This article is broken down into three main sections:
LP Segmentation & Psychology Understanding the different categories of investors (also known in the venture capital industry as LP’s - limited partners);
Pitching LP’s Convincing investors to join your syndicate and look at your deal flow, and;
Growth Growing your investor community over time.
LP Segmentation & Psychology
Before you reach out to people, you need to understand who you are dealing with.
Here’s a simple framework for investor segmentation. On one axis you can see how active or passive an investor is. On the other is their ticket size.
Independent angels (either investing directly in startups, or through syndicates) are on the lower left side of this matrix. They’re typically active investors. They generally have a limited amount of capital to deploy and will want to pick specific deals. Their cheque sizes vary pretty widely based on net worth and risk tolerance.
Family offices sit in the middle. Some pick and choose deals, others invest in pretty much every deal with a few specific syndicates, or just deploy through funds. They may invest in funds in order to get co-investment rights on specific deals that they like.
Fund LPs are large cheque investors and passive for the most part. They tend to be more “institutional” - they might be a university endowment, a pension fund or a fund of funds. They typically deploy capital with a fund manager who can soak up a large cheque, and entrust him or her completely with the job of selecting opportunities and generating a return.
Within the angel subset - our focus area - different people have specific interests and needs.
I hear time and time again from angels that they invest in startups as a way to learnand develop their skills. Some do it for status / perceived prestige. Others want to be part of something bigger than themselves, have a positive societal impact or add value to a business that they believe in.
People generally join syndicates because they have wealth and liquidity but don’t know how to start, or don’t have time to source and select opportunities. Syndicates provide curated dealflow, undertake diligence and typically offer access to off-market opportunities.
Family offices typically invest with syndicates when they’re testing the water with VC as an asset class. Syndicates offer more control in terms of deal selection than funds, and the ability to start small. They may also be interested in adding value to portfolio companies, but tend to be more passive.
Fund LPs invest almost exclusively for a financial return, and bet on a fund manager. They generally want to be hands off and just need periodic updates.
As a broad rule, 80 - 90% of your base should be other Angel investors and 10 - 20% family offices.
So how do you identify LPs, convince them to join your mailing list and get them to pay attention to your deal flow?
Here are a few things to note:
Most of this is self explanatory, but I’ll dig a bit deeper on our value proposition. Once I’ve got to know someone, my objective is to demonstrate to a potential LP that my syndicate in particular is relevant and aligned with their needs.
My three key messages here are typically:
High conviction: I source and diligence heavily, and assemble full data rooms for every deal I back (see the previous post on my process). Out of the hundreds of companies I look at each year, only 6 - 10 receive investment.
Decision control: Unlike funds, being part of a syndicate means LPs construct their own portfolio. There are also no minimum transactions per year or any other expectations. The only requirements we have are on minimum check size ($10,000 per deal).
Alignment with LPs: I invest in every deal, and have often also invested much earlier and at much riskier stages in the same company. I only profit if our LPs profit, by charging a 20% deal carry and no management fee.
This messaging is tried and tested across hundreds of investors. It works.
Here is aphased roadmap for building out your LP network. Each phase has specific, milestones and metrics that indicate you’re ready to progress to the next one.
Phase 1: Seeding your LP base
As mentioned previously, you should start with warm connections. Refine your pitch and get people who know you interested. It will take work, and your first pitches probably won’t be good.
Milestone: speak with 30-50 warm leads from your network
Metric: 70 - 80% of calls result in a ‘yes’ to share dealflow with them.
Phase 2: LP Engagement
Phase 2 is about testing to see if your LP network is actually engaging. It is easy to say yes to receiving a newsletter, especially if it’s somebody you know. It is an entirely different thing to get people to make an investment.
To get sufficient data, you need to grow your LP base to at least 50 (but up to 100 is good). That should be enough to share your first deal and raise a meaningful amount ($100k or close to it).
Milestone: Grow LP base to 50 - 100 with warm network outreach
Metric: at least 22%+ of LPs should express interest in a deal (not necessarily invest). This means people are engaging with your deal flow, which is crucial.
Phase 3: LP Commitment
In phase 3 you want to test if your investors are committing capital at a reliable rate. You need 100 LPs minimum to get a clean signal, so keep going with those outreach calls.
Phase 4: Auto Scaling!
You now want to focus on getting your LP network to grow on its own.
By the time you get to 200 LPs, you’ll have a big enough base for referrals to kick in.
You should be getting new LP introductions in two ways: i) Someone in your network found one of your deals interesting and shared it with a friend; ii) One of your LPs told someone about your syndicate.
The auto scaling effect in syndicates is one of my favourite things about this model.
When I realised it was really starting to work, I took my foot off the gas on seeking out new LPs. Using referrals alone, I’ve grown my LP network from 200 → almost 1000!
Here’s the proof from my own syndicate:
The blue line on this graph shows the number of investors subscribed to my mailing list over time. On to this, I overlaid the times when I was active with deal flow.
I announced startup #1 in late April 2020, and ran the syndicate in July. I announced startup #2 in July 2020, and raised the syndicate in October. I repeated this for startup #3 in December of 2020 into the start of 2021. At the same time, I raised for startup #4 in that period as well.
The data shows a very clear correlation between deal activity and growth of the investor network. Great deal flow drives growth better than anything else.
But remember, this will only happen if your LPs know and trust you. Trust is the currency of the private markets.
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