Welcome to our 3 part series on building angel syndicates. This is a guest post series written by AngelSchool.vc.

Vauban from Carta and Angel School are partnering on Syndicate Program Cohort 6 starting on May 17, 2023. Find out more here.

“How do I build an angel syndicate” is a question we often hear from angels in our network who want to professionalize and scale their investing.

In part 1, we’re going to talk about how to value syndicates and what that benefits are to Angels who successfully build one.

Let’s start with a framework for how to value a syndicate from the perspective of a syndicate lead.

Running a syndicate is not an easy task and the road to success is long. The best Syndicate Leads work tirelessly on sourcing and diligencing new tech companies to invest. That level of commitment and effort deserves fair compensation. 

It’s not just about sustainability. The right structures align the interests of Syndicate Leads with the LPs (or Limited Partners) that they serve. LPs back a syndicate’s deals and are their source of capital. 

Syndicate leads can easily structure management fees and carried interest on Vauban. Carried interest (or carry) is the share of profits the syndicate receives upon a successful exit. For example, a syndicate can charge a one-off management fee of 2% and 20% carried interest. In this case, a $150,000 raise results in $3,000 of fees and an upside worth $28,400 net of SPV costs for the syndicate lead.

The right tech stack and SPV help from services like Vauban from Carta streamlines your operations. Fundraising and maintenance effort should only marginally increase while your capital deployed and upside grows.

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Earning carried interest is one of the big motivators for angels to start a syndicate. Creating a syndicate also helps you support founders with your network, build a track record & meet minimum ticket amounts. Carried interest gives angels an upside on capital greater than writing a personal Angel cheque.

Imagine you invested in a company that exits at a 11x return (or 10x profit).

In scenario 1, you made a direct angel investment of $20,000. 

In scenario 2, you invested $5,000 personally and raised a syndicate that deployed $100,000 and charged 20% carry.

Scenario 1: As an angel, your $20,000 investment generates a $200,000 profit or 1000% ROI.

Scenario 2: you would receive $50,000 on your own capital and $200,000 in carried interest. You generate $250,000 of profit on $5,000 capital at risk or 5000% ROI.

This simple example shows how scaling capital and receiving carry improves the upside for syndicate leads.

Another way of looking at the benefit of scaling capital through a syndicate is that it improves your statistical outcomes. Writing a larger cheque and charging carry can help you generate meaningful financial returns from modest outcomes.

Here’s some data showing historical VC capital return patterns in the US. It’s a proxy for investor performance.

The data says that the probability of getting a 5x return on a venture investment is about 15%. 

If you’re able to grow your LP network to an average syndicate cheque of $150,000, that’s a 1:6 chance for $150k in carried interest.

An active syndicate might do 6 - 10 deals a year. In 2 years, you’ll have invested in 2 - 3 winners with an expected carry value of $300 - 450k.

By contrast, getting a 100x return is an amazing outcome but statistically, that’s a 1:10000 event. It’s an outcome so rare that few ever achieve it.

One of the great things about syndicates is that there are built-in growth levers. Gain the trust of your LPs and find the best possible deal flow for them, and they’ll become your advocates.

They’ll be telling their peers about your syndicate, sharing your dealflow and offering to make introductions. 

When it starts to happen, what seems like random noise is a sign you’re on the right track. It’s the beginning of a tailwind that will auto-scale your LP network.

I noticed this pattern in 2020 when I had ~150 LPs and decided to backtest the hypothesis. I constructed this data using my CRM, email inbox and calendar events. 

The blue line in the chart tracks the number of investors on my mailing list. There’s a clear correlation between dealflow activity and growth in my network. That’s the referral effect!

When I realized this pattern existed, I shifted my attention entirely to finding the best possible deals to invest in.

I’ve relied on this growth pattern to go from 200 to 1000+ LPs. Today, I never go looking for LPs. They all join my syndicate as warm introductions.

This frees me up to focus on what we’re all in this for- to back great companies and Founders!

That wraps up part 1 of this 3 part series. See you in part 2 where we’ll be covering syndicate challenges.

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

Vauban from Carta 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.