FiBAN's Business Angel Academy and Nordic Angel Program joined their efforts in a mutual training session on the 14th of March. The participants got acquainted with the core of angel investor strategy: syndication process and what legal procedures goes with it. The presentations were given by two FiBAN experienced Lead Angels, EBAN Vice President Riku Asikainen and former FiBAN chair of board Jaakko Salminen.
In Europe, syndication is the term used when private investors create a group to invest together in a growth company. In the syndicate, the rest of the group give a mandate for decision-making to one of its members: this person is referred to as Lead Angel or Deal Lead. Syndicated investment in Europe usually refers to a group of investors together in one syndicate, whereas in the United States it usually means two or more syndicates investing together. Creating angel syndicates has many benefits to investors, according to Salminen. As mentioned, the risk is significantly lower, as the funding round is divided between several person. Angel funding round is typically around €200k to €500k, but you can get into a syndicate with a smaller ticket size.
So why would a startup choose angel syndicate over VC? "The biggest advantage for a growth company is syndicate's flexibility to negotiate the funding terms", argues Salminen. "For example exit times for VCs are usually strict. Angels tend not to be so stiff. If the situation changes, the exit time can be re-negotiated." But VCs and angel syndicates are not competing with each other. "On the contrary, as startups' valuations are often too high, funding round's angel syndicate together with a VC can actually make the entrepreneurs realize that they need to come down with the valuation in order for them to close the round", Salminen concludes.
So are there any downsides in syndication? Obviously, there are. Investors tend to be busy and hard to reach. "One commonly used phrase is that leading a syndicate is like herding cats", Salminen adds. It has its difficulties, but the obstacles are relatively manageable compared to the positive effects of a syndicated investment. And like with cats, trust in the syndicate is truly the most important thing. FiBAN has built its syndication process so that it is as transparent as it can get.
"In Finland, the syndicate is usually created before the investment. This way investors can get to know each other already before the startups are brought into the picture."
Syndicate can't function properly without the Deal Lead, who is facing lots of responsibilities. They have to communicate to the syndicate, make sure that due diligence is done properly, arrange regular meetings: the list seems infinite. That's why it is important to compensate the deal lead. More about Deal Lead compensation in FiBAN's article from EBAN conference in 2017.
Final thoughts on syndication:
•Using a platform to manage the syndicate can help
•Be prepared to modify the deal in the process or even cancel
•Do it, you’ll learn a lot!
Next Business Angel Academy:
Thu 24th of April: Startup-yrityksen hallitus ja tiimin sparraaminen
More information here.
Next NAP training session:
Fri 27th of April: Due Diligence and Investment Criteria w/ KPMG
www.fiban.org/nap or contact reetta.ilo(at)fiban.org
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