By Dušanka Seratlić & Alana Podrx

Investing in early-stage startups can prove very lucrative and educational for investors. However, it’s not easy to source and recognize good deals as a novice investor with a limited investment fund. 

That’s where syndicates come in. A syndicate is a special purpose investment vehicle that pools together funds to make an investment. Typically, a leader forms a syndicate, finds a deal, and invites backers to contribute to the investment. 

How does it all work exactly? Let’s dive in!

The Structure of a Syndicate

A syndicate lead investor is usually a person experienced in angel investing or venture capital. Angel investors and venture capitalists typically invest in the early stages of startups and earn their return once the startup makes it (aka successfully ‘exits’ through IPO or sale).

A great lead investor has a stellar reputation in their industry, a growing portfolio, connections, and access to a deal flow. 

Usually, a lead investor will do the due diligence and find a startup they want to invest in. Forming a syndicate allows them to participate at lower individual investments to reach a collective “minimum”, then collect fees as well as carry (usually 20% of any profit made on the initial investment for putting together the deal).  

Backers are investors who participate in a syndicate started by a lead investor. Backers need to be accredited investors. In the US, investors receive accreditation based on their net worth, income, or professional achievements. Find out more about requirements for accredited investors.

Syndicates generally use platforms like AngelList to present their deals and find backers. In turn, backers can explore different syndicates and pick one based on the syndicate’s values, entry requirements, and previous investments and deal flow. On AngelList, a backer can enter a syndicate with as little as $1k, but the entry point will vary with different syndicates.  

Benefits of Syndicates for Lead Investors

With syndicates, lead investors may gain access to deals with minimums they may not be able or willing to fill alone while also earning ‘carry’ on the profits from the allocation they contribute with the group if the startup does well. 

It can be a significant amount of work for founders to have too many investors on their cap table given the tax reporting responsibilities (K1s) and communications. Typically founders will require a minimum investment size and if a group of investors can pool to meet that minimum they are viewed as one entity under the syndicate structure. 

Beyond increased access and carry, syndicate leads can also use individual syndicate investments to start building a reputation in venture capital and illustrate a track record if the leader is considering later raising a fund. In a venture capital fund, backers contribute a minimum amount to the fund and trust the fund manager to make the investments without their review or approval deal by deal. 

Benefits of Syndicates for Backers

Joining a syndicate means a backer can take part in great deals with relatively low risk. As a single investor, a backer would probably not have access or funds to fund certain startups. By entering a syndicate, a backer can invest as little as $1k painlessly. 

In addition, backers also benefit from:

• unprecedented access to deals that would otherwise be private or available just to the lead investor,

• an opportunity to invest small amounts, minimizing risk in case the investment fails,

• diversification - a backer can comfortably invest in several syndicates across various industries.

What Are the Risks With Syndicate Investing?

Angel investing and venture capital are always risky. Syndicate investing allows investors to come together as a team and pool resources, but it doesn’t alleviate the foundational risk of investing in startups. 

It’s always necessary to do due diligence and check the startup, founders, team, and vision. Lead investors will do their research and in some syndicates, they will share their results. However, backers need to do their own research as well, as the lead will never guarantee a return on the investment.

Backers should also be aware that the capital invested in startups may take 7+ years to access (if ever). Returns when investing in startups usually take years. Each syndicate has its own structure of fund allocation depending on whether the startup gets acquired or liquidated. And although syndicates make investing more simple and accessible, backers should always be aware of the conditions and risks they’re taking on. 

What Are Other Ways to Do Angel Investing?

Syndicates are rising in popularity as the preferred investment vehicle, but there are other ways to invest in startups. 

If you’re not an accredited investor, you can always take advantage of crowdfunding mechanisms and invest through platforms like Republic. In this case, you become a part of a larger pool of investors who can invest as little as $100. 

You could also do direct investments if you have startup founders in your network. Alternatively, you can join a venture fund or become a venture capitalist yourself. 

With Web3 gaining in popularity, we’re also seeing the rise of investment DAOs. A DAO is a decentralized autonomous organization that uses smart contracts to conduct its business. Similar to traditional investment syndicates, investment DAOs pool funds to make investments in various assets. 

To be part of the investment DAO you must contribute the minimum amount of capital required. In exchange, you receive a governance token. Governance tokens allow you to get a say in which investment deals are selected. 

Platforms like Syndicate Protocol have reached over 20,000+ investment syndicates. The caution for investment DAOs is to carefully structure the legal entity and charter (rules) that the group of investors is operating under. This process of protecting the investors involved in the group is still relatively complex since, unlike AngelList, there is no central platform that has systematized the steps and taken on the responsibility for the tax and legal structures of the syndicate. 

Ready to Learn More?

Investing can be very rewarding - even without a clear return, investors always learn from their deals. Angel investing in particular can be very lucrative - but the higher the potential reward, the higher the risk. 

If you’re considering joining or starting a syndicate, we recommend checking out Eve Wealth. EveWealth members learn how to do their own research on Web3 angel investment opportunities and get access to deal flow together. Eve’s mission is to increase the diversity in access and ownership of Web3 infrastructure. 

Eve Wealth is also a Surge Passport partner, so if you’re a holder, you can access Eve courses and membership with a discount. Together Eve and Surge are helping to unlock the wealth and tech revolution for women and non-binary people around the globe. 

Any questions? Want to learn more about this topic? Let us know! We’re always happy to chat. Join Surge Discord or write us a DM on Twitter.