Simplifying Angel Investing - The Use of Investment Syndicates
Loon Creek helps investors form and administer investment syndicates. This is the first in a series of blog posts based upon our experiences in doing so.
An investment syndicate (also known as a “single purpose vehicle” or a “single investment entity”) is a group of investors who combine together into some type of organizational vehicle in order to make an investment in a specific company. Usually the vehicle is a limited liability company (LLC).
For purposes of this discussion, I exclude “funds” which are formed to invest in multiple companies that are identified at a later date.
Syndicates are formed for a variety of reasons:
• Minimum investment. The company may have a minimum investment amount that is more than the investors individually wish to commit. A syndicate allows them to combine their individual investments to reach the minimum.
• Larger voice. The investors may wish to combine their investments in order to have a more significant voice in the affairs of the company. The thought is a singlean $100,000 investment on the capitalization table gains a larger say than twenty $5,000 investors.
• Liability protection. The investors may want to invest through an LLC as a liability shield.
• Ride coat tails. An investor may want to invest alongside an experienced investor or someone with specific expertise who forms a syndicate to allow angels to join him in an investment.
• Leverage contacts and knowledge. An investment leader may want to leverage her contacts and investment knowledge by inviting others to join her in an investment.
• Earn a carry. Such an investment leader may also want the potential to earn a “carry” (a share of any investment gains) on the syndicate’s investment. • Diversification. Angel investment is a diversification game. The majority of angel investments will result in losses. This means smart investors spread their money over a number of deals. Investing through a number of syndicates is on way of achieving diversification.
• Minimum Investment. A Boise-based startup led by a successful serial entrepreneur was beginning to scale her company. The company offered a Series A round with a minimum investment of $100,000. The Boise angels made a $100,000 investment through their fund. A number of the individual members of the fund wanted to make side-by-side investments, but in amounts less than $100,000. They formed a syndicate to combine their funds in order to make the minimum of $100,000.
Subsequently, the company had others approach them who wanted to invest less than their minimum. Rather than accept these investments, the company facilitated the formation of additional syndicates.
By the time the round closed, 20 investors invested a total of $278,000 in the company’s offering. Yet there were only three entries on the company’s capitalization table.
• Ride coat tails. A New York investment group specializes in training new angel investors. After several months of meetings, the cohort of new angels selects a company for an investment. Each investor contributes $5,000 to a syndicate, led by one of their peers. The syndicate then makes the investment and the lead member is in charge of following the investment.
There are a lot of great reasons for investing through syndicates. The process can be complicated and there are a number of considerations and decisions to be made. All of these decisions will impact the operation of the syndicate and the costs involved. In other posts I will address some of these complexities.
Loon Creek specializes in syndication services for angel investors. You can learn more about our services on our web site.