An investor syndicate is a group of smaller investors who pool money to invest in startups, led by an experienced angel who sources deals and is paid a percentage of profits called the carry. Members must be accredited investors. This post explains how the investment runs through an SPV and lists pros and cons for investors and founders.
How to raise money is a crucial question for startup founders. Due to the newness and riskiness of many startup ventures, most founders can’t access capital through traditional means such as bank loans.
For this reason, many startups turn to alternate funding sources, such as an angel investor or venture capitalists. VCs and angel investors are early-stage startup funders looking for smart investment opportunities. In exchange for a lump sum of cash, these investors receive equity in the business that they can sell (hopefully for more than their initial investment) at a later date.
There are a variety of different startup funding options within the world of angel investing and venture capital. One option is an investor syndicate (or investment syndicate). So what is an investor syndicate, exactly, and should tech startup founders be looking for syndicate funding?
What is an investment syndicate?
An investment syndicate is a group of smaller investors who join together in order to invest in startups. A startup syndicate provides access to opportunities that investors might not have individually. They are a good option for people who want to invest smaller amounts of funding. They are also useful for startup founders looking to connect with smaller investors who want to get in on the ground floor.
An investment syndicate is like an ad-hoc venture capital firm whose members are united by a single common cause: making good syndicate investments. The members of an investment syndicate must be accredited investors. Under U.S. Securities and Exchange Commission rules, an accredited investor is an individual with a net worth over $1 million, excluding their primary residence, or income over $200,000 ($300,000 with a spouse) in each of the last two years. The definition can change, so check the current SEC definition.
Investment syndicates also appoint a lead investor, who is typically an angel investor with significant experience in the startup community. Syndicate leaders are responsible for sourcing new investment opportunities, and are paid a percentage of the group’s profits for their efforts. That’s what’s known as the “carry”.
How do startup syndicates work?
Investors can join syndicates by browsing the listings on online investing platforms that host syndicates and applying for membership. A syndicate lead may also send invitations directly to investors.
Once investors have joined, the syndicate leader presents them with investment opportunities that are sourced from the leader’s contacts in the startup world. Investors can request more information about the deal in order to properly evaluate the opportunity. This includes information like the company’s business model, financial data, team members, and more.
If a startup appears promising, investors submit a proposal that describes the amount of money they want to provide, as well as a signed term sheet and other documents. To execute the investment, the syndicate creates an investment vehicle known as a special-purpose vehicle (SPV). An SPV is a legal entity created for a narrow or singular purpose—in this case, financing startups.
From this point on, the syndicate leader is responsible for managing the investment and making important decisions. The leader is also tasked with distributing profits to investors once the startup undergoes a successful exit or liquidation event.
To learn more about investor syndicates, see if you qualify for membership to join Founders Network.
Advantages and disadvantages of investor syndicates
Obtaining startup syndicate funding has benefits and drawbacks for both investors and startup founders. Here’s what investors should consider when participating in a startup syndicate:
- Diversified portfolio: A startup syndicate typically invests in multiple companies, which makes it easier to diversify your portfolio and hedge your bets. Spreading the same total across several companies carries less risk than putting it all into one. That kind of spread might not be possible without joining a syndicate.
- Peace of mind: Once they’ve sent in the funds, individual members in a syndicate don’t have to worry about overseeing their investment. This work is handled by the group’s leader. Of course, this comes at the cost of the “carry” that is paid to the syndicate head.
- Higher costs: Creating an SPV to handle the investment costs money. It involves processing, legal consultations, administration, and more. These expenses are lower per person when distributed among more people. However, adding more people to the venture also creates the risk of differing interests or expectations.
Meanwhile, startup founder should weigh the following pros and cons of startup syndicates:
- Less effort: Most of the heavy lifting in syndicate investing is handled by the group’s leader behind the scenes, limiting the effort required on the part of the founder. Of course, this could be a blessing or a curse, depending on the efficiency of the syndicate leader.
- Greater simplicity: A syndicate investment may consist of dozens or even hundreds of people, but only the SPV needs to be listed on the cap table. This greatly simplifies the process of seeking funds and communicating with investors.
- Loss of privacy: With syndicate investing, founders have less control over who views sensitive information like pitch decks. This is risky for early-stage companies that haven’t yet obtained the IP rights for their concept.
Frequently asked questions
What is an SPV in startup investing?
A special-purpose vehicle is a legal entity created for a narrow or singular purpose, here financing startups. The syndicate creates one to execute the investment, and only the SPV needs to appear on the startup's cap table.
Who can join an investment syndicate?
Members must be accredited investors. Under SEC rules, that means an individual with a net worth over $1 million excluding their primary residence, or income over $200,000 ($300,000 with a spouse) in each of the last two years. Check the current SEC definition.
How does a syndicate lead get paid?
The lead sources opportunities and manages the investment, and is paid a percentage of the group's profits known as the carry.
What are the downsides of syndicate funding for founders?
Founders have less control over who sees sensitive information like pitch decks, which is risky for early-stage companies without IP rights in place. Whether the lead's hands-on role helps depends on how efficient the lead is.
