How syndicates work online and what advantages do they have?

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A syndicate is an investment vehicle that allows investors (backers) to co-invest with relevant and reputable investors (leaders) in the best startups in the market.

Syndicate leaders are business angels with vast experience in selecting investment opportunities and investing in then, in various technology sectors and with dealflow that most investors don’t have access to. They tend to be angels -or successful startup founders- who have been part of the industry for many years and know its ins and outs.
There are three characteristics a syndicate leader should meet:

  1. Access to capital: business angels with a good track record or successful startup founders that have the capital necessary to invest in startups.
  2. Propietary dealflow: dealflow refers to the to the rate at which investors receive business proposals or investment offers. If this dealflow is propietary -as in, exclusive to the investor- the chances of scoring good deals increases.
  3. Good judgement: knowledge and market experience that might result key in making the right investments

It’s worth noting that the fact that an investor meets this requirements doesn’t guarantee his or her success. Investing in startups is hard and risky, but co-investing might decrease the risk associated to it.

A backer is an investor that either does not have a lot of experience in startup investing or, even if he or she does, he’d rather allow someone else -the leader- manage the investments and choose the startups in which to invest.

 

Syndicates offer great advantages to both leaders and backers.

Leaders:

  • They can invest more money per deal.
  • They can reach startups that might have high minimum commitments they couldn’t match on their own.
  • By investing more capital per deal they might have access to better investor rights.
  • They also get paid a carry (capital gains generated by an exit or dividends paid) in return for their ‘leadership’ on a project they would invested in anyway.

Backers:

  • Better dealflow by having access to investment opportunities they might not be able to find by themselves.
  • Transparent negotiation process.
  • Aligned interest with the leader
  • Less paperwork than if they were investing on their own.
  • Less risk: leaders have vast experience in investing and thus can differentiate good from bad deals.

Startups:

  • Access to higher sums of capital.
  • Not having to deal with numerous and different investors.
  • Leaders take advantage of the fundraising process and they are responsible for managing their relationship with backers.
  • There’s only one investor in the startup’s cap table as the investment is done through a vehicle.

Lead investors invest their own capital into the startups and they charge backers 10% of the capital gains generated by an exit or dividends. A carry is only paid in the case of a successful investment.

tute Train Answered on September 7, 2015.
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