Get Ahead of the Game: A Checklist for Investing With AngelList Syndicate
10 things to understand before investing alongside an AngelList Syndicate.
Don’t forget to follow me on twitter @natarajsindam for above average tweets!
If you like what you read forward this email to three of your friends who would like to be Above Average.
Who am I to talk about this? Over last 4 years I have looked at 1000+ deals across AL or otherwise, invested along side AL syndicates across India & U.S including seeing some exits. I have also co-lead some deals in the process with my own syndicate. If you are interested in future deals that I might Syndicate, here is my syndicate link.
This is not an investing advice.
If you are investing via AngelList syndicate this guide might be useful to you. So here are 10 things you need to think about before investing with AL Syndicate.
Are you okay loosing this investment entirely?: A lot of people will say they are okay loosing it, but they don't spend time thinking through that scenario. As someone who invested in 20+ companies the first zero will effect you, it will test you and it will make you question your thesis and what you know about angel investing. This is where most people will stop doing Angel Investing. This is where theory meets practice. If you have not gone from this stage to next, it's a guarantee that you will never get back to angel investing again. If you are lucky, the first zero doesn't hit you until you have built a portfolio of 10 and even if the zero hits you, you are fine as you have seen some markups by now. The worse scenario is your first one going to zero in first 6 months. This makes angel investing tough and to stick with as an individual.
Understanding AL syndicate lead: So most syndicate leads know the game they are playing. They are in their own journey of building a portfolio they might have already gotten their life changing their exit or are looking for one or are just playing because of the love of the game and not looking for quick exits. There will be newish leads who have bought new network with them to the platform say like a early stripe or an early Doordash employee. Understanding the lead is as important as understanding the each deal.
What is the return pattern you want and this deal falls into that bucket? There is a certain sales element to the AL deals which means leads can exaggerate the possibility of success while downplaying the risks. Or convince you why a certain high valuation also makes sense. Here is where most early investors make mistakes, primarily on valuation basis. A late stage deal or a flat round often gets pitched as an attractive opportunity along side a tier 1 investor and angel investors commit based on the signal of co-investors. Although there would be deals where a good tier 1 co-investor makes sense, its much more likely a late stage deal with tier 1 co-investors is more like than not a bad deal. I am going off track here. The point to really remember is if you invest in late stage rounds, you have to ask this question - at what valuation this company should exit so I can get a 10x (or whatever x you are looking for).
Be ready for Different types of exits: Its easy to think we start investing in startups and something goes 10x or 50x but the journey is slightly different. There are different types of exits that happen. Quick exits are often interesting, not good, not bad but always interesting. Quick exits are a sign of times we live in more than the ability of our decisions. Quick exits can be positive or negative, I have seen both. One of my quick exits was a company that got acquired by another company which went to SPAC and I received the shares in the newly public company. This was a 3x return (pre-tax) in less than 12 months. In some of these case in retrospect you would expect
How to think about allocations that a syndicate lead is getting: Syndicate leads have a problem of getting allocation in deals they want to invest. That's the main problem they are solving for and also the reason why you are investing with them. But note that different allocations are different. In some allocations the Syndicate lead is closely working with the founding team. This happens in pre-seed & seed stage. In later stage deals not so much, specially because the founder would outsource all fund raising to a senior employee in the company and is not directly involved since its for a Syndicate. Also there is still some stigma for certain founders to use SPVs or Angel List syndicates. Even the founders who would tweet that every one should be able to invest in a startup are also behind the scenes not giving allocation to syndicates when its time for their company to raise venture money. This happens more often than people think.
Have you done your own diligence about venture investing? This I think is a common mistake people make when they first start doing angel investing, to not read a book about angel investing. Not blogs not podcasts but an actual book about angel investing. My go to recommendations is Venture Deals. You don't have to read this book entirely but read through the basic terminologies and you would be better off than 90% of people who get into angel investing.
Are you investing out of FOMO? Think of deals as a continuous flow for ever, there is always a new intelligent founder somewhere starting a new company and you will see new deals every day. Go in with this perspective because most of the world in every sector right now is defined by FOMO and its very much alive in venture & angel investing. This is where having your own set of rules matter. You need to have rules around what max valuations you are investing, which types of shares you will invest, will you only invest if you have pro-rate rights etc., Having these rules not only helps you increase the quality of your portfolio, but also makes you decision making better. You don't have to look at deals that don't fit these terms and focus on what fits your rules. This doesn't mean you will always stick to them, but atleast directionally you will be right over couple of years.
Your incentive vs VC incentives: This is combination of some of the above rules, but the key point is AL Syndicate leads might have their own solo fund or a rolling fund or might have previously had a fund. Which means they are building a portfolio or doubling down on previous investment. In such cases the valuations & terms might make sense for the lead but the individual LP. Being aware of this nuance will help you think for your self.
Exits are not in your control: If you follow the rules of building a portfolio, stick to the rules of valuations & with a little bit of luck (major ingredient) you will start to see some exits & markups starting year 3. In case of both you as a investor in the syndicate will have little to no choice in what option the Syndicate exit will look like. For example if a company is marked up and the new investor is giving the Syndicate an option to partially exit you might want to take that exit but the lead knowing more information or for having more conviction would want to stay in the round. Note that this doesn't always end well. The conviction might not play out as the lead thinks it will and you as an individual in the Syndicate have no say. This applies to other types of exits or pro-rate commits. Note that this is not necessary a feature nor a bug it is both based on case by case basis.
Don't count your eggs before they are hatched: You will see in both AL leads who are raising their first fund or a VC who is raising their next fund talking about markups. Markups mean that a Startup they invested got a higher valuation already in the market by some other investor. And based on the markup size solo leads & VCs raise their next funds. This is a good signal, because its the only signal you have in short term. But you have to note that these signals are just that, signals. There is still scope that these startups will go to 0 and will return nothing. To make this point here is an interesting example that a friend of mine experienced not as syndicate member but just as an individual Angel Investor. He was an early investor in a crypto exchange serving institutions. In the heights of crypto bull market on 2021 he was offered a 50x exit of his original investment. A global investor has been leading a $25M round. My friend decided not to take it. His reasoning was that it will be a 100x or more. 6 months later the company was effected by Terra Luna and the subsequent dominoes that fell around it. The point here is to be aware of outcomes and making calls based on that. And often these calls might not be in your hand if you are investing with an AL Syndicate. You are dependent on lead's decision. In this case the lead might say No to an exit and you as a Syndicate member would have said yes. So keep that in mind.