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Democratizing Angel Investing: The Use Of Angel Syndicates

Community engagement must be a permanent part of the strategy and operations of any angel syndicate and this means moving quickly establishing communications and understanding their needs and expectations and how the syndicate will operate within the community.

In the preceding decade, the number of startups in India has increased rapidly with many more investors, individual and institutional alike, investing in this asset class. Yet, the current pace of investing lags behind where it needs to be and there is an urgent need for more risk capital in the Indian startup ecosystem to support the ever growing number of startups in the country. A pertinent question, of course, is how to accelerate the total capital pool available for startups.

Democratizing angel investing is one powerful mechanism which experienced investors can use to support founders looking to raise venture capital and create access for individual investors. These investments can help these individual investors better support deserving entrepreneurs and build diversification in investors’ portfolios. While the potential benefits of taking capital from individuals in the angel syndicate are often framed as being readily apparent, it is useful for individual investors and their wealth advisers to better understand how to invest in the economic success of Indian entrepreneurs, first-time and seasoned alike and the inherent risks in such an investment strategy.

A comprehensive due-diligence or risk report can help these individuals become aware of various risks and specifically consider aims and objectives of each angel syndicate, the investment opportunity under evaluation, and conduct a self-evaluation to determine his/her fit with risk-return considerations and diversification benefits arising from the investment. Intelligent investors spread their money over a number of deals and invest through a number of syndicates to achieve this diversification.

“An angel 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.”

One of the greatest financial innovations to come out was the advent of angel syndicate to solve a daunting challenge for entrepreneurs, individual investors and experienced operators. Previously, an entrepreneur had no choice but to take small angel cheques from many individual investors and have each individual be part of his/her cap-table. This also exposed the founder to a number of challenges and for most founders it was difficult for them to see how a large number of angels can play a meaningful role in his/her venture’s journey.

In fact, one of the compelling reasons for an entrepreneur to take investment from an angel syndicate, is an opportunity to leverage the scale of individual contributions without any additional complexities of having to deal with each investor separately while benefiting from their collective know-how. These individual investors can be a potential source of talent for the employee base, for contractors for services that the organization seeks to outsource and, of course, as a market for the organization’s products and services.

On the other hand, the advantage for individual investors is that typically, there is a minimum investment amount setup by founders, an amount that is more than the investors individually wish to commit. A syndicate allows them to combine their individual investments to reach this minimum amount. Additionally, an angel syndicate offers the relative ease of access to investment opportunities. In addition, the investors may wish to combine their investments in order to have a more significant voice in the affairs of the company. The thought is a single $80,000 investment on the capitalization table gains a larger say than sixteen $5,000 investors. Furthermore, investing along with experienced investors and operators help in building confidence among the syndicate members by inculcating the art of angel investing and gradually they can move to make angel investments independently.

The syndicate lead may want to leverage his/her contacts and investment knowledge by inviting others to join him/her in an investment round. The lead may also want the potential to earn a “carry” (a share of any investment gains) on the syndicate’s investment and build his/her investment track record.

Community engagement must be a permanent part of the strategy and operations of any angel syndicate and this means moving quickly establishing communications and understanding their needs and expectations and how the syndicate will operate within the community. Syndicate Lead needs to understand the issues that concern the syndicate members; the beliefs, values, and experiences that drive the actions of syndicate members and how the members interact with one another.

A syndicate lead also needs to carefully select best strategies for their relationships with the investors. A lead can typically choose from among community investment which is a one-way process of providing information and resources to the investors (e.g., a pitching session, providing regular information on the portfolio company etc.); community involvement which involves two-way communications, such as consultation processes prior to investing in a startup; and/or community integration which involves sharing information and consultation in advance of pitching sessions and investing in a startup that are jointly controlled with, and often led by, investor groups.

Source: Business World

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