Thursday, June 27, 2013
Making Syndication WorkEditor’s Note: Syndication is one of the topics that remains at the forefront of many angel group priority lists—and for good reason—syndication is a critical component of angel investing success. When we look back 5+ years since ACA held its first collaboration committee meeting, established with the goal of improving syndication best practices across the nation, we can revel in how far we’ve come: From the leading syndication practices of some geographies like what we’ve seen in New England (which led to developing the ACA Syndication Guide in 2009), to the steady increase in angel group co-investing which for 2012 included 70 percent of deals evidenced by data in the 2012 HALO Report, we can pat ourselves on the back for the progress we’ve made. But despite this progress, there is more work yet to be done to tailor and refine practices to the differing needs across distinct angel groups, industry sectors, and geographies. Below, Dick Reeves, ACA Board Member & Executive Director of the Huntsville Angel Network shares his personal views on the challenges and opportunities left to overcome in his realm. If syndication is the answer to so many problems, why are we having such a hard time making it work well? Those of us who live in the hinterlands spend most of our time dealing with the facts that we have a small flow of qualified capital seeking candidates, we are volunteer-led, we don’t have all the skills and domain expertise needed to adequately deal with many of the candidates that do show up, and we soon tire out the limited supply of diligence labor we do have. There are only 30-40 members in the group, not enough to raise an initial round for many companies, not to mention follow-on rounds. Our members do not see enough deals per year to build a diverse portfolio in 4-5 years, so their portfolio ends up being of low quality and concentrated in a few companies and industry segments. Members burn out after 3-4 years, and the angel group peters out over a year or two.
Syndication would seem to offer solutions to many of these problems: more deals, greater diversity, more investors participating so higher amounts of money can be raised and the risks can be spread, and more people to participate in the diligence process … what’s not to like about this?
The Lead needs to be compensated for its work, and perhaps so do the diligence committee members. Some groups use a carry. How should we do this?
The results? Potentially, a deal syndication process that can move deals from initial screen to closed deal in 90-100 days, and that can raise $1 million rounds routinely.
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