When I first started as an angel investor I was excited to start investing in startups - but I didn't know much," says Gil Penchina, who now heads the highest-value syndicate on AngelList with more than $6 million (£4m) of backing. "I couldn't tell the good ones from the bad, I didn't understand all these venture capital terms, so I would invest somewhat blindly." So, why go it alone? With a syndicate, you can invest alongside people with experience, better connections and access to deal flow - a higher rate of business transactions. "If you have the deal flow as an individual then that's great," says Nancy Fechnay, who heads Penchina's first UK syndicate, Flight.vc UK, alongside him. "But usually, people can't possibly see every great deal that's in the market all by themselves." Most syndicates have hundreds of thousands of dollars in backing, from anywhere between two and a few hundred backers - depending on their minimum-investment requirement. By joining a syndicate, investors can also invest sizably less than they would need to as an individual investor. So, if you're interested in making startup investments, but don't want to gamble as much money, here's how to get a piece of the action.
Get accredited
AngelList allows international investors to back American syndicates. Backers must meet American standards and either have a net worth of $1 million or have earned $200,000 in each of the previous two years. "We ask investors to meet the accreditation standards because tech startups are not right for everyone," says Philipp Moehring, director of AngelList UK. "We want them to be aware they can lose money too, because that's what startup investing is like."
Find a syndicate
There are hundreds of syndicates, so don't be hasty. "Look at the syndicate leads, their connections, what deals they've done before," advises Fechnay. "And check what resources they have at their disposal, so they're getting the best deals and also providing their companies with support." You can pick a syndicate dedicated to a certain area - from Bitcoin to the UK. "You're looking for someone with a thesis that matches yours," says Penchina.
Research the leads
Leads are not limited to serial investors. They range from venture capitalists like Jenny Rooke (£325,000) to Stanford law professors such as Jeff Schox (£82,000). Many are entrepreneurs: Wayne Chang, whose startup Crashlytics had angel funding before being acquired by Twitter, raised £623,000. The majority don't invest often but some are active. Jason Calacanis' and the FG Angels syndicates have, since 2014, made 11 and 33 investments respectively.
Get in on the action
Once they've been accepted, backers are notified each time the lead investor syndicates a deal. They can choose to opt out if they don't wish to convert their backing into a reservation - an indication that the investor wants to invest. When enough reservations are confirmed, the investors will be invited to close. Converting a backing to a reservation is non-binding, but pulling out of a deal often may result in the lead removing them from the syndicate.
Know the risks
The companies backers invest in are just starting out; they are usually run by young teams and will have to overcome many challenges. "Investing in this asset class is quite risky," says Penchina. "Angel investments have a high likelihood of failure." Because of this, backers should consider how much they could afford to lose and be cautious. Penchina's advice: "Limit your exposure to five per cent of your portfolio, or a similar small amount."
Understand the deal
When the lead investor syndicates a deal, they will provide a rationale for the investment, and will disclose any potential conflicts of interest. Only 99 accredited investors can invest in a syndicated deal at one time. This does not mean a syndicate cannot house more than 99 backers, but it means some may miss out if they do not act quickly. "It typically takes five days to opt in or opt out," says Penchina. "Although on some of the hot ones it can go faster than that."
Remember the carry fee
Because a syndicate allows investors to co-invest with other notable investors, they pay the lead investor a "carry" fee. This means the lead investor will earn an extra percentage of any profit for their involvement. The carry fee is similar to a performance fee, as it is assumed that the experience they bring will enhance the deal - though there is no guarantee that lead investors are experts here. A five per cent carry fee is also paid to AngelList.
Close the deal
Backers don't sign the financing documents; instead, they sign documents to invest in a nominee structure or LLC fund, which is managed by the lead investor. The fund is created solely for the purpose of investing in the company (this is done so that the startup only has to deal with one fund, rather than with excessive amounts of investors). Then the investors are invited to close, which means signing the documents and wiring the capital to the fund.
Make a profit (hopefully)
The syndicate lead will advise the backers when to sell shares. Syndicate deals also have pro rata rights - if you buy a stake in a company and it releases another round of shares, you are given the option of buying more to maintain your ownership percentage. "Investors like me value it because it's essentially a free chance to buy more stock in good companies," says Penchina. "And because you get the same terms I get, you get the benefit of me negotiating for you." Good luck.
This article was originally published by WIRED UK
