Find out why syndication could be a popular pick in the future!
The following is a guest post from Deepanshu Sidhanti. He is an Investment Associate at Artha India Ventures, a Mumbai based venture capital firm that invests in seed and early stage start-ups. The views and opinions expressed are solely those of the author and do not necessarily represent those of The Syndicate Investor.
‘Angels’ is a term we use in the start-up community to refer to those Investors who are high-net-worth individuals (HNWI) who invest a portion of their income.
They are known for investing and backing entrepreneurs they see potential in, and they also provide capital to start-ups who are in their preliminary/ growth phases. In addition, they also back small businesses that could be in dire need of capital. As someone who evaluates early-stage deals weekly, I’ve noticed that these ‘angels’ sometimes turn out to be family and friends of the entrepreneur/ founder of the start-ups.
Recently a new trend has started — Angel Investors are now diversifying their personal portfolios! They’re doing this in 2 ways:
1. By funding multiple business owners directly
2. By investing in different sectors
I find this noteworthy because traditionally, Angel Investors were known to do ‘Strategic Investments,’ which means they would only invest in sectors that were their area of expertise. Most successful angel investors look to join Angel networks and invest in multiple sectors and geographies through them.
Even though it’s a positive attribute — this had led to some adverse effects. The sector has become rather unorganized — the Angels choose popular networks to join and may only go for deals that come through them. If you are an Angel, this negatively affects you, too. To put it simply — you aren’t seeing everything that’s out there before making your picks.
I believe Syndication and syndicate platforms, Angel List and LetsVenture, are the clear-cut solution. With everything going digital, there’s a need for transparency & an unbiased platform with a multitude of options.
Many, including Artha India Ventures, have turned to using these platforms to invest and lead investments. Obviously, when money is involved, we all want to choose wisely!
I’ve been handling Artha India Venture’s profile on AngelList for 4 months! I am proud to say I was the one who researched the idea of leading a syndicate and successfully introduced the idea to the team.
I’ve learned that the platforms can be used not just to access to deals, but there are a lot more benefits of running online syndicates. Here are my observations about some of the advantages:
- They are legal!
Platforms like AngelList are legally approved to host syndicates and onboard angel investors. They form a trust structure to invest in every deal. They also take an undertaking from angel investors that the investor has accreditation based on the Indian government’s rules.
Hence, investments done via syndicates are entirely hassle-free.
- Any accredited investor can lead a deal.
These platforms allow all investors to apply to both listing & lead a deal. Some internal checks are done for every deal before it listed on the platform. There is no sector or geographic restriction on listing the deals if the operation of the business is legal. The process is smooth, and every start-up gets a chance of pitching to a broad audience of angel investors.
- Less number of investors on the cap table
This is one of the most significant things that I like about online syndicates. The cap table of the start-up remains clean and adds only one investor to the cap table, i.e., the new trust created under the Government of India’s guidelines. Single investor on the cap table makes it easier for the start-up to approach VC’s in the future round as a secondary deal is easy to crack. Also, this reduces the operational effort of co-ordination with a bunch of investors for any regulatory documentation.
- There’s an incentive for the lead investor!
As the lead investor does most of the hard work in getting a deal to the table, i.e., by regularly interacting with the founders, performing due diligence, incentives are necessary. As a feature of leading an online syndicate, the lead has an option to charge carry from the rest of the investors. Carry simply means that the lead investor will get a part of the profit that the exit (0–20%) generates. This is a fantastic upside for the lead investor and ensures active participation of the lead with the start-up, which increases the chances of success.
- Alas, they are free for all to join! 😊
All the existing platforms are free to join for investors and gives them access to evaluate deals that feature on the platform. Hence the problem of the unorganized sector, i.e., the substantial membership fees of an angel network, gets solved.
Also, imagine reaching out to a group of 10,000 angel investors for one start-up deal. I know it sounds challenging, but I did just that! I was able to get in touch with many angel investors with a click of a button and quickly raised funds for the start-up.
In conclusion, I firmly believe that the future of angel investing lies in investing and raising funds via online syndicates! I have now shifted my focus to enhancing our profiles on these platforms to attract more co-investors. If you want tips on that, reach out to me.
Remember, it takes taking that one step to result in a brighter (and wealthier) future!
Originally published on https://medium.com/artha-india-ventures on August 27, 2020.
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