AngelList Syndicates, recently launched by AngelList, is a way of allowing small-time backers to pool their resources behind a leader who’s investing in startups. It’s an innovative, new method for early investing that affects the way companies can get funded.
To a certain extent, AngelList Syndicates are simply formalizing what many angels already do--they find a company they like, invest, and persuade their friends to invest too. Now, just as if you’re investing in a mutual fund, you can apply to any syndicate and put money behind the investments of existing AngelList syndicates. Syndicates have no management fees, so it’s almost a no brainer to invest. The syndicate then spends the money on ventures chosen by the Syndicate’s Super Angel (the team captain).
Today, almost 300 syndicates are on AngelList. One caveat: AngelList’s syndicate-backers must be "accredited" investors (a firm or an individual) who must apply to join. Syndicators have the option of rejecting an application. Any accredited investor can also create a syndicate, and AngelList handles all of the back office work (setting up funds, tax filings, etc.) for syndicates.
It’s not yet clear what the ramifications to early stage investing are yet, but it’s clear that the landscape will change as a result and that it won’t be a passing trend. Just the way Super Angels and VCs with proven track records are rewarded with deals that flow, so it will happen with syndicates. But interestingly, there will crosspollination: Smaller VC shops may find themselves competing with bigger syndicates and bigger VC shops. As for bigger and more established VC firms, they’re not likely to take a hit. There’s not likely to be much of an impact on bigger VC firms.
Small-time backers now get access to powerful syndicates.
Importantly, AngelList Syndicates gives you a chance to invest with a powerful and experienced syndicate that you otherwise probably wouldn’t have access to.
In an ideal world, these new syndicates see deals that average investors can’t access and may not understand for lack of expertise around volume and investment-worthiness. Getting access to the mental horsepower of the SuperAngel(s) who manage the syndicates means you can improve your chance of success by joining up with seasoned investors who’ve built their careers on being good at picking winners.
Important: The syndicate-backer is putting in money at the same valuation as the lead; this means that you can join a syndicate and get into a deal at the same valuation level as the founder of your syndicate, because you become part of their investment group. Both the founders of the syndicate and the syndicate-backers have skin in the game and common interests. That’s a good thing.
Fundraising gets easier and faster for everyone.
Fundraising won't take as long. With this new approach, Angels can quickly develop a syndicate of smaller investors who believe in their picks and in their investing model. AngelList Syndicates lets experienced Angels raise capital so when they’re ready to pull the trigger on a particular investment, the powder’s already in the tank.
For example, through AngelList Syndicates, Digg Co-Founder Kevin Rose, an employee of Google Ventures and a "tech celeb," raised 1.1 million dollars in a week from 245 people who committed to put their own money into any deals he does. Why did people invest in Kevin's Syndicate? Because they believe in him, they have faith in his track record, and they want a stake in anything he invests in. Similarly, if you believe in other venture "celebs," you now have a chance to ride along with them. Quite frankly, that’s pretty incredible.
The startup, in turn, gets access to the syndicate's entire network without granting them a direct interest in the company or putting each backer on the cap table, but rather putting the syndicate as a single line item. For example, Sqwiggle used Syndicates to raise more than $300K, and Tim Ferriss used it to raise more than $250K--in less than an hour--to invest in Shyp.
The Foundry Group responds.
In response, other syndicators are accepting backers without exclusivity. After AngelList Syndicates launched, the Foundry Group started its own syndicate, called FG Angels. And Foundry Group Co-Founder Jason Mendelson said in an email, about FG Angels, that "we are not rejecting anyone until we reach 500K and then we are shutting it down. We actually don't vet if people are accredited--AngelList does that, so we are 'come one and come all.' We like to be inclusive."
Why did the Foundry Group hop into the fray? "If you know us, we love to experiment with stuff, rather than theorize about things," Co-Founder Brad Feld said in a blog post. "We are huge believers in seed and early-stage investing." Foundry Group’s directors are prolific angel investors on their own, with many investments in seed funds and direct personal investments in startups. There are also the ties Foundry Group has to the TechStars startup accelerator, which Feld co-founded.
The risk is in the outsize amount of cash VCs can crowd-source.
The AngelList Syndicates are causing disruption in the VC arena, and the commotion has caught the eyes of mainstream venture capitalists.
"They [the leader of the Syndicate] will have to step up before anyone else does," wrote Fred Wilson, an early backer of Twitter and a partner at Union Square Ventures, in a blog post a week ago. "They will have to negotiate price and terms. They will have to sit on boards. They will have to help get the next round done. Essentially they will have to work."
Over time, Wilson says, the talented angel syndicators will emerge, and will be able to crowd-source their syndicate to raise significant capital.
Some venture capitalists, like Mark Suster, argue that Syndicates will actually help many venture capitalists: "I can have 40 investors but just one signatory on deals. I don’t have to chase down tons of individuals. Helpful because if I know that Jason [Calacanis] or others are 'fronting' others in a deal I can deal with one person to negotiation in difficult times. Helpful because at the time of rounds we’re not herding cats."
According to Feld, the brilliance of AngelList is that it accelerates the network dynamics that we are already used to such as Twitter, Facebook, and LinkedIn. He believes it's a similar version to those phenomena, and is incredibly powerful for entrepreneurs. He believes that AngelList helps amplify, coordinate, and accelerate the amount of activity around early-stage companies.