Angel investing is by its nature a risky endeavour. Every investor naturally has an overarching goal to minimise risk and maximise returns. In the context of angel investing, ensuring that the relevant elements needed to achieve this are in place is easier said than done.
Investor syndicates are an excellent way of optimising risk and return. In broad terms, a syndicate is simply a group of investors that work together to leverage each other’s resources. In this way, investors can work as a group to find, access and invest opportunities, and thus as a group to can benefit from sharing in the associated risks and rewards. When it comes to the structure of a syndicate there is no set modus operand. The syndicate structure can be established to suit the investors’ preferences and thus a gradient of alternatives might apply. Broadly, syndicates might be structed formally or informally
In a formal structure, investors collaborate to source and evaluate opportunities; when an opportunity is identified, and the group decides to invest, the investment might be made through a vehicle created specifically for that purpose. This vehicle is the official nominee of each of the group’s investors who retain beneficial ownership of the underlying investment. The syndicate charter may require all syndicate investors to unanimously agree on a opportunity and perhaps a minimum contribution, although this is very much dependent on investors’ preferences. As this structure is a formal legal entity, there is an associated burden in the form of an administrative cost to ensure accounts are filed and personnel such as Directors and Non-Executive Directors are carefully appointed, as well as appropriately defining their individual responsibilities. The advantage of this structure, particularly from the point of view of the management team of the investee business is that there is less of an administrative burden in dealing with one entity representing a group of investors, the latter of which may make it difficult to negotiate and agree terms.
The alternative is an informal, light-touch structure in which investors also work together to source and evaluate opportunities, with the difference being that each member ultimately invests directly in their individual capacities and thus become direct shareholders of the investee entity. As there is no formal syndicate entity, this structure does not have any of the administrative or cost burdens associated with a formal structure.
Regardless of a syndicate’s structure, there are many advantages to syndication as opposed to operating purely on an individual basis. Portfolio diversification is perhaps the most beneficial aspect of investing through a syndicate. Leveraging the expertise and experience of fellow syndicate members allows efficient and thorough due diligence, and individual investors can take comfort in investing in opportunities that may not necessarily be in their own sector expertise. This might, for example, occur if an investor with deep expertise in a sector decides based on her knowledge and due diligence that she is willing to be lead investor in the funding round. Investing as part of a syndicate therefore means that investors can operate fluidly across a range of diverse industries, particularly when the expertise of syndicate members is spread across diverse industries. The pooling of skills, experience, expertise and contacts can also create significant benefits and value add for the investee businesses as they grown and look to raise additional capital. This creates a virtuous circle, where investee businesses benefit from their investors above and beyond the capital they bring, and investors are able to drive value creation for their portfolio of investments. Formal syndicate investors may also have the advantage of being able to invest in larger deals where investee management teams have set a minimum ticket size for individual investors.
One question we hear all the time is, ‘how can an investor syndicate work for me?’ It’s always a matter of preference- it’s your personal capital. It is important to get to know your fellow investors, particularly the professional skills and experience they bring to the table and how these can be combined with yours and other members’ skills to minimise risk and maximise value for all stakeholders. Get to know your fellow investors personally; as with any business relationship, trust is paramount. This will ensure all stakeholders interests are aligned for the long term.
Zafar Kanani, firstname.lastname@example.org