Our main focus at M8 Ventures right now is growing our new angel syndicate on the Aussie Angels platform.
Although I’ve been a member of a few angel syndicates for a while now, it’s a whole other thing to manage one, and I’ve learned a lot about how most syndicates work, how and when you should consider approaching them, and how syndicates differ from VC funds. If you have a startup that might need to raise capital in the future, this is for you.
What’s the difference between a VC fund and a syndicate?
A syndicate operates differently to a VC fund. A VC fund manager is a partnership between the people who started the VC fund (they usually have titles like “General Partner’ or “Managing Partner”), the investment team (with titles like “Operating Partner” or “Investment Principal”), and the high net worth individuals, family offices, corporations, superannuation funds and governments which typically invest in VC funds (who in the VC fund partnership are grouped together as “Limited Partners” (LPs).
As a VC fund grows its funds under management it will add on a support staff of analysts, associates (aspiring partners), venture partners (investors who also do some work for the VC fund), operations, marketing, finance and legal staff.
Syndicates investing in tech startups in Australia are typically run by a much smaller team; all the way from a part-time role for a handful of people for older, more established angel syndicates like Sydney Angels, Melbourne Angels or Brisbane Angels, down to some syndicates which are a side-project, for one person only, who may only spend a day working on the syndicate per month.
As far as I know there’s no difference between the investment outcomes of large or small teams in VC or angel syndicates but knowing how much time the syndicate manager is able to devote to their syndicate helps you set an expectation for how likely they are to respond to communications, progress a deal through due diligence, or whether they do much due diligence at all.
Just remember that every syndicate manager is doing the best they can, and if they can’t respond right away, it’s probably not because there’s anything wrong with you or your startup. They’ve just got a lot going on right now.
Understanding who makes investment decisions
To understand the VC fund, learn as much as you can about the background, track record and investment focus of the general partners and managing partners, because they started it, lead it and are ultimately responsible for what the VC fund invests in and why.
M8 Ventures managing partners Emily Rich and Alan Jones
Those general partners got started by first persuading LPs to commit to investing in the first fund they raised. When an LP commits to investing in the fund, they don’t have to send all the money to the fund manager right away, but once they’ve signed the papers, they’re on the hook for the money.
The general partners now have some degree of certainty about how much capital they have to work with when investing, and a high degree of autonomy in which companies they invest in. If an LP is unhappy with the investment decisions a VC fund manager makes, there’s not much they can do about it without taking the fund manager to court or refusing to participate in future funds they raise.
Once the general partners have raised their VC fund, they can get started investing, knowing how many first cheques and follow-on they can write, and how big those cheques can be.
To understand an angel syndicate, learn what you can about the syndicate managers but also spend some time trying to find out more about the individual investors who are members of the syndicate, since it’s ultimately them who fund the deals.
Most angel syndicate managers don’t have independence from their investors; all a syndicate manager has in terms of control is which deals to bring to the syndicate’s members. If syndicate members don’t like a deal, they don’t have to commit to investing in it, or the next deal, or the deal after that.
In other words, a VC fund investor invests fund-by-fund, whereas a syndicate investor invests deal-by-deal. Once you’ve convinced a VC fund’s investment committee to invest in your startup, you’re good to go; once you’ve convinced a syndicate manager to invest in your startup, you (and they) still have work to do.
Think about a syndicate as a bit like a crowdfunding proposition, in that once you’ve convinced Emily and I at M8 Syndicate that investing in your startup is a great idea, with your help we have to persuade the syndicate members that it is a great deal too — they don’t automatically follow our recommendations, and they all have the right to invest/not-invest in the deals we bring them.
Do syndicates mean slower raises?
You’d think that would add a lot of time to the process of raising money from a syndicate, and that a VC fund would be quicker, but that’s usually not the case. Because a VC fund has much larger investors who have committed to invest in a fund upfront, they require the VC fund to do a lot more research, analysis and due diligence before investing. Whereas since each individual angel investor in a syndicate is making their own investment decisions, the syndicate manager will typically spend a shorter time in research, analysis and due diligence than a VC fund.
Some of the older angel syndicates groups have a poor reputation dating back to how they ran their processes a decade ago, when everything ran more slowly. It would be fairer to say they have all sped up their processes over the years, but the syndicates that still have monthly meetings and in-person founder pitch events can be much slower than online-only syndicates such as those on Aussie Angels. I’ve seen some of the Aussie Angels syndicate launch and fill an investment allocation in a ‘hot’ startup only a week (though the median would be more like a month or more).
Do syndicates ‘lead’ rounds?
An investor ‘leads’ a round when they lead the negotiations with the startup on things like the nature of the investment (SAFE, convertible note, or priced round), valuation, round size, and the details of the shareholders agreement, board seats, etc. An investor usually has the right to lead the round if they write a bigger cheque than the other investors in the round.
Because each syndicate member makes their own investment decisions, a syndicate manager can estimate likely demand but they never really know how big a cheque the syndicate can offer you until the deal is put to the syndicate, and the negotiations around terms already need to be set before that happens. So unless there’s no competition to lead the round from other investors, you usually shouldn’t expect a syndicate to lead your round. They’re better suited to helping ‘fill out’ the remainder of the round once your lead investor has agreed with you on terms.
It’s also difficult for a syndicate manager to offer you ‘matching’ funding (the kind of “we’ll invest $250k if you can find another $250k” deal that government and other risk-averse fund managers like to offer) since they can’t really be sure how much their syndicate members will invest until taking the deal to them.
What kind of startup is a good fit for a syndicate?
The startups most likely to be successful with a syndicate in general:
- Confident and engaging founders with a relevant track record (since you’ll be helping the syndicate manager pitch the startup to their syndicate members)
- Startups targeting a customer/problem that has broad appeal (vs a highly specialist/technical niche)
- Seeking a relatively small amount – a pre-seed or seed stage round, or a small part of a larger round that is already close to closing
- The round already has a committed lead investor, with an agreed valuation and terms
- Your startup already has a little customer/revenue traction
How does pitching to a syndicate work?
At a high level, there are the following phases to gaining investment from a Syndicate:
- You initially pitch to either the syndicate manager or one of the angel investors in the syndicate, and if they express interest there may be a second pitch to a larger group;
- You agree to offer the syndicate an allocation in your round, with an allocation agreement to e-sign. An allocation might be AUD$250k as part of a $1M round, for instance.
- They go through their due diligence process with you and ask for your input to help produce a deal note to explain the investment opportunity to their syndicate;
- They pitch the deal to the syndicate members, which involves making the deal note and a deck available to them online for a couple of weeks, inviting you to a live video founder Q&A call or pitch meeting or event in-person, and then helping drip-feed the syndicate some latest updates from your ongoing traction during the time the deal is before the syndicate;
- If the syndicate commits enough to the deal to reach a minimum threshold, the deal proceeds (hopefully it goes past that and they’re able to fill it or even oversubscribe);
- The syndicate gets all the angels to sign their paperwork, collects their funds, and transfers the investment amount to you.
There’s a bit more to the process…
How long does it all take?
At M8 Syndicate, depending on how available Emily and I are, it might take a couple of weeks to get through the pitching in stage one and two. Make it through that phase and it takes us about five weeks from beginning due diligence to a startup receiving the funds, which may be faster than some other syndicates.
However, we only have capacity to do a deal about once per month at present, and we’re lucky to have some great deal flow, so we usually have a queue of about three months’ worth of startups waiting for their deal to launch to our syndicate. Add the wait time in the queue to the due diligence and syndication process and it could take four months from when you first pitch us to close the investment and receive the funds.
So in most cases at the same time you’re pitching us, you should be finding a lead investor, so when we’re able to put the deal to the syndicate you’ve agreed on deal terms with a lead investor, and then we see if we can help fill some of the round. We have capacity to fill up to about $100k at the moment, but as our syndicate membership grows and we learn more about what our syndicate members like to invest in, that’s likely to grow.
What’s involved in due diligence?
It varies from syndicate to syndicate but some will want to review all the company information you have available, some of which you may have to create if it doesn’t already exist (but other investors will require them too) including company constitution, shareholders agreement, term sheet for the deal, employment contracts, copies of any patents or trademarks, cap table, financial statements and financial forecast. The best way to share this is to copy it to a set of folders and subfolders in a Google Drive or similar, and then build a quick index page for it all in Notion or similar.
At M8 Syndicate we also want a list of customers and beta testers with their contact information and anything you’d like to tell us about them before we complete a 10min customer interview with a few of them. Because we really care about backing world-class tech teams, we’ll also want to interview some of the people in your tech team.
Syndicates on the Aussie Angels platform (including ours) will need to get sign-off on the company constitution, shareholders agreement, term sheet and deal note from Aussie Angels too.
What’s involved in deal note drafting?
The syndicate manager will take the lead in drafting a deal note document that summarises the information they’ve received in their meetings with you, their own research and their opinion on why the deal is a great investment opportunity.
While they’ll take the lead and ‘own’ writing the deal note’s content, you can usually expect several requests for further information to back up claims in the deal note.
You may be asked for further information to ensure everything in the deal note is factual, with references to company information or third party sources such as research papers, industry databases such as Crunchbase, or previous industry news coverage.
They’ll need a clean copy of your logo as a PNG and your deck as a minimum, and they may have other graphic requests, such as changes to your deck or a video walkthrough of your software.
Do I end up with many individual syndicate members as shareholders or SAFE holders on my cap table?
Usually the syndicate invests from a trust that sits as a single entity on your cap table. Syndicates don’t usually need/want a board seat or board observer rights. Information rights (copied in on monthly updates and quarterly/annual reports) and pro rata rights are usually requested but aren’t always obligatory.
How do I invest with the M8 Syndicate?
To invest in syndicate deals on the Aussie Angels platform you’ll need to qualify as a sophisticated/wholesale investor.
Reach out to the Aussie Angels team if you think you may need help or advice about how to qualify.
Once you’ve joined as a member of Aussie Angels you can join as many of the syndicates on the platform as you like for free, including the M8 Syndicate at aussieangels.com/syndicate/m8-ventures.
There’s no ongoing membership fee for our syndicate and no obligation to invest in any of our deals once you become a member.
How do I pitch M8 Syndicate for investment?
Get started by researching what we look for, because we wouldn’t want you to waste our time or yours – more detail on that in this blog post.
You can get started by completing the form at m8.ventures/startups and then hit one of us up however you can reach us.
- Alan Jones is a partner at M8 Ventures. He was a founding investor in Pollenizer, Startmate and Blackbird Ventures. He also prints some cool t-shirts to help refugees and tweets as @bigyahu
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