Angel syndicates: An emerging alternative for early-stage funding

Raising early-stage capital from individual angel investors is both challenging and time-consuming for the founders. Angel Syndicates are emerging as a powerful and efficient alternative for founders, to raise early-stage funding.

If you are a successful entrepreneur and raising capital for your next venture, frankly, many investors will knock on your door, with a cheque book in hand.

But if you are a first-time founder of a startup at an early stage and you need capital to either build your product or demonstrate an early proof-of-concept, it may not be easy to land that first cheque.

Reading the newspapers and tech blogs overflowing with funding news only makes it worse. Water, water, everywhere but not a drop to drink.

Thankfully, in a sign of a steadily maturing startup ecosystem, the avenues for fund raising are increasing for the founders. Angel Syndicates, a relatively new phenomenon, are now funding over 250 startups per year in India.

In this blog, I will talk about the pros and cons of raising your early capital from angel syndicates.

WHAT IS AN ANGEL SYNDICATE?

Asyndicate is a group of angels who pool in individual investments and collectively invest a more meaningful amount as a single entity. The Lead Investor of the syndicate typically evaluates and finalises the investment opportunities and individual angel investors in the syndicate have the option (but not the obligation) to participate with a small cheque on a deal-by-deal basis.

Angel Networks, which have been around much longer, are different from Angel Syndicates because these angel networks typically don’t pool in the investment of all angels into a single entity that invests in the startup. Instead, they serve as platforms that provide access to many angels (and such angels invest in the startup directly).

About 3 years ago, after the Securities and Exchange Board of India (SEBI) approved the amendments to the regulations with respect to Angel Funds, it became much easier for angels to invest in startups via the Angel Funds.

Since then, a number of Angel Syndicates have come up, riding on top of Angel Fund infrastructure provided by platforms like LetsVenture. It is safe to say that a few dozen such Angel Syndicates are operating presently in India, some more active than the others.

THE BENEFITS OF RAISING CAPITAL FROM ANGEL SYNDICATES

1. One large cheque

Let’s say you are looking to raise INR 2cr ($300k) for your first round of funding. On an average, an individual angel invests about INR 10 lacs ($15k) in any one startup and it means you need to bring onboard about 20 angels to complete your funding round. To get there, you probably need to reach out to 100 or 200 angels through various channels (LinkedIn, friendly introductions etc.), pitch to at least 50 of them individually and convince 20 angels who finally invest.

With Angel Syndicates, if the Lead Investor is excited about your startup, he or she will offer the investment opportunity to all the angels in the syndicate (who can choose to participate in the deal).

By successfully pitching to the Lead Investor, you are effectively convincing a much larger group of angels.

Typically, syndicates in India are able to pool and invest anywhere between $50k to $500k per deal presently and this number will only rise with every passing year.

2. Clean ‘cap table’

If you raise money from individual angels directly, you will have a large number of small, individual shareholders on your cap-table (list of shareholders), which is an administrative headache for the founders. There are many documents that require the signatures of all the shareholders and the longer the list of shareholders, the more complicated it gets.

The larger VC funds, that you may be bringing onboard in future, would rather see a clean cap table with only a few shareholders who have meaningful ownership as against many small investors.

3. Investors that add value beyond capital

Of course, your first priority as a founder is to get the capital you need. But we can’t stress enough how important it is to bring in the right kind of investors at an early stage of your journey.

A syndicate with high quality angels, can help the founders as needed with domain expertise, referrals for hiring, opening doors with customers and partners and also help with introductions to investors for the next round of funding.

It’s not always clear who the angels behind an Angel Syndicate are. You should ask your Lead to name some of the angels in the Syndicate and ideally, you would like to make sure that there are at least 3–4 angels who bring in strong domain expertise in the area of your business and functional expertise in the areas of product & engineering.

The real value of a good Angel Syndicate is not so much the $$ but the combined power of the angels in such a syndicate that the Lead Investor harnesses for the benefit of the startup.

4. No risk of Angel Tax

As a founder, you may be aware of the ‘Angel Tax’ risk (Read more here) when you raise capital from individual angels directly. When you raise capital from Angel Syndicates that run on SEBI-approved Angel Funds, you eliminate the risk of such tax.

5. Quicker decisions

Angel Syndicates are lean entities that make quick decisions. You reach out and pitch to the Lead Investor directly. Lead Investor may consult some of his syndicate members who have appropriate domain expertise for an independent point of view. But as a founder you don’t go through 3 or 4 layers of pitching before you get a confirmation from the Lead.

6. No signaling risks

Let’s say you have the option to raise $300k — $500k from a large VC fund for your seed round. If you raise such a small seed cheque from a marquee VC fund, the primary risk is that if that large VC fund doesn’t lead the Series-A round, it’s a potential negative signal for other prospective investors. So, it is better to raise early-stage capital from Angel Syndicates and/or Seed funds.

Angel Syndicates can help with initial seed round and usually participate in follow-on rounds, but there is no risk of any negative signaling since no prospective Series A investor expects the Angel Syndicate to lead the Series A round in the first place.

7. No placement fees or associated costs

Many boutique investment-banking firms (and also angel networks) that offer to help startups raise money, typically charge up to 4% of the investment amount raised by them as their fees. Some angel networks take 2 -3% equity to help raise the capital.

However, Angel Syndicates earn their remuneration from the participating investors as Carry (Profit-share) that the investment may generate and therefore, from the founders’ perspective, there are no associated costs. Nevertheless, it is good for you to check upfront with the syndicate if they take any placement fees or equity for completing the funding round.

What are the drawbacks?

By definition, Angel Syndicates operate on the model that all the investors who are members of the Syndicate can choose to participate deal-by-deal and therefore, there are 2 drawbacks:

  1. Unlike funds who can put a firm investment amount on the Term Sheet, Angel Syndicates will typically give a range, based on the estimate of the Lead Investor and the final investment amount will be known to the founders only after the investment opportunity is formally offered to all the investors in the Syndicate.

To address this uncertainty, typically Lead Investors take smaller allocations in the funding round, that they know for sure will be fully subscribed to.

2. While the Lead can give you an idea of the quality of angels behind a Syndicate, there is no guarantee on which of those angels will end up investing in your company.

Overall, Angel Syndicates can be a great starting point for founders looking to raise early capital quickly.

Disclaimer: This document is being presented solely for informational purposes and it is not meant to be any investment advice. Please consult your legal, financial and tax advisors for your investment and fund-raising decisions.

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Waveform Ventures is a syndicate of India’s best angels. We invest $100k to $500k in early stage startups in India. Write to us at hello@waveform.vc