In a previous article, we characterised the 3 options Angel investors have to get into venture investing. These options are not mutually exclusive, and can be combined or evolve over time.
We follow up here by making the argument that Angel investors are best served by syndicates, particularly when they are relatively inexperienced and have professional and personal lives which are demanding on their time.
TLDR:
- Of the 3 investment vectors, VC funds are out of reach of 90+% of angel investors due to high capital requirements.
- Syndicates are superior to being an independent Angel due to curation, ability to access deal pipeline, and diligence quality.
Angel investors retain 100% control over investment decisions and can diversify more through lower minimum investments. - We suggest the following criteria for selecting the right syndicate for you:
- Thesis alignment
- Trackrecord
- Diligence quality
- Alignment of interests with LPs
If you need help with terminology, here’s Angel School’s Ultimate Glossary of VC terms.
Introduction
Angel investors have 3 options to be involved in venture investing, each with their own characteristics. These options are not mutually exclusive and may be combined. Their mix can also evolve over time depending on their needs.
1. A 2x2 Matrix for segmentation
A simple way of evaluating these options is to use this simple 2-dimension framework.
- How active or passive would you like to be in the investment decision?
- How much capital do you plan to allocate to your venture portfolio?
We can fit our 3 investment choices into our 2x2 matrix based on:
- Independent Angel: Highly active and moderate capital requirements.
- Syndicates: Moderately active and low to moderate capital.
- VC funds: Passive and very high capital requirements.
Your reasons for choosing each investment vector are as follows:
- Independent Angel:
- You want to retain investment decision control.
- You want to be hands-on on the entire process- from deal sourcing to DD- for learnings or some personal advantage.
- You strongly prefer not to pay fees and carried interest.
- Syndicates:
- You want to retain investment decision control.
- You prefer to stay active in the investment evaluation.
- You value the access provided and curation performed by syndicates.
- You value the time and energy saved from syndicates sourcing, curating and diligencing deals.
- You are comfortable paying some fees and carried interest.
- VC Funds:
- You prefer to be a largely passive investor.
- You can allocate $250k - $ ‘MNs to a fund.
- You are comfortable with the VC 2/20 fee structure.
Why are syndicates appealing?
For the vast majority of individual angels, the minimum capital commitments of VC funds are out of reach. We can immediately drop that from consideration.
The advantages of syndicates over doing it yourself are pretty clear by looking at their characteristics.
Syndicates deliver undeniable value to investors through curation, ability to access deal pipeline, diligence quality WHILE giving investors 100% control over investment decisions AND allow for more diversification through lower minimum investments.
The tradeoff for syndicate investors are costs in terms of fees and carried interest.
We speak with every single investor who joins Angel School’s syndicate to get to know them on a personal level. That’s given us a lot of insight into the people that entrust us with their capital.
Individual angels tend to be one of two personas: the first are high-performing mid to senior career professionals. The other are founders and employees of successful startups who have exited.
What they have in common (beyond financial motivation) is that they are intellectually curious people who are passionate about helping early stage companies be successful through capital.
They are also very busy people which aligns with how syndicates save them time and energy by sourcing and curating deal flow, and providing professional diligence.
Choosing the right syndicate leads
Let’s say you’ve decided that syndicates are the right investment vehicle for you. It’s important to be aware that not all syndicates are created equal.
Here are our considerations for picking the right syndicate:
- Thesis alignment: Find syndicates that have a similar investment thesis as yours. The easiest way to evaluate is is to ask the syndicate lead or look at their portfolio companies.
- Trackrecord: Do they have a successful investing trackrecord? Look for datapoints and success indicators.
- Diligence quality: Great syndicates should prepare quality diligence for investors.
- Ask for access to a dataroom for a previous investment
- Is there independent analysis e.g. an investment memo beyond the company materials?
- Alignment of interest: Ensure that the syndicate’s interests are aligned with you. This comes in different forms:
- Do they have ‘skin in the game’? Are they invested in the companies they syndicate?
- How are they incentivised? Syndicates which charge higher carry and lower upfront fees are preferable since they profit when LPs receive a return.
Conclusion
In this article we shared a 2x2 framework for segmenting an angel investor’s options. With VC fund requirements out of reach for 90+% of investors, being an independent angel or investing in syndicates are viable choices.
We also concluded that Syndicates are a superior investment vehicle through curation, ability to access deal pipeline, diligence quality WHILE giving investors 100% control over investment decisions AND allow for more diversification through lower minimum investments. This saves LPs time and energy in making investment decisions.
We recommend 4 criteria for selecting the right syndicate for you: (i) thesis alignment, (ii) trackrecord, (iii) diligence quality, (iv) alignment of interests
Other reading:
- If you need help with terminology, here’s Angel School’s Ultimate Glossary of VC terms.
- Here’s our article characterizing an Angel investor’s choices for venture investing
About AngelSchool.vc
AngelSchool.vc is a Fellowship program dedicated to helping Angel Investors build syndicates. We give Program Fellows a syndicate blueprint in just 8 weeks.
After that, they’re invited to join our Investment Committee (IC) to get real deal experience AND earn carried interest. Apply for the next cohort of our Syndicate Program here.
The AngelSchool.vc Syndicate is backed by 1000+ LPs and deploys $MNs annually. Subscribe here for exclusive dealflow.
