Syndication among Angel Groups to Close Larger Rounds

January 25 2010 No Commented

Syndication among Angel Groups to Close Larger Rounds

In recent posts, I have described the growing US capital gap between typical angel and VCs round size.  US angels generally invest in rounds of $200K and $1 million, while VCs have moved from rounds of $2-3 million in the ‘90s to rounds of $7-8 million today.  This gap is quite troubling for entrepreneurs seeking investment between $1 and $5 million and for us angels who provide seed capital for their startups.

Compared to the 25,000 seed/startup investments by US angels or even the 1000 first stage investments by US VCs, the number of investors (and investments) in the US capital gap is small.  One partial solution to the funding gap problem has come through syndication among several neighboring angel groups, pooling resources to fund rounds of $1 to $3 million dollars.

Syndication (or any form of deal sharing) was rather unusual among angel groups until about five years ago – coinciding with the time of the formation of the US Angel Capital Association (ACA).  Organized networking among angel leaders at ACA meetings led to trust-building among these leaders and eventually to sharing deals.  I admit that a decade ago I had some personal skepticism about the value of national organizations of angel groups, but I was wrong.  National organizations, such as ACA and Angel Association New Zealand (AANZ), promote the formation of new angel groups, foster proliferation of best angel investing practices and facilitate trust among angel groups.  (There are many other advantages to national organizations of angel groups which I will discuss in a future post.)

Angel groups considering syndication must deal with several thorny issues as they begin to work together, such as agreeing on (a) deal leads, (b) using single term sheets and valuation, (c) sharing due diligence but not depending on the due diligence of others in making investment decisions, (d) holding syndication partners harmless when deals perform poorly, and other issues.  Nonetheless, many ACA angel groups are now actively syndicating deals with neighboring angel groups to fill larger rounds of investment.

The funding gap between angel groups and VCs in the US is a serious problem for entrepreneurs.  Syndication among angel groups resolves only a fraction of this problem, but is a good step in the right direction.  Syndication opportunities are another good reason for angels to join groups and for groups to join national angel organizations.

It’s a GREAT time to be an angel.  Find a group and jump in!

PS  Having communicated with angels in many countries, I can report that the funding gap is larger and more serious in some countries than others, but tends to exist in most jurisdictions.

Bill Payne is the 2010 BNZ University of Auckland Business School Entrepreneur In Residence.