Angel Group Syndication Process Design (Part 2): Paul G. Silva

In Part 1, we talked about how angel groups are increasingly collaborating and co-investing with each other to increase investment size, reduce financial risk, and tap into the wisdom of the crowd.

To give a vivid picture, we asked Paul G. Silva, managing partner of Angel Catalyst and group manager at River Valley Investors (RVI), about his group’s recent syndication effort with 7 other angel groups (North Country Angels, Granite State Angels, Walnut Venture Associates, Boston Harbor Angels, eCoast Angels, Northeast Angels, and Boynton Angels). Silva was generous enough to offer some terrific advice on group syndication process design.

The syndication involves 33 Series A stockholders in total, raising US$1.83 million for Incentive Targeting, a company that presented to RVI in mid-September 2009. The entire syndication process took roughly 120 days and the deal was closed in January 2010.

Here, Silva continues with the interview and talks about the advantage of syndicating early, what he’d do differently if he’d do one thing all over again, under what circumstances he’d go against syndicating a deal, and more.

* Edited interview

VH: What’s the advantage of syndicating early?

PS: This effort was an excellent example of the advantage of syndicating early – by that I mean BEFORE a regional syndication summit.

My group’s team (led by Dr. Widder) liked the deal but didn’t have a critical mass of capital and expertise. We reached out to a group of angel group managers whom I know well, and did so well ahead of the next summit.

This proved critical as it helped get us 2 other key angels: Ty Danco (North Country Angels) and Michael Mark (Walnut).

With their help, we finally had enough domain knowledge to gain real momentum on the due diligence effort. This in turn gave us enough progress to:

• nominate the company to the next regional angel syndication summit, and
• walk into that summit with the due diligence essentially complete and a term sheet not very far off.

Walking into the summit with angels from 3 different groups already behind it proved critical to gaining interests from more groups, and things snowballed from there.

VH: What were the criteria to selecting syndication partners?

PS: Our group had domain expertise in only 1 of 3 critical areas. We needed experts in those other areas and so that was our first priority. We knew that once we had the expertise on board, and assuming we liked the deal, securing funding wouldn’t be as large a problem.

VH: If you could do one thing all over again, which one would it be?

PS: After due diligence and before negotiations, I think I could’ve done a better job if I’d solicited input. I relied on people writing in, but this topic was too important to be very passive about.

I gave our lead negotiator the best data available and, while it all worked out in the end (to his credit!), I can’t help but think the process could’ve gone smoother for both investors and entrepreneurs.

VH: Under what circumstances would you go against syndicating a deal?

PS: If your group has all the expertise and money needed to pull it off, there’s little incentive (beyond diversification of risk) to syndicate.

If there’s plenty of expertise and money to go around, then by syndicating, the angels are diluting their own interest in the company. They’d probably get a better deal by working the deal alone and keeping it all for themselves.

And any other reasons to NOT participate aren’t syndication-related. They’re deal related, at least the only ones I know are.

VH: How would you describe an “ethical angel syndication”?

PS: An ethical one is easy to recognize. It’s highly transparent to the entrepreneur, and it’s clear that each angel group participating is adding value (either domain knowledge, money, or both).

Critical Elements of Angel Group Syndication

While the benefits of angel group syndication are obvious, issues such as conflicts and competitiveness between groups might impede them from participating in deal syndication. Cross-border and international syndication faces additional challenges such as taxation and legal issues.

To enable successful syndication, ACA executive director Marianne Hudson said that a systematic set-up, where groups can get to know each other and build knowledge and trust between each other, is critical.

Such set-up would require groups to:

• reach general consensus on terms;
• develop standard documentation [PDF];
• agree on minimum standards of due diligence, so that when one group brings a deal to the table, the others can trust that some basic homework has been done; and
• sign an angel group treaty [PDF] under which groups promise not to be litigious over due-diligence issues if an investment goes bad.