AngelList syndicates are changing seed investing, whether VCs like it or not

By Michael Carney , written on September 30, 2013

From The News Desk

AngelList Syndicates are the best thing ever to happen to entrepreneurs and investors!

AngelList Syndicates are the worst thing ever to happen to entrepreneurs and investors!

Regardless of which of these statements you believe, it’s hard to argue that the new angel capital aggregation platform won’t have an impact on the way startups are funded in the future. And they’ve surely had the industry abuzz for the last seven days.

First, a quick rundown of the concept. AngelList Syndicates allow well-known, well-connected, and well-respected (or so that's the plan) angel investors to pool capital from other accredited investors to invest as a group into startups. The syndicate lead will collect 15 percent of any profits (with an additional 5 percent going to AngelList), with the remaining investors keeping the additional upside. Unlike traditional VC funds, there are no fees paid before an investment is successful.

As you try to make up your mind about what syndicates will “mean,” take the thoughts of some of our industry’s brightest minds and most prominent voices into consideration:

Macro sentiment

[tweet 384398880843919360 align='none' width='400']

[tweet 384461149531418624 align='none' width='400']

[tweet 384409588432265218 align='none' width='400']

[tweet 384356174453538816 align='none' width='400']

Picking Winners

Via Chris Dixon's, "Some thoughts on startup crowdfunding:"

Startup financings tend toward the extremes of being very oversubscribed or very undersubscribed. If you graphed out investor interest, it would look like a “U”. This is primarily the result of signaling – once a few investors commit (especially high quality ones), other investors pile on. If investors don’t commit, other investors start to wonder what’s wrong. So when you consider startup crowdfunding, it’s important to distinguish the oversubscribed cases from the undersubscribed cases. 

Via Jason Calacanis', "The Great Venture Capital Rotation":

There is a long way between AngelList Syndicates and success. We have to make sure we get returns for the angels following us, and we have to make sure that we don’t include annoying people in the syndicates who slow down our founders. We have to make sure that the angels in our syndicates understand that 7 of 10 startups fail. And that’s a good thing! We want 7 of 10 to fail because that means they are trying high-variance projects that have massive implied odds. ... You can only succeed as an angel investor, I believe, if you are a massive gambler. You have to bet, bet, bet with ice in your veins: knowing that after dozens of failures, you’ll hit a winning bet of epic proportions. 

[tweet 384127261835681792 align="none" width='400']

This changes everything

Via Jason Calacanis', "The Great Venture Capital Rotation":

Previously I was < 10% of any given investment round. In fact, I was typically 3% of a round. Now I'm going to be between 33% to 100% of any round. That's a huge difference for the founder. I can now get founders fully funded and off to the races and I don't need to ask anyone for help. I don't have to ask anyone for permission.

[tweet 384371175448510464 align="none" width='400']

[tweet 384372134585188352 align="none" width='400']

[tweet 384154435183575040 align="none" width='400']

[tweet 384124932214366208 align="none" width='400']

New roles for angel investors

[tweet 384114865385652224 align="none" width='400']

Via Hunter Walk's, "AngelList Syndicates Will Also Pit Angel Against Angel":

Before as a founder I might have been able to get both Dave Morin and Kevin Rose into my deal, offering them each $50k slugs. Now they each represent more than $300k in syndicate dollars. Does that full slug get invested into each deal or can they pro rata down? ... Angels, who previously collaborated, now might be competing? ... My guess is there are also some angels who were popular when they represented a $25k check but won’t be as sought after if they try to push $300k into a round.

Via Fred Wilson's, "Leading vs. Following":

Angel List Syndicates are turning angels who have traditionally been followers into leads. That's a good thing in many ways. The more folks who can lead a round, the better, at least for the entrepreneurs. But, as Hunter points out, it will mean that less of these angels will get into rounds than before because they will all be showing up with a lot more money than before. It also means that they will have to learn to lead and lead well. ... And I can tell you this. Not everyone is good at this. In fact, very few are.


Via Jason Calacanis', "The Great Venture Capital Rotation":

Who will this affect? The bottom half of VCs – the ones who don't really provide a lot of extra value – are going to find themselves never meeting with the best deals (they already have a hard time). The bottom half of VCs have already been at risk due to their anemic returns, so I predict this is the nail in the coffin. They’re fracked. ... Top firms are the the top firms for a reason – they ain’t going nowhere. But the bottom half of VCs will now be wholesale replaced by folks like Kevin Rose, Dave Morin and myself.

AngelList Syndicate Leaderboard

AngelList publishes a "leaderboard" of syndicates, ranked by total dollar commitment. The list also reveals the number of backers each syndicate lead has accumulated, and through a few clicks through to each lead's profile, the identity of those backers. At 7am this morning, here were the top five syndicates:

AngelList Syndicate Leaders (9-30-13, 7am)

The ability to form and market syndicates via a public forum like AngelList is an entirely new concept in seed stage investing. Whether the impacts of this change are positive or negative remains to be seen, but it surely means the game is changing.

[This is an extensive discussion and the above are just a brief collection of thoughts on the topic. If you've seen additional material that you think should be included in this post, please share in the comments.]

[Image via Batman-Online]