AngelList Syndicates – A Good Deal For Investors?
AngelList screens investors to make sure they are capable of making good investments. However, my first reaction to their syndicates program is that this isn’t a good investment. Then I heard out AngelList syndicate managers to hear why they think it is a great deal for investors. Unfortunately it will be a year or more before data is available so for now we need to reason it out.
Syndicates are not a good deal for investors.
– 20% carry is too much. I imagine the trade-off is that investors are willing to pay a 20% carry so they can invest less in each deal and make more investments. But if your syndicate invests in the next Uber you will pay them 20% of your profits. Wouldn’t it be better to make direct investments and pay no carry? I imagine your chances of hitting the next Uber are comparable if you invest yourself.
– One benefit of direct investment is that you get to know the founders and hopefully you help them. You don’t get that connection to investors with a syndicate.
– Too much failure with startups for baskets to work-out. AngelList has also launched syndicates that are essentially index funds that focus on sectors like consumer Internet. Index funds work great with public companies but with tech startups there is just so much failure. Sure there are bound to be some wins but the losses are bound to
Syndicates are great for investors.
– Top investors that have syndicates get early access to the best startups. This is valid. Startups like Square that over-subscribed will not be accessible to your typical AngelList investor.
– If an investment is a big winner, nobody should complain that they have to pay 20% to the syndicate. You’ll be too busy giving high fives.
– Access to follow-on rounds. Mark Suster has a great blog post on the value of syndicates. For angels, the primary value he sees is that: In most deals angels have few rights. One of the most important rights is “pro-rata” rights to invest in subsequent rounds. With angel money being “packaged” and aggregated into large bundles it makes it easier for angels to ask for rights it might not otherwise have.
– To have good odds of a success, you will need to make 10 investments. That’s a lot of work.
Push Comes to Shove
Until there is more data on the performance of the syndicates it seems that syndicates can be a good alternative investment to balance against public market investments. However, for people that aspire to really participate to in the angel investing market there you really need to make direct investments, get to know the founders and help them to succeed.