We often get the question, why should I syndicate? In this blog we identify the reasons why you should consider syndication and in part 2 of this blog we outline how you should go about it.
Before we get in to all of that, lets start at the very beginning. What is syndication? Simply put, this is when more than one investor co-invests in a startup. This can be done through some form of financial vehicle or as individuals bound by an agreement. One investor will typically assume the lead investor role and the other(s) will tag along (also known as a backer).
There are numerous benefits to syndicating an investment, firstly startups become more accessible. By clubbing resources together investors are able to extend their investment range and afford startups that require investment above their maximum threshold.
Through syndication investors are also able to invest in more startups, providing greater diversification. Diversification is key to any investment portfolio, but this is particularly true in the startup space. Startup returns don’t follow a normal distribution, there is no average. There are those that shoot the lights out and those that fail. Most will fail. Research in the US shows that if selected properly one in every ten will succeed. Angel investors should be aiming to have a minimum of twenty startups in their portfolio. There are no silver bullets in angel investing, you have to shoot lots of lead bullets.
Having more people involved in a deal means there’s a greater collective effort. There’s another pair of eyes, a different perspective and more importantly, an extended network of people to make the business happen. Experienced angels will tell you their value to a startup is: open doors, offer expertise and provide capital (in that order). More angels means more doors that can be opened.
Benefits of Leading a Round
Lead investors generally get paid a ‘carry’ in exchange for the work they do during the syndication process. They are also able to negotiate better investor rights as a result of the work they do and the larger amount of capital they typically invest.
Benefits of Tagging Along
Backers generally have less paperwork to complete. They pass certain responsibilities on to the lead investor. The net result is that the investment process (pre and post investment) is far less complicated.
Syndication is also a good opportunity for those new to the arena to dip their feet in the water to check if the temperature is to their liking. Angel investing is not for everyone, there’s a good chance you will make nine bad investments, it takes a special person to go ahead with the tenth.
Syndication services, like the one offered by Jozi Angels, pair up experienced investors with those new to the market. Its an excellent opportunity to find someone to show you the ropes. Lead investors will generally source the good opportunities, by tagging along in the deal you can learn about due diligence, post investment management and develop relationships with follow on funders.
There are downsides to syndication. Its not always easy to get a group of wealthy individuals to agree on something. Its important that everyone is on the same page at the point of departure otherwise there’s a tendency for participants to follow divergent paths. Discuss everything, including roles, upfront so there are no surprises or disagreements later on.