Unlocking the Benefits of Syndicate Investments
One of our core missions at JourneyOne is to make investing approachable and accessible. So, we’re rolling out a content series that’s focused on educating investors about the different pathways to invest in a startup.
In 2022, we formally launched an invitation-only angel investing syndicate (check it out here) where members gain access to high-potential startup investment deals in health and wellness that are pre-vetted by our investment team.
In this post, we’ll cover syndicate investments, what they are, why people invest in them, and the pros and cons.
What is a syndicate?
Syndicates bring together groups of investors to invest deal-by-deal in startups and are led by a “Syndicate Lead/s”, who is usually an experienced angel investor or VC. Investors can join a syndicate, and the Syndicate Lead/s will share deals regularly for consideration.
In some cases (including ours), the syndicate may be affiliated with an actual VC fund, while in other cases, they are brought together by individuals who have a passion and connections in the startup space, but don’t formally operate a fund - for example, by an individual angel investor or operating executive. Both types of syndicates can be great. As with most things in life, it just depends on the individuals involved.
Syndicates vary in their style. In ours - each investor in the group makes their own decision about whether or not to invest in each deal, and the amount of money raised in each deal will vary accordingly. Other syndicates may have mandatory minimums, and/or decisions made by a central investment committee vs member by member.
The most common legal structure for this type of investment is to use a “Special Purpose Vehicle”, aka an “SPV” in fund manager lingo - which is structured as a legal entity such as a LLC that allows investors to pool their capital and make a single investment into a specific company. Many platforms like AngelList and Sydecar make this very easy to operationalize administratively.
Here’s how it works:
Deal sourcing and diligence: The Syndicate Lead identifies an attractive investment and secures an allocation, often into a competitive or unique company. The lead will be in charge of spearheading the deal, managing the relationship with the founders, doing diligence, and finalizing the investment terms.
Deal sharing: The Syndicate Lead will share info about the deal to the syndicate members. This step usually involves a deck and/or memo that outlines what the company does, key performance metrics, funding history, who the other investors are, key opportunities and risks. The Syndicate Lead can also answer questions and may host a Q&A webinar or call with the founder and prospective investors.
Finalizing the investment: Assuming enough syndicate members want to participate in the deal (eg a minimum check requirement to invest in a company maybe $500k) , the Syndicate Lead will create a SPV and send a link for participating investors to sign paperwork and wire their investment. Let’s assume 20 investors in the syndicate each write a check for $25k - they wire money to the SPV entity, then, the Syndicate Lead will write a single check for $500k (minus SPV setup costs and potential fees) from the SPV entity to the startup.
The waiting period: A startup investment can take 7-10 years to exit, sometimes even longer. Syndicate investors will receive an annual K-1, which is a tax document that shows changes in the value of your investment. Some fund admin providers have different processes so it’s important to clarify that some providers send out K-1s even when it is not required. Fund admins are only required to issue K-1s to investors if the SPV has a taxable event such as:
Convertible or SAFE note conversions into equity
entity dissolution (aka the startup failed)
An exit
IPO
Dividend distribution
What happens in an exit scenario: If the company has a successful and profitable exit, investors will receive their principal investment back first and then profits are distributed thereafter (based on the original amount they invested and the SPV terms). Once the profits are distributed, it’s time to celebrate and the lead will dissolve the entity.
Syndicate terms explained:
Below are the common fees that are charged to investors to join a syndicated investment.
Carry: Think of carry as the profit split between the Syndicate Investors and Syndicate Lead.
Carry is the percentage of a deal’s profits that the Syndicate Lead will collect for doing the work to get an investment properly evaluated and executed, e.g. sourcing the startup, doing diligence, securing an allocation in a competitive round, organizing the syndicate, etc. This process can take numerous months.
Common carry structures range from 10-20% and are typically explained as the following:
90/10 carry = 90% of profits goes to the investor and 10% goes to the Syndicate Lead
80/20 carry = 80% of profits goes to the investor and 20% goes to the Syndicate Lead
Carry is only paid on profits, not the principal. Meaning the Syndicate Lead doesn’t get paid at all unless the deal is successful.
To illustrate - if the terms of a SPV is 80/20 carry and you invest $25k and receive $25k in distributions back, you and the Syndicate Lead will make nothing because there was no profit. However, if you invest $25K and receive $100k in distributions back, you are making a profit of $60k (80% carry), and the Syndicate Lead will receive $15k to account for their 20% carry.
Fees: Fees outside of carry will vary deal by deal and syndicate by syndicate. Here are the most common fees that you should know about.
Membership fee: Most syndicates are free to join, though some local Angel groups charge membership dues (~$2-5k+ per year). Paying dues can be helpful if there’s a high-quality education component, but there are many high-quality syndicates that are free to join, like ours.
SPV setup fee: The average SPV costs ~$8-12K to set up administratively over a 10 year life term and covers legal documents, state filing fees, and the cost for prepping K-1s to investors. Leads will usually pass this fee onto all investors in the syndicate to split pro rata. E.g. If a syndicate allocation is $500K and the $10K SPV costs are split amongst all investors, the investors would have a 2% admin fee ($10K/$500K) for their investment.
Management fee: This is typically a 2-2.5% annual fee that covers a 10 year term and is charged to investors as a percentage of their investment. Since Syndicate Leads don’t get paid at all unless the deal is successful, they will sometimes charge management fees to help cover their operational costs and the time that it takes to source, evaluate and help support a company.
Why do founders like syndicates?
Founders typically like working with syndicates and pooling investments through a SPV because it allows them to diversify their cap table and bring in small check investors without cluttering their cap table. The benefit of this structure is that they have a single point of contact (the Syndicate Lead) and a single legal entity on their cap table (e.g. JourneyOne SPV 1, LLC) rather than having 50 angel investors on their cap table that they need to get sign-off for every time there’s a new financing round, etc.
Why do investors like investing through syndicates?
Access to private off-market deals: Syndicates offer investors access to deals that aren’t publicly marketed. The connections and networks of the Syndicate Lead often grant access to startups at an early stage before they hit the public market. This exclusivity can present opportunities for higher potential returns, as investors can enter at a lower valuation point.
Flexible Capital Deployment: Unlike traditional funds where a General Partner selects the companies to invest in, and how much they are investing, syndicates allow investors to deploy their capital selectively into companies of their choice. This flexibility is particularly attractive to those who have a specific interest, expertise, or passion in certain industries, or who just want to be more hands-on in picking their investments because they find it fun and interesting. We’ve found that a lot of individual investors and family offices like this flexibility, they can pick and choose companies that align with their investing thesis or values that round out their portfolio.
Learning Opportunities: Joining a syndicate can be a great way to learn about startup investing and private companies. New investors can gain insights into the startup ecosystem, learn about the due diligence process, and understand the factors that influence investment decisions. The transparency often provided by Syndicate Leads in sharing deal memos and insights can help educate investors about the startup landscape and interesting companies in their sectors of interest.
What are the downsides for investors?
Lack of Risk Pooling: A key benefit of traditional venture capital funds is the ability to pool risk across a diversified portfolio of companies as VC firms invest using power law principals. In a syndicate, investors are essentially making individual bets on each deal, which can increase risk exposure. For example, in a traditional VC fund with 20 companies, a failure in one company may only impact 5% of the portfolio, whereas in a syndicate, if an investor puts the same amount into just one deal, a failure would mean a 100% loss of that investment. This difference can lead to a more pronounced impact on an investor's overall returns in a syndicate, as there isn't a portfolio of winners and losers to average out returns and create a more predictable risk profile.
Limited information: You will be reliant on the Syndicate Lead to summarize due diligence and share relevant information. You are unlikely to have direct access to the company to ask questions, kick tires, and look under metaphorical rocks. In some cases, you may have an opportunity to ask questions to the company directly (e.g. during a pitch or webinar), but you will generally not be able to go to the level of depth that a professional investor would. That means you need to trust your Syndicate Lead. Well-known successful firms participating in the round can also be a way to gain comfort that due diligence has been done, though it’s not a full guarantee (see: “Sequoia Capital says it did proper due diligence on FTX” 😬).
Limited ability to follow on and maintain ownership stake: Some early investors in a round will have clauses in their agreements that ensure they have “pro rata” rights to follow on in future rounds. This isn’t guaranteed in an SPV, though it’s not unusual. However, maintaining the ownership has to be done at the SPV level, meaning the Syndicate Lead needs to create a new SPV for the next round and find enough other investors that want to participate for it to work. The JourneyOne Syndicate generally participates in follow-on for the companies that are performing well, but not all syndicates will do this.
Limited Influence: Syndicate investors generally have limited influence over the management and strategic decisions of portfolio companies and are passive investors working through the Syndicate Lead.
What else should investors look for, aka “the watchouts”?
Is there any important information missing from the investment memo? JourneyOne Partner Sarah Stewart saw one recently that had a lot of great information about traction, but nothing about finances or runway. Red flag! Ask the Syndicate Lead if critical info is missing, and find out why. Make sure it wasn’t left out simply because it wasn’t favorable. We’ve also seen syndicate memos from other syndicates for companies that we knew based on insider information were struggling but looked positively amazing in the memo and syndicate materials. You can make just about any company look amazing when you get to pick and choose your data points.
Is the Syndicate Lead investing? Sometimes there are good reasons that a Syndicate Lead isn’t participating, but in some cases, it can indicate less conviction. If in doubt, ask! Some reasonable reasons that a Syndicate Lead isn’t participating could be that the deal is being run by a fund and this company is “off thesis” for them but they still believe in it, or it could just be that they’re not rich yet and honestly can’t afford to put a personal check into every deal that they do, and are instead showing commitment with their time.
Who else is investing? Does the company have reputable investors in the round? Are those investors experts in the space that the company operates in? (i.e. does a biotech company have successful biotech investors on their cap table?).
If the company has raised money before, are prior investors participating in this round? If not, why? Again, there can be good reasons, like a fund only participates at early stages and does not participate in later stage rounds - but you should know what those reasons are.
Where can I find syndicates to join?
AngelList syndicates are a good place to cut your teeth, though some syndicates are more vetted than others and you often won’t have many reference points by which to evaluate the Syndicate Leads (see our “watchouts” above);
Google “angel syndicate + city” or “angel syndicate + [your area of interest]” and see what comes up;
Ask around with anyone in your network who works in VC, investing, or the startup world.
Join the JourneyOne Ventures’ Syndicate
If you’re interested in seeing top health and wellness deals, please consider applying to the JourneyOne syndicate to get access to our deals! We’ve spent years building relationships with high-performing founders and positioning ourselves in all the right channels so that you don’t have to. We charge no annual membership fees and stay true to our word of making private investing more approachable and accessible to all investors new and experienced!
Our recent deals include:
Contraline (Medtech and Biopharma): clinical stage medical devices and drug therapeutics company that has the two most advanced male contraceptive assets globally in its pipeline.
Plant People (CPG): Doctor-formulated plant based supplements. #2 functional mushroom selling brand in Wholefoods.