Funding a startup throughout its lifecycle is quite the challenge, even for seasoned founders. The initial backers of a startup are the lifeblood of future investors and can position it for success.
One such group, known as an angel syndicate, come hand-in-hand with or directly following the friends and family round. They’ll also typically lead a startup’s pre-seed or seed round, and participate in future rounds.
So, what is an angel syndicate? How do they work? How much do they invest? These are just a few of the questions we’ll cover in this post. We also cover some of the most commonly asked questions about angel syndicates.
What is an angel syndicate?
An angel syndicate is an informal group of individuals who source and invest in startups together. Angel syndicates and angel groups were formed in response to the Jobs Act of 2012, which enabled the creation of special-purpose vehicles (SPVs). Syndicates leverage the SPVs to invest in startups as a single entity.
How does an angel syndicate work?
Unlike other forms of institutional capital, angel syndicates typically do not have full-time investment associates or partners. Instead, they have one or two lead investors who source and review deals, and other members can introduce investment opportunities as well. In some angel syndicates, investors are obligated to invest in every member-approved deal, while in others investors are under no obligation to invest in a deal.
Typically all members of the syndicate conduct due diligence on the startup’s business model, financial data, team members, etc. to decide whether or not they’ll invest. In exchange for sourcing and managing the deal, the lead investors charge a “carry” for their efforts. The “carry” is expressed as a percentage of the syndicate’s profits and usually doesn’t exceed 20%.
For example, let’s say the lead investor charges a 20% carry. One of the companies in the syndicate’s portfolio goes public and they recognize a $5M profit. The lead investor would receive $1M, and the remaining $4M would be distributed to the other investors in the syndicate.
Why do startups raise capital from angel syndicates?
Angel syndicates typically fill in the gap between the initial funding provided by founders or their friends and family, and the institutional capital from venture capitalists. It is also sometimes used to fill in the remaining capacity of a round alongside family offices and individual angel investors. Rather than taking on debt, startups also occasionally use capital from angel syndicates to fulfill their op-ex needs, or as an extension between formal rounds.
How much capital can you raise from an angel syndicate?
There is no set limit for how much capital you can raise from an angel syndicate. It depends on a variety of factors, but one, in particular, is the size of the group. These days, they are known to invest up to $1 million per deal, but the average sum is closer to $300k. Some syndicates, like Gil Penchina Flight Ventures, have been known to cut checks as high as $10 million or more.
How much equity do angel syndicates take?
The amount of equity that angel syndicates receive in exchange for their investment varies from deal to deal, as there’s typically no set amount. That said, it’s typically between 10-30%, but it sometimes exceeds 50%.
When is the right time to raise capital from an angel syndicate?
There’s no right or wrong time to raise capital from angel syndicates, but most startups leverage capital from this source early in their lifecycle. In particular, they leverage it for their pre-seed, seed, and Series A rounds.
How long does it take to get capital from an angel syndicate?
Funding from angel syndicates closes quicker than funding from VCs and other providers of institutional capital. Typically, syndicates can close deals within 2-4 weeks, but competitive deals can be closed even faster.
Angel syndicate vs Angel Group?
An angel syndicate is an informal group of individuals who source deals for each other to invest in. Angel groups, on the other hand, are professional organizations that collectively work to find investment opportunities, and perform diligence. When raising capital from an angel syndicate you’ll receive a check from all interested investors, whereas, when raising capital from an angel group you’ll receive a single check.
Angel syndicate vs venture capital?
While angel syndicates are groups of individual angels who invest their own money in startups, venture capitalists are professional organizations that invest the money of their “limited partners”. Also, whereas VC’s entire livelihood is driven by sourcing, securing, and seeing deals through to liquidity, typically it is not the primary source of income for the angel investors in an syndicate.
Pros of raising capital from an angel syndicate?
- Access to higher sums of capital compared to friends and family
- Lead investors handle most of the legwork around organizing investments
- Greater simplicity with just one SPV on the cap table
- Exclusive mentorship and guidance with the angels
- No interest or repayment is required, whereas it is required for debt financing
Cons of raising capital from an angel syndicate?
- Loss of control through board seats, voting rights…etc.
- Higher cost of capital compared to debt and alternative forms of financing
- Takes more time to close compared to alternative forms of financing
Common terms or provisions provided by angel syndicates?
- Board seats or control requirements. Some angel syndicates require board seats and most will push for pro rata, information rights, and most favored nations clauses— but it is a much less confrontational relationship compared to VCs.
- Liquidation preferences and multipliers. Syndicates sometimes require liquidation preferences and multipliers as a stipulation of their investment. Consider avoiding term sheets with more than a 2x multiplier.
Top angel syndicates in the United States?
The top angel syndicates have empowered startups to scale to incredible heights through funding, introductions, and mentorship, while the worst have contributed to their collapse. So which syndicates have contributed to the success of so many? Here are just a few of the most well-known:
- Calm Ventures
- Noveus VC
- Flight VC
- My Asia VC
- New Stack Ventures