Welcome to our 3 part series on Building Angel Syndicates. This is a guest post series written by AngelSchool.vc.
In part 1, we covered valuing syndicates and their benefits to angel investors. Part 2 was about the challenges of building them and understanding their limitations.
Today, we’ll share some ‘must know’ techniques for getting every bit of performance out of your syndicate.
Running an investment through the syndicate model has some unique characteristics.
Unlike angel investing, they require a more efficient and thorough diligence process. LPs also need help with decision making so you’ll need a data room as well.
You’re fundraising for each company after you decide to back a company. Funds on the other hand, have a prolonged upfront fundraising cycle but then have a pool of dry powder to deploy from.
These differences mean that syndicates need their own process for managing the deal lifecycle. We’ve developed one that is segmented into 3 tracks.
The deal sourcing track is a continuous, iterative process of sourcing deals, qualifying them, performing diligence, and compiling datarooms.
The investor facing workstream is about deal marketing. Our objective here is to maximize LP engagement and close capital commitments.
The SPV formation track is about moving capital. This involves setting up legal entities and investor governance, receiving and wiring capital, and administration like pro rata rights and carry share agreements.
Vauban and Angel School are committed to helping angel investors build and launch their own syndicates. We’re excited to be partnering on Syndicate Program Cohort 6.
Deal marketing is an essential skill and one unique to syndicates.
Great syndicate leads must be great at presenting startups to investors in a way that is easy to understand, representative of the deal, while being compelling enough to generate interest.
It’s a delicate balance to achieve and absolutely critical. In our experience, 80% of your LPs’ interest in a deal comes from the very 1st touchpoint (step 5 in the deal lifecycle). You have only one chance to get this right.
Our objective when introducing a deal is to build interest. The ‘win’ is to lead them to a pitch deck or dataroom to move them towards an investment decision.
To achieve this, your primary goal is to ensure LPs understand the company does, then to get them excited about it. After all, you can’t get someone excited about something they don’t understand in the first place.
We recently did a study where 13 random angels were invited to present a startup to their peers. After each presentation, we conducted a poll that asked 2 simple questions:
We found a clear positive correlation between the level of understanding and level of interest.
So how do we optimize for understanding and interest? What does that look like?
If you’ve got even a modest LP network, you won’t be able to reach out and pitch them one by one. You’ll need to broadcast this to everyone using email, a notion page or something.
So in addition to understanding and interest, we’re restricted to plain text.
To arrive at this answer, I looked at hundreds of emails and messages from Founders reaching out to me. I also studied tons of communications between investors.
What I noticed is that investor communications are far more structured and succinct. They also contain standard sets of information. I surmised that investors have a lingua franca - a common way of communicating deals with each other. It only makes sense to communicate to investors in this language that they understand.
Based on this, we developed our own 10-line framework for introducing deals to LPs. It optimizes for ease of understanding, then building interest.
This is the format that AngelSchool.vc uses to publish deals to our 1000+ LP network and it raises $500,000 on average for us.
When investing through syndicates, LPs decide which deals to invest in and how much. This introduces an element of unpredictability for fundraising.
This is the ‘optimization problem’ in syndicates. The optimal allocation you should seek in a startup is exactly how much appetite there is in your LP network. However, as we’ve explained, you don’t know what this is.
If you overestimate allocation, you’ll be scrambling to fill it or hurt the startup by missing the raise.
On the other hand, if you stay conservative and underestimate allocation, you’re leaving capital on the table and sacrificing upside.
How do you solve this?
We’ve developed a funnel management approach to running syndicates. It’s appropriate to borrow a concept from sales since a syndicate is in essence a deal-by-deal investment opportunity.
You’ll find our 5 stage funnel definition below.
We then measure our conversion metrics across our funnel using actual deals and developed the below benchmarks.
We have produced consistent metrics deal after deal and assume and recommend the following conversion benchmarks:
Funnel management techniques combined with best practice benchmarking offers a way for syndicate leads to predictably close capital and optimize allocation.
That brings us to the end of part 3. Here’s part 1 and part 2 in case you missed it.
We hope you found this useful. I’d love to hear your feedback and questions. You can reach me at firstname.lastname@example.org.