Angel syndicates: An emerging alternative for early-stage funding

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.

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.

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.

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.

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.

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.

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.

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Waveform Ventures

Waveform Ventures

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