Welcome to our 3 part series on Building Angel Syndicates. This is a guest post series written by AngelSchool.vc.

In part 1, we shared some thinking on valuing syndicates and why they’re beneficial for Angel investors who successfully run one. Here’s where to find it in case you missed it.

In part 2, we’re going to talk about what makes Syndicates hard and some edge cases where they’re less effective.

There’s a ‘chicken and egg’ problem when you’re starting your syndicate. Should you find LPs first or find a startup to invest in?

Even if you had both, you still can’t ‘make the market’. That’s because there are underlying variables that are out of your control.

Having an LP network doesn’t assure you of capital because you don’t know who will look at your dealflow. LPs control the investment and capital allocation decisions in syndicates so you don’t know who will invest and how much. 

On the other hand, startups will want how much allocation to hold for you.

Without a better way to solve this, your outcomes are suboptimal. 

Your can over index on building your LP network to meet the fundraise resulting in wasted time and effort. Or, you can be conservative and seek a lower allocation, thereby leaving capital and upside on the table.

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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. 

Apply to Cohort 6 here.

The 3 most common questions I get asked by aspiring syndicate leads are:

1. How do I find LPs?
2. How do I find dealflow?
3. How do I deploy capital?

They’re important questions for sure. However, each of these questions break down into dozens of non-obvious drivers and considerations. 

When there are that many factors at play, suboptimal decisions compound leading to a lot of inefficiency in our syndicate’s performance.

We think obsessively about all this because we believe there’s a science to building syndicates.

When you’re building your LP network, here are some questions you should be thinking about.

How do you profile and target the right LPs for your syndicate? 

How do you convince them to pay particular attention to your dealflow above other sources?

How do you know who’s engaged or not?

Growing your LP network is also important. After all, if you return to the same investors time and time again, you’ll dry out your capital pool.

On the other hand, how do you manage 10s, 100s or 1000s of LPs? This requires a scalable way to distribute dealflow, of nurturing interest and closing capital.

Syndicate deaflow and diligence is a step change from angel investing off your own balance sheet. You’re now influencing LPs’ investment decisions and becoming a custodian of their capital. 

A number of interesting challenges arise from this evolution. For example, what does good ‘due diligence’ look like? 

Once you complete diligence on a company, how do you ultimately decide whether to move forward with syndicating a deal?

Finally, as a syndicate lead, your mandate is to ‘sell’ an investment opportunity to LPs. So, what does marketing for syndicates look like?

Finally, when you’re able to ‘make the market’, you need to deploy that capital.

Should you manage the investment in-house using your own Corp Secs, tax accountants, and legal  service providers or rely on SPV admins? 

What should you charge for syndicate fees and carry structures?

Selecting the right SPV admin is also an important long term decision. What are your options? Who best fits your needs?

Finally, let’s look at some scenarios where syndicates are less effective. We’ll do this by contrasting them against fund structures.

There are 3 areas where syndicates may be disadvantaged compared to funds.

There’s a pecking order in venture capital. After all, startups talk about being VC-backed rather than funding from angel groups. It’s likely the case that syndicates don’t get equal access to dealflow even if they could write similar sized cheques.

Second, syndicate LPs control investment and capital allocation decisions. As such, syndicates never know for certain how much allocation they’ll fill until all the commitments are in. That said, we’ve developed techniques for managing this (stay tuned for part 3).  

Finally, syndicates don’t sit on dry powder. We only publish deals to LPs after diligence on a company is complete. Fundraising takes place after that. As such, the syndicate investment timeline is always longer than a fund. That makes it harder to pursue deals on a short timeline.

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That wraps up part 2 of this 3 part series. Stay tuned for part 3 where we’ll share some skills and techniques for managing your syndicate.

We hope you found this useful. I’d love to hear your feedback and questions. You can reach me at jed@angelschool.vc.