Basic of Startup Syndicate and How does it Function in India | Jordensky

What is a Syndicate?

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.

What is a Leader?

Syndicate leaders are business angels with extensive experience in selecting and investing in investment opportunities, spanning multiple technology sectors and with deal flows inaccessible to most investors. They are usually angels who have been in the industry for years and know it inside and out, or founders of successful startups.

What makes a Good Leader?

Naval Ravikant, co-founder of AngelList, famously stated that a syndicate leader should have three characteristics:

1. Access to Capital: Business angels with a track record of success or successful startup founders with the capital to invest in startups
2. Propietary Dealflow: The rate at which investors receive business proposals or investment offers is referred to as dealflow. If this dealflow is exclusive to the investor, the chances of landing a good deal increase.
3. Good Judgement: knowledge and market experience that could be crucial in making the right investments

It is important to note that simply meeting these requirements does not guarantee an investor's success. Investing in startups is difficult and risky, but co-investing may reduce the risk.

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What is a Backer?

A backer is an investor who either does not have much experience in startup investing or, if he or she does, prefers to let someone else - the leader - manage the investments and choose which startups to invest in.

What are the Advantages of Syndicate Investment?

Syndicates offer great advantages to both leaders and backers.

Leaders

• They can invest more money per transaction.
• They can reach startups with high minimum commitments that they would be unable to meet on their own.
• They may be able to obtain better investor rights if they invest more capital per transaction.
• They are also compensated with a carry (capital gains generated by an exit or dividends paid) in exchange for their 'leadership' on a project in which they would have invested anyway.

Backers

• Better dealflow by having access to investment opportunities they might not be able to find by themselves.
• Transparent bargaining procedure.
• Interests aligned with the leader
• There is less paperwork than if they invested on their own.
• Less risk: leaders have extensive investing experience and can thus distinguish between good and bad deals.

Startups

• Access to larger sums of money.
• Not having to deal with a large number of different investors.
• Leaders benefit from the fundraising process and are in charge of managing their relationships with backers.
• Because the investment is made through a vehicle, the startup's cap table only has one investor.

What are the Disadvantages of Syndicate Investment?

For Startup Founders

Lack of privacy for startup founders is the biggest drawback of syndicate funding. When a startup joins a syndicate, the syndicate is aware of the startup's participation and distributes pitch decks, executive summaries, financials, and other documents to numerous possible investors. Additionally, the startup entrepreneur makes public the funding that founder is looking for.
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The Startup Founder may not want this information made public, depending on your startup. For instance, if you have a unique product, you might not want information about your company shared because it could alert rivals to your intellectual property. In this situation, founders must consider the benefits and drawbacks of syndicate investment.

For Investors

There are "too many cooks in the kitchen," which is a drawback for investors in startup syndicates. There are more investors with a variety of interests in larger syndicates. Perhaps there are too many investors vying for board positions in a single business, or different expectations, such as different preferences for startup structures or milestones, start to surface. Conflicting interests might result in decision-making stumbling blocks or overall annoyance.

How does Syndicates Works in India?

There are 5 phases in which Syndicate Funding Works :

• Opening
• Investment
• Closure
• Monitoring
• Liquidation

What is a carry?

Lead investors put their own money into startups and charge backers 10% of any capital gains from an exit or dividends. A carry is only paid if the investment is successful.

How are Syndicates Structured? Where do syndicates take place?

As previously stated, investors can specify their investment criteria on their profiles, and startups can then choose which ones to contact. Startups, on the other hand, can provide specific details about their business to help investors.

These types of investment vehicles and startup financing options benefit all parties involved: investment reaches more startups, investors are encouraged to co-invest, and the investment ecosystem accelerates.

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