Syndicates

Author:

The Carta Team

|

Read time:

11 minutes

Published date:

21 March 2023

A syndicate is a group of investors who invest in startups or companies on a deal-by-deal basis. Learn how angel-run syndicates work in the venture ecosystem.

Contents: ‍Hard-earned feedback from the battlefield

What is a syndicate?

A syndicate is like a deal-by-deal venture capital firm. Syndicates are run by a lead and funded by angel investors or high-net-worth people (referred to as a limited partner or LP). A syndicate lead may work with the same investors across deals, but they may not be the same for each deal because LPs might opt in or out. Each startup investment is called a syndicate deal or a special purpose vehicle (SPV).

How does a syndicate work?

1. You discover an early-stage startup that you think is set for growth.
2. You talk to the founder and manage to secure an allocation of $150k in their fundraising round.
3. You set up a deal-by-deal investment vehicle (called an SPV).
4. You then set about fundraising for that SPV, hoping to fill as much of your allocation as possible.
5. The SPV then invests all of its funds in the startup.
6. When you exit, the funds are allocated as per the structure of your waterfall. Typically this means that investors get 100% of their funds back, and then split the remaining amount 20% for yourself and 80% for your investors.

Why would an investor invest in a syndicate?

Pros

• Look at more deal flow: If you back 5 syndicates, and they do 2 deals a month, you're gonna look at 120 deals per year
• Invest smaller tickets: You're starting out and want to write $1k-$5k checks, which most founders won't take immediately. Through a syndicate, you can write smaller checks.
• Be part of the ecosystem: Meet new people, network with founders and other angel investors
• Fees: Often no management fee vs investing in a fund
• Flexibility: Ability to opt into deals that you’re excited about and pass on those you’re not

Cons

• Lots of work: It's not like investing in a fund and relax, you need to review all deals you are receiving

Why lead a syndicate?

Pros

• Increase your return by 5x: If you usually invest $5k per startup and you find a deal that your network invests $45k in alongside you with 20% carried interest, you’ll get considerably more upside- do the math!
• You can do it part-time vs managing a fund which is way more time consuming. If you are busy, you can simply not make any deals.
• Opportunity to build a track record to launch your fund in the future
• It's easier to convince LPs to invest in a startup than in your fund.

Cons

• Lots of work – you’re fundraising for every single deal vs a fund where you fundraise every 2 years

Challenges when building a syndicate

Running a syndicate is not an easy task and the road to success is long. The best syndicate leads work tirelessly on sourcing and performing due diligence for new tech companies to invest. That level of commitment and effort deserves fair compensation.

A framework for valuing syndicates

It’s not just about sustainability. The right structures align the interests of syndicate leads with the LPs that they serve. LPs back a syndicate’s deals and are their source of capital.

Syndicate leads can easily structure management fees and carried interest on Carta. Carried interest (or carry) is the share of profits the syndicate receives upon a successful exit. For example, a syndicate can charge a one-off management fee of 2% and 20% carried interest. In this case, a $150,000 raise results in $3,000 of fees and an upside worth $28,400 net of SPV costs for the syndicate lead.

The carried interest argument

Earning carried interest is one of the big motivators for angels to start a syndicate. Creating a syndicate also helps you support founders with your angel network, build a track record and meet minimum ticket amounts. Carried interest gives angels an upside on capital greater than writing a personal Angel check.

Improving your odds

Another way of looking at the benefit of scaling capital through a syndicate is that it improves your statistical outcomes. Writing a larger check and charging carry can help you generate meaningful financial returns from modest outcomes.

Syndicate "auto scaling"

One of the great things about syndicates is that there are built-in growth levers. Gain the trust of your LPs and find the best possible deal flow for them, and they’ll become your advocates.

The "cold start" problem

There’s a "chicken and egg" problem when you’re starting your syndicate. Should you find LPs first or find a startup to invest in? Even if you had both, you still can’t "make the market."

Building LP Networks

When you’re building your LP network, here are some questions you should be thinking about. How do you profile and target the right LPs for your syndicate?
How do you convince them to pay particular attention to your deal flow above other sources? How do you know who’s engaged or not? Growing your LP network is also important. After all, if you return to the same investors time and time again, you’ll dry out your capital pool.

Deal flow and diligence

Syndicate deal flow and diligence is a step change from angel investing off your own balance sheet. You’re now influencing LPs’ investment decisions and becoming a custodian of their capital. A number of interesting challenges arise from this evolution.

Deploying capital

Finally, when you’re able to "make the market", you need to deploy that capital. Should you manage the investment in-house using your own Corp Secs, tax accountants, and legal service providers or rely on SPV admins? What should you charge for syndicate fees and carry structures? Selecting the right SPV admin is also an important long term decision.

Fund vs. syndicate dynamics

Finally, let’s look at some scenarios where syndicates are less effective. We’ll do this by contrasting them against fund structures. There are 3 areas where syndicates may be disadvantaged compared to funds.

"Must know" syndicate skills

The deal lifecycle

Running an investment through the syndicate model has some unique characteristics. Unlike angel investing, they require a more efficient and thorough diligence process. LPs also need help with decision making so you’ll need a data room as well.

Deal marketing

Deal marketing is an essential skill and one unique to syndicates. Great syndicate leads must be great at presenting startups to investors in a way that is easy to understand, representative of the deal, while being compelling enough to generate interest.

Funnel management for syndicates

When investing through syndicates, LPs decide which deals to invest in and how much. This introduces an element of unpredictability for fundraising. This is the ‘optimization problem’ in syndicates. The optimal allocation you should seek in a startup is exactly how much appetite there is in your LP network.

‍Hard-earned feedback from the battlefield

Diego Camilleri eSeed.vc

• Automate as much as possible. I use Mailerlite, Docsend, Notion, Asana, Pipedrive, Zapier and Carta to automate my back-end. I now spend less than two hours per deal on admin tasks.
• Launch with an MVP mindset: Don’t overthink it, just define your investment thesis, find a few good deals and start onboarding investors.

Matt Ward, 4ward.vc

• Start as a venture scout: Find great deals and refer them as a scout to other syndicates or VCs to build up a track record and karma
• Work with existing syndicates to co-syndicate their deals to your LP base (which helps you with getting some carry share on great deals and also testing your LP base's willingness to invest).

Aksel Piran, CP3 Ventures

• The most surprising part about the first deal we did was the speed at which it happened. We collected interest over three weeks and as it was a hot crypto deal in the middle of the crypto boom early 2020. It was so much more successful than I ever could have imagined.
• It's a beautiful experience overall and takes your business angel journey to the next level. An amazing way to enlarge your circle of like-minded friends, entrepreneurs, C-level managers and professional investors, that will be your treasure trove!

Author: The Carta Team
Carta's best-in-class software, services, and resources are designed to promote clarity and connection in the private capital ecosystem. By combining industry experience with proprietary data and real customer stories, our content offers expert guidance and clear, actionable insights for companies and investors.