The Pros and Cons of Investing via an Angel Syndicate / SPV

Investing in startups is an outlier sport. You’re either average – which generally means below the public markets – or you’re extraordinary. You either invest in the great companies that make up 95% of venture returns, or you don’t.

The problem is, to get into the very best companies – the Googles, the Airbnbs, the WhatsApps of the world, you need to be early. And you need to be fast. The best companies have venture capitalists clamoring over one another to throw money at the founders and invest.

And as an angel investor, you can’t compete with that. You can’t compete with Sequoia’s $15M Series A or Andreessen’s brand name and often overvalued prices. You simply don’t have the brand or cash firepower to play in those types of arenas, at least not as an individual angel.

Not unless you’re Jeff Bezos or JayZ. Not unless you’re Elon…

In reality, you need to come in earlier and catch thunder before it happens. That, or you need to pool your capital with other angels so you can deploy serious firepower.

Either way, that’s where SPVs come in.

An SPV (special purpose vehicle) is a legal structure that lets you and your 250 closest friends invest as a single entity on a startup’s cap table.

Which is a big deal for founders. It means instead of collecting cash and complicating their cap table with 10, 20 or 250 other small angel investors, they can have a single $100k, $1M or $100M check come in without much paperwork or hassle.

Founders can take the cash and only have one “syndicate lead” to deal with, one person responsible for finding and scouting the company, setting the terms and being the go-between on all things company business and updates.

But syndicates (revolutionized by Angellist) aren’t just advantageous for founders, they are incredible for investors. They allow anyone (depending on income and where you live in some instances) to invest in promising early stage startups, even if you are doing 80 hour weeks in dentistry instead of scouting for and working with startups.

This is a HUGE unlock.

Because time and access are two things most people (especially the wealthy), simply don’t have enough of. How many founders have you met in the last two weeks – let alone how many great founders building potential unicorns?

The truth is, like we said above, success in venture capital and angel investing comes down to deal flow and access to great companies. Invest in the best, and you win. It’s pretty much that simple.

But to invest in the best, you need access. And that is where syndicates come in. As a syndicate lead, I am constantly on the lookout for top startups and talent. I am constantly looking to meet and network with the most driven founders building the most game-changing businesses of tomorrow. 

That’s the entire purpose of The Startup Tank – to help discover and invest in the world’s best founders. It’s what I spend my days doing – working with great companies, connecting with great investors and sharing deal flow. 

And sharing is a big piece of the puzzle – because this is an industry of insiders. The more people you know, the better access you have.

If you came to this article, you might be thinking about joining an angel syndicate (maybe even ours)

Here are a few things to consider:

The Pros of Investing via SPVs:

  1. Pooling investment allows SPVs to secure larger allocations and better terms

Most startups won’t take a $5k or 10k check, it is simply too much work – see the cap table and legal costs issues associated above. 

The thing is, when you invest via an angel syndicate with 35 other investors, suddenly that $10k becomes $350k, the founders take you seriously and the SPV lead is able to negotiate on your behalf for pro rata, information rights etc… (for more on term sheet terminology, see this post).

  1. Access to more companies and a better chance of outlier success

See above. The more companies you look at, the higher the likelihood you stumble across the next Slack, Instacart or Zoom.

  1. A professional perspective on the investment opportunity

Most syndicate leads (at least we at The Syndicate) provide a detailed deal memo of every company they invest in outlining the terms of the deal, the potential risks and upside and why they believe it’s a good investment. These analyses can be invaluable, especially as you first get into angel investing. Because every founder is charismatic and “going to change the world.” And cutting through that polished veneer to get to the heart of the business and whether or not it’s a good investment is a craft that takes lots of practice.

  1. Networking with other investors

One of the best ways to meet other angel investors and increase your deal flow is simply by investing alongside other top investors. And a syndicate / SPV is undoubtedly the easiest way to do that. When else would you have the chance to bump elbows with folks like Jason Calacanis (who I invested with in Assure and Public Goods – see portfolio here), Reid Hoffman, Sergey Brin or the folks at YCombinator or 500Startups (also co-investors!)? Well, in an SPV, you can have 249 other angels… who knows who you’ll investor alongside.

  1. No setup or legal complexities

SPVs are great for individual investors. There’s no complicated terms, working with lawyers or managing entities or investments… it’s just a few signatures and a bank wire and the syndicate (often supported on the backend by Assure or Leva – two companies our syndicate uses for setting up SPVs) handles the rest – including K1s and tax forms at the end of the year.

  1. Build a diverse portfolio thanks to smaller minimum investments

If you were to invest as an individual angel, most startups wouldn’t take anything less than a $25k check, as a bare minimum. So, if you wanted to invest $100k or $200k into startups, you’d only get a few shots on goal. 

This is THE WORST possible strategy as an angel investor, especially a relatively new one. The key to success in venture (outside incredible luck and hitting all outlier companies) is diversification – because most companies go to zero. And the best way to ensure above average returns is by building a portfolio of 30+ startups and doubling down on your winners. 

While that is hard to do when you are writing $25k initial checks, it becomes much easier with syndicates which (like with ours) often have a $1k or $2k minimum limit.

But syndicate investing isn’t ALL rosy. There are of course disadvantages as well.

The Cons of Investing via SPVs

  1. Sharing carry

The only “real” disadvantage of an SPV is carry – the syndicate’s incentive/comp for scouting the startup, setting up the deal and managing the investment. Carry is the cream on the top that motivates SPV leads (like myself) to hustle everyday and find the best startups to present to our syndicate members.

The industry standard when it comes to carry share is 20%. That means, if the syndicate were to deploy $100k into a company which later IPO’ed and returned $100M to investors (a 1000x return), then 20% of the carry would be $20M.

Sure, the example is extreme, but 1000x is what we’re shooting for, right? At The Syndicate we focus on companies with at a bare minimum a 50-100x potential – because otherwise the returns profile just doesn’t make sense.

But even if you were to hit that 1000x+ unicorn, 20% seems pretty fair considering your $10k investment turns into $8M in your bank account 🙂

(For more on the economics of venture capital, see this post).

And that’s about it when it comes to the disadvantages of SPVs. As an angel investor, joining a syndicate or two is almost always a great idea. It helps with deal flow, helps you network, helps you learn the industry and even clues you in on what other investors are interested in.

In my opinion, it’s absolutely the best way to break into angel investing – better deal flow, better 

diligence, smaller check sizes, a more diverse portfolio – all of which make you much more likely to succeed with venture.

Want to know more? Our syndicate invests in mission-driven pre-seed to Series A startups tackling big problems in the areas of commerce/ecommerce, platforms/marketplaces, consumer tech, fintech & blockchain, cleantech & climate change, B2B/enterprise, hardware-as-a-service and of course software/SaaS.

To find out more and apply, please visit: mattward.io/syndicate.

NOTE: Certain startup investment opportunities are only available for accredited investors (folks with net worth > $1M or yearly income of at least $200k).

Startups interested in fundraising? You can check out The Startup Tank and apply for one of our upcoming investor pitch sessions at thestartuptank.com.

 

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