Thoughts from a first time Syndicate Lead
Hey everyone, hope you all had a great weekend! I was in the hills near Dehradun for the weekend, away from all the Delhi rains, and it was such a nice break. There's been a barrage of funding news over the last and I frankly am a little bored of nothing super interesting being reported on lately (though India getting its second crypto-exchange unicorn is cool). Vedica and I have also been running our syndicate on AngelList for a couple of months now so I thought I'd share some thoughts on running a syndicate, and why I hope to see more folks run syndicates.
We are also still accepting LPs for deals we syndicate in the future (including an exciting one coming up in a couple of weeks), please fill out the following form if you're interested (we promise it'll only take 2 minutes) and we’ll follow-up with you later this week.
But what is a syndicate? A syndicate at its core is a Special Purpose Vehicle (SPV) that acts like a deal-by-deal venture firm. A syndicate lead (eg: Vedica and me) find a company they want to invest in, and then bring several syndicate members or LPs (eg: our community) who all pool capital together to invest in that company as a collective. I won't go too in-depth about how syndicates operate, or why one should invest in a syndicate but these resources are great places to get started:
Vedica and I have been angel investing independently for a while and have talked about starting a syndicate here and there in the past. As tiny angel investors, the capital you bring to companies are mostly unhelpful and it is often because of the goodwill of the founders or being helpful in a specific way that we have been on the cap tables of companies (this is also much easier for Indian companies structured as Delaware C-corps).
So, what are the benefits of syndicating a deal? Well, there is always the potential of a greater financial outcome through syndicates since leads earn a carry on the capital contributed by LPs (Disclaimer: Investing in startups is incredibly risky - only invest what you’re comfortable losing). Since leads also pool other people's capital, they also have a fiduciary duty towards them and thus it is a way in which people become more serious about their craft of investing in early stage companies (by writing memos, convincing LPs, etc) and building a track record co-investing with larger firms or other micro-VCs and syndicates.
And how does one start a syndicate? We use AngelList for all our syndicates because they take care of all the flow of capital (wires from LPs, wires to the portfolio company, distributions & carry on exit), along with all the paperwork. Having done a couple of direct investments in India, I know how exhausting the paperwork can be so we're super grateful for the AngelList India team and their back office who helps us take care of all the formalities. That being said, AngelList does charge a 2% setup fee and 5% of the carry on all investments.
The way carry works on AngelList India is that AngelList takes a 5% carry from all LPs in a deal, and the syndicate lead can choose to take carry between 0 and 15%
This is noticeably different from the AngelList US platform that takes a fixed fee of $8k spread across all leads and syndicate in a pro-rated manner. I assume this is due to a combination of reasons including round sizes being smaller in India and the paperwork and work involved in India being much larger. If you are raising a syndicate in the US, there are also cheaper alternatives like Assure but it does mean you lose the benefits of a platform like AngelList and there is definitely more work involved for leads. I haven't come across a similar product for the Indian market but most leads who are investing part-time, including us, are very happy sharing the carry and paying the setup fees to AngelList India and don't want to take on the additional work. Shout out to Jivraj (he also runs a podcast interviewing founders and VCs in the Indian ecosystem) and Shiva (who also writes a weekly newsletter and a podcast on the Indian ecosystem) from the AngelList India team for helping us get started on the platform and resolving issues along the way.
The Cons. All being said, there is a lot of work involved with running a syndicate. We knew some of what went into the process, but have also realized that a majority of the work goes into the LP side of the relationship rather than the founders. In two months, we've done two syndicates and have spent 90% of the time writing memos, creating the deal on AngelList and talking and convincing LPs who have questions, and unfortunately we haven't gotten to spend as much time with the founders. Also with running a syndicate, just make sure you know you're signing yourself up for things that can go wrong especially if your LPs aren't as familiar with investing in syndicates on platforms like AngelList.
The Future. Syndicates still feel overly positive for leads despite the work that goes into them. It gives people the chance to build a somewhat real portfolio with meaningful ownership in companies without having to raise an actual fund. And with all the trends we've seen in the pre-seed and seed ecosystem in India, it feels like the number of syndicates will only increase. In early stage rounds, it has gotten much much harder to lead a deal and put up $500k - $2M, but it has also gotten much easier to get smaller allocation ($25k - $100k) in these rounds with founders being keen on raising party rounds and bringing along dozens of angels or micro-VC firms. And with platforms making it easy for anyone with deal-flow and access to some sort of LP base (HNIs, founders & operators, etc), we're going to see a continuation of the proliferation of syndicates and small firms in the Indian ecosystem.