Syndication: A team sport
What is syndication? Let's break it down:
Syndication is simply when a group of investors club together to invest in a specific project. These investors can be any natural or juristic persons, including: trust and companies. The investment can be done through a special purpose vehicle (SPV) or as individuals bound by an agreement. Irrespective of the structure, one of the members will assume the role of the lead investor while the other members are called the backers (or tag along).
In this blog we’ll be covering the basics of syndication. In the follow up we’ll be discussing the mechanics of the different roles involved. We’ll also cover syndication across angel groups and lastly, we’ll have a separate blog that goes through the Jozi Angels investment process.
If you are asking yourself why should you syndicate, here are a couple of reasons why:
You have access to additional expertise across the syndicate group. Any experienced investor would advise you to invest in what you know, which is great advice. When investing as a group, you don't have to only depend on what you know, but you also have access to the industry knowledge and networks of your fellow co-investors. This increase in useful domain expertise is key to better decision-making and increases the chance of making a good investment while reducing risk.
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.
You have access to better investment rights. As part of a syndicate you have the opportunity to invest in projects that may have an extremely high minimum requirement, in other words, syndication enables you to invest in bigger projects, that you otherwise wouldn't have been able to enter into. The collective bargaining of the syndicate may also mean you unlock more favourable commercial terms.
You expand your network. It is true that sometimes who you know is more important than what you know. You can have the best ideas and skill sets, but without the right team or network, you can easily feel stuck. With syndication, it is expected that investors that share an interest in a particular project/company would also find other synergies. It goes without saying that knowing the right people can open doors to new opportunities. Here at Jozi Angels we strive to build long lasting, mutually beneficial professional relationships.
You can diversify your portfolio. Instead of using all your funds to invest individually into one big project, you can spread your capital by co-investing in various projects. Syndication reduces the bite-size of individual investments. This way you are making more deals, spreading (i.e lowering) your risk and increasing your potential for higher returns. Diversification is key to any investment strategy but this is particularly true in the startup asset class where risk is high. At Jozi Angels our investment minimums start at R50,000 and are adjusted depending on the startup’s capital requirement. Investors are able to do ‘spread betting’, making lots of smaller investments and then doubling down on those that outperform.
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.
As mentioned earlier on, within the syndicate, you can either be a lead investor or a backer :
Lead investors and the benefits:
A lead investor is the angel investor that handles the majority of the administration required to source and secure a deal. These individuals are highly experienced, and have built up channels to identify ideal investment opportunities, which most investors don’t have. A lead investor has valuable insight which is used to the advantage of all members of the syndicate.
Syndicate leaders don’t only enjoy the benefits of making a bigger investment with better investment rights, but they also get paid a carry. A carry is the percentage of profit from an investment, that gets paid over to the lead investor.
Backers and the benefits:
A backer is an investor in the syndicate that enjoys the luxury of having a leader handle most of the admin regarding a deal. There’s a lot less paperwork to complete and chasing after people. This includes the founding team, chasing the founder for a regular business update while trying to juggle your responsibilities can be frustrating. As a tag along, you have access to better investment opportunities irrespective of your experience in investing. There are scenarios where experienced investors choose to be a backer due to time limitations.
Backers benefit from the expertise of the leader. This means that they significantly lower their risk of making a bad investment. At Jozi Angels we work in a close environment with trust and transparency at the core of the process so backers can also enjoy the benefit of a peace of mind.
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.
There is another party that also reaps the benefits from the syndication. The entrepreneurs/startup companies that need the funding. They gain access to bigger investment amounts from a ‘single’ investor to kick-start their company. This simplifies and narrows down their hunt for financing to one syndicate, enabling them to get their business off the ground earlier.
As seen above, there are many advantages to syndication. But as with any investment, there are still risks involved. These risks are minimised by working with an experienced leader. The formation of the syndicate can be like herding cats, but once everyone is onboard and understands their role, all parties involved can enjoy the benefits. While there will inevitably be moving parts through the course of the deal, doing it together makes the journey a lot smoother.
There are downsides to syndication. It's not always easy to get a group of wealthy individuals to agree on something. It's 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. It is clear that syndication can drive innovation and stimulate the whole startup ecosystem.