A syndicate investment occurs when investors pool their funds and invest in one company under one entity.
To learn more about other terms commonly used in venture capital, check out our complete VC Glossary.
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A syndicate is an alliance of business investors that work together to manage large transactions.
This would be impossible or difficult to do individually. Syndication allows companies to pool their resources, share risks and make it easier for them to collaborate.
Syndicates usually consist of companies from the same industry. Two pharmaceutical companies might combine their research-and-development (R&D teams) to form a syndicate for developing a new drug. Several real estate companies may also form a syndicate to oversee large-scale development. Sometimes banks may form a syndicate to lend large amounts of money to one party. If the opportunity offers a high rate of return (RoR), companies may form a syndicate to manage a particular business venture.
Some large projects require a lot of expertise and can’t be done by one company. Large construction projects, such as the construction of a stadium, highway, or bridge, are often such that no single company has all the expertise necessary to complete them efficiently. Companies may form a consortium to allow each company to apply its expertise to the project. Generally, syndicates can be considered partnerships or corporations for tax purposes.
A syndicate (or particular purpose vehicle) is an investment vehicle that was created to make one investment. It is a VC fund that was specifically created to support your startup.
Syndicate investments can be high-risk and high-reward. Accredited and reputable investors are required to be backers.
Qualified investors can also back multiple deals with tiny amounts through syndicates. AngelList allows all the investors to contribute as low as $1,000 to a syndicate.
A lead investor is responsible for each syndicate. A lead investor is usually a part-time investor who has experience in the startup industry, often a founder or former founder.
A syndicate investment leader is not paid a high management fee like a venture capitalist. Instead, they charge to carry. Carry is a percentage of the syndicate’s profit. The lead can choose the amount they charge, but AngelList sets a minimum rate of 20%.
An example: A fund you invest $10,000 in has lead charges of 20% carry. Your distribution will be $100,000 after a successful exit. Your total distribution is $90,000. The 20% lead takes 20% of your profits, less the initial investment ($100,000.- $10,000). You walk away with $72,000 profit because 20% of 90,000.
The lead investor chooses a startup that he considers a great investment opportunity.
To participate in syndicate investing, investors must first open an account on an investment platform such as AngelList.
After their account has been set up, they can browse the syndicates they are interested in and apply to join them. The syndicate leader will decide which investors would be the best match for their syndicate.
Leads can also invite investors to sign deals. In this case, it is up to the investor to decide if they would like to participate.
Some syndicate investments are closed to investors. Investors can only join them if invited.
Syndicate investors can be divided into three types:
The syndicate investment leader is responsible for sourcing deals. This person is most likely involved in founding or investing in startups.
Leads are well-connected in the startup community and have their deal flow. A notable angel investor or VC will feed on a “deal flow,” a continuous stream of investment opportunities. They have a reputation and are well-connected in the industry. This allows them to keep up with new startups and meet founders.
Leaders are constantly looking for new investment opportunities in startups. They can also form syndicates to share their deal flow and make it available to potential investors. Besides that, investors should look at the syndicate’s past investments before investing.
Connecting with successful syndicate leads is a great way to get your venture funded as a startup founder.
Investors may apply to join startup syndicates via sites such as AngelList and The Syndicate. Investors will be approved to open an account to search for syndicates and investors. Investors can also get deal memos by email. They can also attend webinars and other information sessions with founders, which will help them decide which syndicate to invest in.
Startup founders may also be eligible to join a syndicate investment. To do this, founders must choose a syndicate and apply to be included. Let’s say the syndicate platform invests in you. The syndicate platform will then share the details of your company with potential investors. This will allow you to access capital gains generated and use talented investors as a resource. Some syndicates are only open to investors, while others are for startups.
The responsibility for startup syndicate funding rests on the shoulders of the syndicate investment leader. The syndicate lead should be able to “sell” your startup’s potential success to other investors. This will allow them to attract enough venture capital to support your startup’s continued growth.
Because syndicate leads have a strong network and are experienced in startup business, they can share their knowledge with other investors looking for a return.
A successful syndicate investment leader may have many investors backing him. The lead shares the opportunity with the backers when they find a new opportunity for a startup world. They then decide whether or not to invest. If investors pay and decide to invest, their capital is pooled in a specific purpose vehicle (SPV), which can then be used to invest in a single startup.
Connecting with a successful syndicate investment leader is a great way to get your startup’s attention.
The result is that syndicates can create the perfect storm in the best way possible. This benefits the leaders, backers, and startups, simplifying the process and making it more accessible. All this is to serve the ultimate goal: To allow people to invest in the next-generation startups and thereby allow us to get the innovation we need at the time we most need it.
To learn more about other terms commonly used in venture capital, check out our complete VC Glossary.
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