Today we will cover the foundations that set up your syndicate for long term success. Here’s the TL;DR…
Have a clear Investment Thesis;
Focus on four core principles: Proprietary Network, Trust, Building for Scale and Metrics.
Let’s dive in!
"I've spent time with many of the most successful VC's on the planet. Most common similarity - they never try to be the smartest person in the room, and are able to break down their investment thesis in very basic terms." - Paul Murphy @paulbz
The job of an investor is not to predict the future.
It is to see the present clearly.
A lot of people fail to do this. They don't pay attention.
This is why I'm a fan of "bottoms up" investing - looking for companies that are performing well now, rather than "top down" - trying to identify the next big thing based on macroeconomic trends and predictions about where you think the world is heading.
It can be tempting to form your thesis based on "top down" thinking (eg. "I think generative AI is going to be big in the next 20 years for xyz reasons"), but it's smarter to pick domains based on relevance to you. Do you understand the space? Can you be helpful to founders so you can get in to competitive deals? Should you focus on just your local area, so that you get more dealflow through your network?
Broadly you need to think about three factors:
Which sectors or domains do you invest in?
Which geographies do you focus on?
What stage of company are you looking for?
Having clarity and focus on this ensures:
You build domain expertise. By focusing on a specific sector (preferably one where you already have some knowledge and experience), you’ve got a better chance of knowing what a good investment looks like.
You build a brand that stands out. The more you focus, the more recognisable you are to founders and investors. You’ll attract the right sorts of LP’s to your syndicate (people who are interested in and knowledgeable about your sector) and that means…
You provide more value to founders. One of the most powerful things a syndicate can offer is the value of their investor community. Many VC’s talk about the power of their network, but often they don’t really deliver on this concretely. Syndicates can. Note from Paddy: Odin has syndicates that are hyper-focused on areas like seed stage gaming, and European cybersecurity. The LP’s in these groups are people who work in those industries. They have a better network and add more value than many funds, especially when the LP’s are very experienced.
You see higher quality deal flow. With a reputation as an expert, a great brand and a powerful, value-add network of LP’s who support on deal sourcing and advice, your syndicate will start to build a real reputation in its niche. This means you will see and get into the best deals.
The 70-20-10 Rule
I have a heuristic called the '70-20-10 rule' when it comes to what most influences investors’ thesis.
Essentially, 70% of an investor's interest is going to be driven by the sector or domain. 20% of it has to do with geography and 10% has to do with the stage.
You should target LP’s with these numbers in mind.
Let's have a look at AngelSchool's thesis as an example.
In terms of sector, we focus on B2B software: Enterprise, SaaS, Deep tech, APIs, and dev tools are fair game. It’s tied a bit to my own experience and personal brand. I was one of the founding team members who built the World's Largest API marketplace. Investors knew me as the 'API guy' and believe I have credibility in that domain.
B2B Software also has a number of features that make it a generally attractive investment:
It tends to have a sticky customer base who don’t like switching once they’re using a product.
It is highly scalable - once you’ve shipped one copy of a piece of software, the cost to ship a million more copies is close to zero (excluding sales and customer support), so it is very high gross margin.
Often these products benefit from network effects - so they become more useful as more people use them. This increases stickiness and reduces scaling costs.
Today we’re primarily US-centric investors (we do plan to expand into Europe in Q1 which is one of the reasons we’re so excited about partnering with Odin!)
I’ve cultivated a global investor network and a US focus was the most practical choice for cross-border capital movement. There's also an ecosystem maturity and trust that helps.
Finally we invest at seed to A, and we might do some series B follow ons. Our average cheques today are $200,000 up to $1m. Those are the stages where our capital is meaningful to founders.
With a thesis in place, what are the basic principles you need to be thinking about as you build?
The Four Core Principles
1. Proprietary Network
Building a proprietary network means owning your LP relationships and not being dependent on anyone else. You probably already know many of the people who will form your initial proprietary network. They’re like-minded folks that you’re connected to - either personally, professionally, or via social media.
To cultivate this network, you should seek to build 1:1 relationships with everyone. I call this the ‘WhatsApp test’. When you can move beyond email / LinkedIn / Twitter to chatting any time on WhatsApp, it’s a good sign of initial trust. Remember - trust is the currency of the private markets. People invest in and with people they trust. More on this below.
In future, you will be able to to leverage your proprietary network to drive referrals. The stronger your initial relationships are, the faster the referrals will start coming in.
Trust is the main reason startup investments happen.
If people don’t trust you, they won’t commit their hard earned cash to something that you’re putting your name to - whether you are doing that as a founder or as an investor.
The simplest thing you can do to build trust is to actually get to know your investors. Listen to what they have to say. Understand what makes them tick, and how your offering is relevant to them. Understand how many siblings they have, whether they prefer dogs or cats, what sports they play and what their favourite book is. Being genuinely interested in other people is the easiest way in the world to do business - but you’d be surprised how many people don’t do it.
As for the mode of communication - a coffee is better than a zoom call, a zoom call is better than a phone call, and a phone call is better than an email. At a basic level, this is about building a positiveemotional connection. Investing is not as rational as you might think.
If you don’t build trust, people will not engage with your deal flow. They likely won’t even read your emails.
You can also build trust more scalably, by producing interesting, thought-provoking content that makes you discoverable to like-minded people. Think of your favourite podcast host. It sort of feels like you know them, right? You’re fond of them, you think they’re smart, or funny. At some level, you trust them.
But content comes later. You should start with one to one relationships, and focus on really getting to know your LP’s.
You can also build trust by aligning incentives. You want to make carried interest your incentive, not upfront fees. If I take deal fees as part of my syndicate, the trust is somewhat eroded. I’m profiting from our relationship in both the short and the long term, but my LP’s aren’t.
3. Building For Scale
You want to focus on investing, not operations. This means outsourcing non-core activities like SPVs to providers like Odin. If you build this stuff yourself, you’re going to waste a lot of time you could be spending on network building and deal flow.
You can also use lightweight tech and automation to help you to scale. You’re going to want to use some sort of simple CRM to track LPs and deal flow (Airtable is excellent, free and very flexible) and you should handle email automation via a product like Mailerlite (very cheap) or Gmass.
Another area worth putting some thought into is community. Done right, community acts as a massive lever for both scale and trust. If you allow your LP’s to connect and collaborate with one another, you’ll strengthen brand loyalty and drive additional deal flow. The simplest way to start is with a WhatsApp channel. Some people use Slack, but engagement is generally better on WhatsApp since it’s such a high use frequency product. If you’re all located in a similar geography, face to face meetups are also a great shout. Of course, meetups themselves don’t scale, but they allow you to drive scale because people have fun, and they tell their friends if they’re having fun. This drives word of mouth and increases the chances of new LP’s hearing about you and joining your syndicate.
Scaling your LP network puts the law of large numbers to work in your favour. You get predictability on fundraising. This means you can negotiate with founders with more confidence, knowing that you can commit to a deal with a high likelihood of filling your allocation.
You can’t improve what you aren’t measuring. And you need to make sure you’re measuring the right things. I recommend running your syndicate like an e-commerce or SMB SaaS business. It’s about constantly testing and optimising everything.
You should track engagement at every stage in your funnel and look for key drop off and conversion points. You then change what isn’t working, and double down on what is.
When you’re benchmarking performance, you want to track things like:
% Open rate of emails
% Click through rate
Browsing behaviour: dwell time on investment materials / memos, and how many people read the full set of materials (you can use Docsend to track this).
Conversion rate: % of investors who click through and view materials who then go on to invest.
Every time you run a deal, what you’re trying to do is optimise these numbers. As your syndicate grows, you can start to A/B test different approaches, accelerating your rate of improvement on these metrics.
In part 3 we dig into the nitty gritty of process, and look at how you should be running your deals, all the way from sourcing to closing.