Founder’s perspective on AngelList syndicates

AngelList recently launched a new feature called syndicates. In simple terms, it allows investors to get behind other investors and invest together as a group (termed a syndicate). The investor who facilitated the deal takes a carry of 15% (interest over a positive return – such as an exit or IPO) – not unlike VCs. In fact, this structure effectively turns angels into fund managers.

Many investors already chimed in, such as Jason Calacanis (The great venture capital rotation), as a syndicate “leader”, and Hunter Walk (Angel vs. Angel), Fred Wilson (Leading vs. Following) and Mark Suster (Is it a big deal?) as VCs. But what does it mean for startup founders?

Large checks change the dynamics between startups and angels

Hunter Walk is correct in his post that the bigger checks would make some angels less attractive. Angels are typically more cost conscious than VCs and seed funds, as the investment is entirely out of their pocket, and they don’t have the backing of a fund behind them.

It’s very common to give angels a “discount” or have them sign-off on a note with a lower cap. This is especially true if they are first money in, or value-add investors. Founders find this very agreeable, as the checks angels write are typically small, and they can add a bunch of them in the round without major dilution.

Syndicate change this dynamic however – if an angel now represents a $300k check instead of a $25k, it stands to reason founders will have a much harder time giving him the same discount as before. In fact, syndicates are now looking much more like seed funds than angels in their check size.

Will angels leading syndicates negotiate terms similar to seed funds? or will they still be looking to get the terms they got when they wrote small checks and offered their value-add to the startup?

Due to their increased financial interest in the investment (via the carry), I do expect those lead angels to provide more hands on value, so that’s definitely a positive.

Speed is appreciated, but not game changing

Jason Calacanis makes special note in his post on how he can make a decision about a startup in minutes. As founders, angels are especially attractive because of their ability to make quick decisions without needing multiple meetings and board approval. All the angels that invested in our seed gave us a decision within a day or two and had the money wired before the end of the week.

On the other hand, seed funds can move rather quickly as well. With a somewhat different process than a traditional VC (which you shouldn’t be approaching at the seed stage, anyway) and typically with a smaller number of partners, seed funds can make decisions in 1-2 weeks, and this includes due diligence (especially if you’ve already completed due diligence once). Unless the syndicate fills out your entire round, odds are you’ll want to bring in at least one seed fund, so that wait is unavoidable.

You don’t finish raising until the round is closed and the money is in the bank.

Traditional venture capital isn’t affected much yet

Having just closed our seed, we are already planning for the next round in 6-12 months. At that time, we will be talking mostly to VCs and not angels. $300k moves you much further to closing a $1M seed, not as much for a $4-5M series A round. It doesn’t hurt, but doesn’t move the needle as much.

A small note about leading rounds

Fred Wilson focuses in his post about how angels will have to learn how to lead rounds. From my personal experience (which is unquestionably, infinitely smaller than Fred’s), some seed rounds (which are still the focus of syndicates), don’t have “leads”. Yes, there is the person or fund that wrote the biggest check. We had that too. But we didn’t give up any board sits or negotiate special terms for that check. Most of the big checks came in the 2nd and 3rd tranche, as we were closing up our round.

For us as founders, the real “leads” were the first few checks when we had no traction with fund raising. I like to refer to a quote I used in one of my previous posts about fund-raising, “The first person to say “yes” is your real investor.” Those people who took a chance on us when no one else did (yet), and gave us the initial capital to get going, are the real “leads” from our perspective. This includes 500startups, which was the first outside money we received, and the first investors in each of the tranches until we closed the round. From what I’ve seen from the companies in our batch and other companies raising at the same time as us, this is quite common.

My co-founder, Adam, likes to say there are 2 ways to raise a round, and I agree:

  1. Going after a lot of individual investors and closing each one of them on YOUR terms = no leads
  2. Going after one seed fund/VC who usually who will set the terms, probably get a board seat and then will actively go and find other investors to fill the rest of the round.

The majority of the seed rounds are (1) but still some of them are being closed as (2). Later rounds are typically done with approach (2).

So to recap – when raising angel money, I’d rather have them write small checks so we could fit more without worrying about dilution too much. Syndicates are a viable alternative to seed fund checks in a round – the question is would they be willing to take seed fund terms as well. As Fred Wilson points out in his post, the angels leading those syndicates will have to learn how to negotiate terms in a configuration different than the one they were used to from when they were angel investing as individuals.

Additional thoughts: Brad Feld announced this morning that the Foundry Group are committing $2.5M in 50 x $50k investments to a syndicate they are representing on AngelList. Thinking about it, it makes even more sense for VCs to use syndicates for early stage investments, as angels might not be the best fit at those check sizes as I’ve mentioned above.

AngelList is quickly becoming THE main channel for early stage investing. VCs who recognize that and adapt their tactics to use AngelList more effectively and proactively will reap the benefits with better deal flow and access to startups.

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