What happens when an angel group comes across, or has in its portfolio, a high-potential company requiring an investment amount that’s too big for an individual group but too small for VCs?
Most likely, it’ll engage in an angel group syndication, “a practice that allows groups to pool their funds to support larger investments” that are often over US$1 million, reports Robert Buderi of Xconomy.
“Groups are increasingly in discussions about syndicating deals to help existing portfolio companies accomplish the milestones to reach cash flow positive and also to invest in new deals,” according to Angel Capital Association (ACA).
Syndicating deals offers more than just a bigger piece of the money pie. It allows groups to reduce financial risk, leverage the expertise of other groups, and steer clear of venture capital money if one so desires.
However, “securing investment from 1 herd of cats (an angel group) is hard enough,” says Paul G. Silva, founder of Angel Catalyst and group manager at River Valley Investors (RVI). “Trying to get herds of herds of cats (a syndicate) to all meow on key can be… exponentially tougher.”
Let’s see how Silva’s group did it.
Earlier this year, RVI led a syndication effort involving 7 other angel groups, namely, North Country Angels, Granite State Angels, Walnut Venture Associates, Boston Harbor Angels, eCoast Angels, Northeast Angels, and Boynton Angels.
There are 33 Series A stockholders in total (26 new investors and 7 promissory note holders that converted into Series A), raising US$1.83 million for Incentive Targeting.
The company presented to RVI in mid-September 2009. The entire syndication process took roughly 120 days and closed in January 2010, Silva tells Venture Hype.
Incentive Targeting is a company whose “technology allows marketers to gain deep insights into shopper purchase behavior, and to put those insights into immediate action through targeted promotional campaigns.”
In other words, it makes sure “the coupons [customers] get at the check-out register are extremely relevant,” says Silva. The company will “dramatically reduce marketing costs for brands selling to grocery stores while simultaneously allowing brand managers the level of experimentation and analytics that Google AdWords users have taken for granted.”
When asked what made Incentive Targeting especially attractive to all, Silva shares:
In every sector I know of, Big Things Happen when modern targeted marketing shows up. Incentive Targeting has found out how to bring lightning-speed turnaround and vast amounts of personalized data analytics to an industry stuck in the 1970s. If they execute right, the impact could be staggering.
Paul G. Silva
So what’s the trick to successful syndication? Silva offers some fantastic insights into the design and development of angel group syndication process:
Syndicate early. If you need other angels to get to critical mass of capital or domain expertise, then get other angel groups involved when your own group is in the preliminary due diligence, or post-presentation due diligence, stage. Don’t wait until you’ve already got everything done.
1 due diligence team. Unite ALL interested investors from all groups into 1 due diligence team, all sharing 1 set of tools. In our case we all used AngelSoft’s Co-invest feature to make sure everyone was on the same mailing lists and looking at the same documentation.
Go into the summit strong. Ensure you have your champions (from multiple angel groups) in place and ready to attend the summit. Ensure the entrepreneurs are fully informed about the process, e.g. what it’ll take and how they’ll benefit.
Clear roles. With a due diligence team composed of dozens of angels from over a half dozen groups, it’s easy for the process to grind to a halt. It’s critical to have 1 person responsible for keeping communication lines open and processes moving forward.
This is distinct from negotiation or due diligence. Those areas of expertise might or might not lie in the same person. Just because someone is good at negotiation doesn’t mean that he’s also good at facilitating the syndicate, or vice versa. It’s unwise to assume that.
Keep the momentum going. Meetings must be conducted on a fairly regular and frequent timetable (every 2 to 3 weeks). This means you’ll lose some people on any given call, but so long as all the KEY people are on the major calls, momentum can continue to be built.
Want more tips and insights on angel group syndication? Stay tuned for Part 2 of the interview, where Silva recounts 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.
* For series, references are published in the last installment of the series.
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