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If you're an angel investor, chances are you've considered joining an angel syndicate.
Syndicate investing is a simple way for a group of investors to come together to fund a particular startup or project. Often they do this via a Special Purpose Vehicle (SPV), a type of micro-fund. One or two investors may "lead" the syndicate.
Syndicate investing benefits angel investors in a number of ways:
- Better deal access
- Portfolio diversity
- Shared deal flow and due diligence
- More bargaining power
- Simplicity (syndication platforms, delegating responsibilities to Syndicate Leads)
- Better portfolio support
- Community and professional development
- Social impact
Advantages of syndicate investing
Better Deal Access
This is probably the main reason people join angel syndicates.
By forming a syndicate, investors can pool their resources and invest a larger amount in each deal. They will often do this via a Special Purpose Vehicle (SPV), a type of micro-fund. Syndicating an investment this way is frequently required in order to gain access to the most competitive opportunities alongside venture capital firms, since founders may have high minimum investment requirements.
Additionally, founders want added value from their investors. By joining a community of other angels, an angel syndicate becomes a much more valuable asset to a founder than you can be on your own - with a bigger network, more experience in different areas, etc.
Portfolio Diversity
Syndicate investing allows angels to build larger portfolios.
Rather than eg. investing $100k in a single deal, you can invest $10k in ten deals. Portfolio diversity is well known as good practice for investors in general, but it is particularly important in angel investing and venture capital.
VC is a “hits business”: a tiny number of outlier investments return many multiples on invested capital (as much as 50x or more), whilst the rest of the investments return very little (or nothing at all).
By investing with an angel syndicate and increasing your portfolio size, you increase the probability of hitting a winner, and dramatically increase the probability of tripling or quintupling your invested capital across your entire portfolio. You also decrease the probability of losing money altogether (source).
Provided you are accessing high-quality opportunities, if you have a 300 deal portfolio instead of a 30 deal portfolio, your chance of tripling or quintupling your money is ~80% higher. Perhaps more surprisingly, your chance of 10xing your money doesn’t decrease as your portfolio size increases. The upside of a true outlier outweighs the downside risk of losing money on all the others. As your portfolio grows beyond 30 companies, the chance of losing money altogether declines from as high as 10% to close to 0. You can read more about this here.
With Odin, you can invest as little as $1k per deal, allowing you to build a truly diversified portfolio.
Shared Deal Flow and Due Diligence
When organised in the right way, groups of individuals are able to make better decisions and solve problems more effectively than people working alone. Syndicate investing allows angel investors to pool not just their deal flow but also their knowledge, experience and resources - their collective intelligence.
By leveraging the collective intelligence of the entire angel syndicate, they are able to source more opportunities and carry out more informed due diligence on the startups they review. This helps improve deal selection.
More Bargaining Power
Because angel syndicates are able to pool their knowledge and resources, they can often negotiate more favourable terms when investing.
For example, they may be able to get more information rights, negotiate a lower valuation, or obtain a board seat. All of these factors can help to improve the chances that the investment will be successful.
Simplicity
The rise of online syndication platforms like Odin has made it easier for investors to participate in syndicate investing. These platforms provide a central location where investors can connect with each other, identify and evaluate potential investment opportunities, and manage their investments. They take care of the payments, legals, operational and administrative duties, which allows the angel syndicate to focus on the more important aspects of investing: sourcing and evaluating deals.
On top of this, much of the heavy lifting associated with the deal (eg. negotiating terms, building the deal flow pipeline, conducting initial due diligence) is often delegated to the Syndicate Lead, in return for carried interest.
This makes the syndicate investing process more efficient and more convenient for individual members.
Better portfolio support
By engaging as a community of investors, rather than alone, angel syndicates are able to offer much more value to founders. Need an introduction to a key industry stakeholder? Perhaps someone in the group has the right contact.
Need help pushing out your message on social media? You have 20 or more angels who can help. Need advice on a specific business area? With an angel syndicate, the chances someone has expertise are higher. The fact that angel syndicates can add more value for founders than solo angels further improves their chances of the success as investors.
Community and professional development
Joining an angel syndicate also means joining a community of like-minded individuals, with similar interests, values and ambitions. The best syndicates are very community-centric and encourage their angels to connect and share ideas. This has numerous side-benefits - you meet interesting people, make new friends, and can also find commercial and job opportunities this way.
Social impact
Beyond the direct benefits of angel syndicates, there are some interesting societal benefits.
Historically, investing in early stage companies has been the preserve of high net worth individuals, family offices and institutional investors. With the increasing popularity of angel syndicates, we have seen the previously exclusive world of early stage investing open up to investors all around the world. This is giving thousands of people the opportunity to own a stake in the future for the first time, and invest in the change they want to see in the world.
Many markets and people have been overlooked by investors for a long time. The lack of access to capital has often been a major barrier to progress. With the recent proliferation of angel syndicates, we are now seeing communities form to serve markets and sectors where both social and financial capital are needed the most.
This fosters innovation, job creation and economic growth.