limited. So there are regulatory and administrative costs involved in managing the PTE LTD (or we usually call it SPV, special purpose vehicle)
vs. direct angel investments which is usually 0.
2. Less startup interaction opportunities — this may be deemed a good or a bad thing. Depends on your reason for angel investment. (Though I would argue interaction is a function of your personal initiatives)
What is a Lead Angel / Syndicate Lead? What does the role entail?
A good syndicate is always led by an experienced angel who has done some angel investments and has a strong reputation in the ecosystem. Usually the lead investor is the one who originates the deal. This is typically what happens: the startup founders sought out the known angel to angel-invest in their company. The lead investor reviews the deal and sees the potential in it. Then he says, “I am keen, and I can think of quite a few other potential investors who will be keen on this.” The lead then sounds out a few angels, and does further due diligence on the startup business, and makes a call to say, ok, I will lead this deal and help this startup get a certain amount of funding. And always the lead is the one to negotiate and finalise the investment terms with the startup founders.
Depending on the quantum target and commitments garnered, the syndication may become a casual one, where post-investment admin work is directly between the startup firm and respective angels. In other words, no SPV is required. And the lead’s work is typically done here.
If it becomes an official SPV, where say there are more angels than what the Startup would like to have (think admin cost for managing a list of 20 angels vs 1 lead investor) then a SPV grouping of the angels may be preferred.
The expectations of a lead:
DURING the fund raising process:
Ring fence the commitments together with the founder
Negotiate the terms with the founder
Lead the due diligence process (both legal and business aspects)
Work with the lawyer to structure investment terms and documents, to execute the investment into the startup
Work with the lawyer to review and structure the SPV such that management of the SPV is kept to minimum, and how company level decisions will be made in the event of an exit
Ideally continue support the founder to build the business, regardless of pace and growth (think cheerleader!)
Regular progress meetings, and update the SPV partners (co-investors)
(Best practice: monthly email updates, which should be shared with co-investors; quarterly face to face meet up to review progress + strategic discussions and reviews)
Provide relevant contacts to support growth
NEXT stage fund raising:
Be the conduit between next lead / VC, founder and the SPV partners
Always look out for the interest of the SPV partners!
How does AngelCentral Support the Growth of Angel Syndicates in Southeast Asia?
AngelCentral’s mission is to build a competent and effective community of angels in Southeast Asia. We will achieve this goal via three key pillars of services: a) curated deal flow for our members; b) angel investment related educations; and c) investment support.
Specifically on investment support, our goal is to help Leads manage the SPVs with as little administrative overheads as possible. Our founders are angels themselves, so they understand the pain involved (as well as the fun of angel investing too!)
As shown in the illustration, AngelCentral will provide administrative overheads to support the lead angel from the moment s/he says go! (typically once the full quantum has been committed) and also to give post investment oversight, SPV and startup performance update tracking.
Where necessary and on a case by case basis, AngelCentral can facilitate to source more funds for the syndicate from our member base.