The whole idea behind the AngelList Syndicate is quite simple. The big problem with angel investing is you have a lot more startup businesses asking for your money than you have time to thoroughly investigate and get a feel for the value proposition of each of the startup companies. If that isn’t bad enough, if you aren’t really an experienced angel investor then the temptation is to throw money at the first idea that sounds halfway good. As you can well imagine, you could easily blow into your investment wad just in time for the best company to show up at your doorstep asking for your investment. To avoid this issue, many angel investors actually spend a lot of time on sidelines. They wait until some sort of power angel or some sort of proven angel investor steps in and pretty much validates a particular startup company and these other angel investors pile on. This has been the pattern on an informal basis for quite some time now. Nothing succeeds better than experience especially when you don’t have much experience yourself. Well, that’s the value AngelList brings to the table. They came up with a system called the AngelList Syndicate.
The Syndicate works this way: a proven or reputable angel will invite other angel investors to invest with him or her with his or her deals, in other words, the proven angel will solicit other angels to back his or her deals. On paper, this is a win win situation because the other angels get a lot of uncertainty out of the way since they are betting that the experience and moreover, the need to preserve the power angel’s reputation will more likely than not steer them away from bad deals. The power angel, on the other hand, using the AngelList Syndicate system gets a fifteen percent share of the deals’ future return. This is quite an incentive. If a venture capital or other big players pile on, or the company goes into IPO, this can translate to huge amount of money. AngelList, in the mean time, just stands in the background and collects a five percent deal portion just for putting everybody together. It seems like a win win situation.
The downside is that this may possibly freeze many investors out because what will happen is that the focus would be on the power investors and the smaller investors are sidelined when bigger investors like venture capital firms pile on because of the power investor. In other words, instead of actually working the way it’s designed, this can actually become some sort of branding mechanism that doesn’t really benefit smaller angel investors looking for a credible way of reducing the risks of bad business selections and playing into the hands of venture capital firms. It all boils down to a simple question: If a power investor backs certain deals and it’s recruiting a syndicate and the startup company sees that a big venture firm might pile on because of that power angel investor, who would they rather choose? Is it the power angel investor backed by venture or a power investor backed by small investors? It’s a no brainer; they go with a bigger pot of money and that’s exactly what critics of skeptics of AngelList’s Syndicate system have in mind.
Like many things in life, there are many processes that work great on paper but once you put the system into play in real life, a lot of very human considerations come in and the outcome might look completely different from your original plan. Still, this is a great idea by AngelList and anything that boosts the overall ferment of investing activity in the technology is not a bad thing. It might just need a little bit of modification but only time will tell. After all, it just got released recently and only after a few dozen deals could we tell where the chips fell and what parts of the system, if any, need adjusting and fine tuning.