Two weeks ago, we announced a plan to syndicate investments as part of our Openbeta program. 72 hours after our announcement, we had successfully completed (although we’re still closing) our first investment syndicate in a company we’ve fallen in love with called Estimote.
There’s been a lot written about AngelList Syndicates in the past couple weeks — what they are, what they aren’t, and how venture capital will be affected. Jason, Fred, Howard, Hunter and many others have all given valuable opinions and you should go read them. I don’t need to repeat them, but needless to say, we think investment syndicates represent an important shift for the industry.
That’s why we did one.
The tl;dr version of the post below is that we’re even more encouraged by the possibility of syndicating a portion of our investments than we were two weeks ago, but that actually structuring and executing them is complicated and takes a lot of hard work and patience.
Here are some preliminary notes and thoughts:
- 46 people reserved spots in our syndicate for a total of $298k, almost double our goal of $150k. The first $100k was filled relatively quickly (in about a day), mainly through the network of people that follow us on AngelList. Going forward, we plan to give investment preference to our syndicate backers. On the third day, AngelList featured the company and commitments accelerated dramatically until we closed the doors. In short, an AngelList feature holds weight, but relying on it is a risky strategy.
It will become crucial for angels and venture funds to build their own proprietary lists of accredited investors. Over time, as the regulations continue to evolve, this will include non-accredited investors too. The angels and seed funds that can build engaged communities around these folks (or have already built them), will have a meaningful advantage in this new environment. We’re already seeing this through the incredible growth of the backers program behind people like Kevin Rose and Dave Morin.
Think about this for a minute, because it’s deeply important and poetic. Many of the same community, customer acquisition, and distribution capabilities that VCs have been instructing their startups to build into their companies’ DNA — they’ll now have to build for themselves.
- The legal and regulatory environment surrounding general solicitation is still unclear, and so we’ve decided to remain conservative and not publicly discuss our investments until our syndicates are closed (like Estimote). Others have chosen to be more explicit. We’re not quite sure how the regulatory environment will evolve in the months to come, but in the meantime, not being able to market specific syndicates is a hurdle. What’s amazing is that despite our decision to not discuss the company, demand for our first syndicate was remarkably strong. That’s often the mark of an incredible product: it works and it grows despite its many flaws.
- Actually executing an investment syndicate is difficult and time intensive (right now). Many of the investors that have announced syndicates and syndicate funds have no idea what they’re in for. There are seemingly countless regulatory issues, legal issues, structural issues, accredited investors issues, issues with managing allocations, firm-specific structural issues…I could go on and on and on. The only way to discover and manage this complexity is to do one (or send us an email…we’re happy to chat). Obviously, we think that over time some of the complexity will be simplified and that the long-term benefits greatly outweigh the work we’re doing now to learn the process and manage it. Announcing a commitment to do 50 syndicates of 500k each? Holy moly, may the force be with Brad Feld and the Foundry Group.
- The reaction to AngelList syndicates from folks we work closely with has not been entirely positive. Much of it is driven by fear and many are right to be worried. There are tens, maybe hundreds of new competitors at the seed stage now, and none of them are charging fees. At the very least, early-stage valuations will rise, maybe dramatically, simply because there are a lot more people now investing a lot more money (on behalf of others) in the same number of opportunities. But for the best performing and most helpful investors in the market, not all that much should change (for now). David Lee tweeted something interesting a week ago:
Haven’t read @angellist stuff yet. IMO the Gates idea of overestimating the change in next 2 yrs and underestimating in next 10 applies.— David Lee (@davidlee)
This is spot on. The best value-add investors are not going to be replaced by AngelList syndicates any time soon. This has been repeated ad nauseum by now, but I’ll repeat it again as a statement to the angel investors and seed funds that we’ve worked closely with for many years and plan to do so for many more. Rather syndicates, in our view, represent a huge long-term opportunity for the best investors in the industry.
- It hasn’t been discussed much yet, but I also wonder about the effect of AngelList syndicates and backers on the LP ecosystem. I’ve never raised a fund, but if I did, I’d seriously consider raising a virtual fund through AngelList backers. LPs are now competing with the “crowd.” Over time, as the administrative, regulatory, and legal hurdles of syndicates are lowered, I wonder if this gives the best venture investors more leverage and pricing power with their LPs. I’m just now trying to understand how this plays out, but my guess is that AngelList has implications for venture capital higher up in the stack too, and it will probably look like this:
- As a final note, one of the most interesting side affects of our syndication is the strong working relationship that we’ve built with Jakub, the founder of Estimote, over a very short period of time. He and his team did something brave with us, and they didn’t have to. It speaks to their high level of integrity, and I’ve never been more convinced that they’re the right guys to build what they’re building. I encourage you to check out their product, order a few beacons, and I think you’ll quickly understand the power of their technology.
It’s been an incredibly exciting couple weeks for us, we’ve learned a great deal, and like everything else we do, the goal is to open source these lessons in order to begin a conversation with the larger community. There are many questions that remain unanswered about syndication, including regulatory, structural, and operational. We’re discovering answers to many of the legal and administrative issues now through the syndication closing process and we’re looking forward to learning more by working and engaging with you.
If you’d like to chat, you can reach out to me anytime at email@example.com.