One of our most frequent pieces of advice for newer angels is to join AngelList. Despite being nearly ubiquitous in early-stage investing, many angels don’t appreciate just how much of a game-changer ‘syndicates as a platform’ (a.k.a., SPVs) have been in terms of democratizing venture as an asset class. BUT, SPVs and platforms promoting SPVs, also have serious drawbacks. Motivations for SPV leads may not always align with the best interests of angel investors. Let’s dig in.
Access: AngelList and its syndicate products have opened up access to high-quality venture investment. Pre AngelList, unless you were part of the inner circle of the Silicon Valley or New York tech scene, access to high-quality deal flow was almost impossible to find, get allocation to, and invest in. Thanks to AngelList, any accredited individual can join syndicates giving them the ability to co-invest with high signal co-investors. In most cases, the cost for co-investment is a fee in the form of 20% carried interest (however with RUVs it’s completely free). While some angels struggle with the notion of paying for deal flow, I find the opinion - especially from newer angels - misguided. As an angel, you want to invest in the best deals possible. Period. Syndicates (as well as RUVs and Rolling Funds) offer an easy way to get started angel investing while building your own pipeline of direct deal flow.
Small Checks = Portfolio Diversification. This is perhaps AngelList’s biggest value to investors — but is often overlooked. SPVs allow multiple investors to be aggregated as a single cap table line item. This means that founders are able to bring on many small check angels, with check sizes as low as $1,000. When I first got into angel investing the minimum check size was $25,000-$50,000. The math is clear that larger portfolios are better. Let’s say you are looking to build a properly diversified portfolio of around 40 early-stage investments. At $25,000 per investment you need a budget of $1,000,000. On the other hand, with an average of $5k per investment, you only need $200,000. AngelList and small checks allow more investors to leverage portfolio construction to diminish the risk of total loss and maximize the probability of outperformance.
Streamlined Investing Experience. AngelList also makes it so easy to get started and all for free. When I started angel investing, every investment was a headache. I would likely have to speak with the founder’s lawyers, sign multiple docs, track/request K-1’s, etc. AngelList takes care of this for you.
Insights & Community
Free Insights: Another key aspect of most syndicates is the “deal memo” where the syndicate lead describes the opportunity in detail. Great syndicate leads really invest time to document the key pieces of deal evaluation: Team, Product, Market and Terms. Deal memos can keep you apprised of new trends, market pricing and technologies. They also offer tons of insight into what makes for a promising outlier opportunity, helping teach newer angels what to be looking for.
Build Pattern Recognition. The best way to gain experience as an angel is through experience: getting in reps by taking pitches and building patter recognition. However, many angels don’t have access (or the time) to have multiple direct pitch meetings each week. While reading 5-10 memos a week is not quite the same, new angels can quickly ramp up thanks to the plethora of information and insights included in memos.
Networking While slightly less common, syndicates are also a great way to build your network. Some syndicate leads, such as Zach Coelius, regularly host dinners or happy hours for LPs. Others host virtual events or have communities associated with them such as Intangible, and TBD Angels.
Areas for Caution
While I see zero downside in joining many syndicates, there is a difference between joining syndicates and investing them.
FOMO. When joining syndicates remember that the lead is heavily incentivized (via carry) to run a lot of deals. The more deals they run, and the larger the allocations the more they stand to gain down the line. Unlike funds, syndicate leads are not compensated on aggregate performance - only on a deal by deal basis. Deals are never presented by leads as “mediocre opportunities”. Instead every deal is painted as a potential future unicorn. Thus angels need to learn to resist the urge to invest in every new deal they see: many deals look great on first glance.
Lack of Control & Power. When investing through a syndicate you have less control than you do when investing directly. LPs in syndicates do not typically interact with founders. They often have little or no information rights. They rarely receive pro-rata.
Track Record. While it’s more important to invest in great companies (no matter whether by syndicate or direct on the cap table) new angels should know that track record is looked at differently when investing via syndicate vs. investing direct. If you one day aspire to manage other people’s money (OPM), it’s likely you will need to have a track record of direct investments and will not be given as much credit for your syndicate investments since the opportunity was not sourced or won by you (unless you were the lead!).
Lack of Exit Optionality. Lastly, if you hold stock directly in your own name, in later rounds you may have an opportunity to exit the position early. With a syndicate, you cede the power of liquidity decisions to the lead.
by Sam Huleatt