The term “angel investor” is a common one in the startup ecosystem, but there are actually some different categories of angel investors, including angel groups and angel syndicates. Let’s look at what defines a syndicate.
What are Angel Investors?
To make sure everyone is on the same page, let’s clarify what an angel investor is. Angel investors are often:
- High-net-worth individuals who have come up through startups and have had some success and now invest in other startups
- High-earning professionals, such as tech company employees/founders doctors, dentists, and lawyers, who invest in startup companies
Due to the tax benefits, angel investors independently invest in startup companies and they aren’t afraid to take risks, since they are often able to take losses as a tax write-off. They’re a key part of the startup funding ecosystem.
Angel Syndicates and How They Work
Now, syndicates are a little more organized. They are made up of groups of angel investors that make investing decisions together.
Angel syndicates are often made up of alumni groups from companies or institutions. This could be people from Google or Facebook or a collection of alums from a certain university. Or, they may have a regional component, being composed of professionals from a specific city or area who like to work together on deals and pool their assets and deal flow. They will meet regularly, once a month or once a quarter, and they’ll present their favorite investment opportunities to the other people in the syndicate. Sometimes founders will pitch for money as well.
After these presentations, the members of the group can ‘opt in’ or ‘opt out’ of investing. They may or may not vote, but they will almost always debate the pros and cons of the company that just presented. Typically, when you are a member of one of these groups, you do not have to invest in the company. Each member has the choice to invest or not. One of the nice things about being in an angel syndicate is how members can benefit from networking while being able to observe the deal flows of friends and colleagues.
Furthermore, in angel syndicates, you typically don’t have to write such a big check because you’re getting a chunk of money from the group. So you also get to benefit from the portfolio and diversification effect. This is really important to super early stage investors because the rate of loss is so high - like it or not, the brutal reality is that most startups at this stage won’t return capital. Investors also rely on the portfolio effect and diversification when investing in the stock market, but those are publicly traded, mature companies. Startups, especially at the earlypre-seed angel stage, are often going to go out of business. Investors really want diversification, so that gains on a successful startup offset losses from unsuccessful companies.
Angel Syndicates Benefit the Startup Ecosystem
Angel syndicates can be really helpful to their members and the companies they invest in in numerous ways. But the benefits go beyond the specific companies that they work with, because they often support the ecosystem through events, networking and advice to students and other potential startup founders. They offer:
- Early stage investment
- Networking for members and companies
- Portfolio diversification for members
- Lower investment requirements
- Sometimes educational help for the ecosystem
There are large, well-known groups, such as Band of Angels, and other collectives that work together to help startups begin their journeys.
How do you get in touch with an Angel Syndicate?
The best way to begin a relationship with an angel syndicate is to be introduced to an individual who is in the group by someone who the person really trusts - a successful founder, a well-known VC who says “this is interesting but too early,” or perhaps by a startup lawyer or accountant. The groups prefer warm introductions, since the person making the intro is basically vouching for the credibility of the founder when they make the intro.
Of course, this can be very hard for 1st time founders or people who come from outside of the traditional startup ecosystem. Breaking in is hard.
One way to overcome this is to find trusted people who are connected to members of the group (use LinkedIn!), then ask them for advice - not an intro, but advice. Startup founders are often very open to having quick conversations with smart people they don’t know, offering advice and know-how. If these conversations go well, then it’s totally OK to ask for introductions. And, if you are going to be a startup founder, you are going to have to get used to the sales motion of cold outreach - so we’d suggest reaching out to people connected to important members of the group, and then getting them to like you, believe in your vision and then asking for the introduction.
Pros and Cons of Angel Syndicate Funding
Pros
- Larger pool of capital. Angel syndicates can provide a larger amount of funding compared to individual angel investors.
- Diverse expertise. Syndicates bring together investors with varied backgrounds and expertise, offering a wealth of knowledge and advice.
- Credibility and validation. Receiving investment from a syndicate can enhance a startup’s credibility and serve as a strong validation of the business model.
- Extensive network. Syndicates can introduce founders to a broader network of potential customers, partners, and future investors.
- Shared risk. The risk is spread across multiple investors, which can make it easier for founders to secure funding compared to relying on a single investor.
- Streamlined process. Syndicates often have a lead investor who coordinates the due diligence and negotiation process, making it more streamlined for the founders.
Cons
- Equity dilution. Larger investment amounts mean giving up more equity, leading to dilution of ownership for the founders.
- Complex decision-making. Managing the expectations and interests of multiple investors can be challenging and time-consuming.
- Higher expectations. Syndicates may set high performance expectations and aggressive growth targets, adding pressure on the founders.
- Structured oversight. Syndicates often have more structured oversight and reporting requirements, which can add administrative burdens on the startup.
If you have any other questions on angel syndicates, angel investors, startup investing, startup accounting, or taxes, please contact us. You can also follow our YouTube channel and our blog for information about accounting, finance, HR, and taxes for startups!
