If you’re an angel investor and aren’t yet well-versed in syndication, now is the time to take notice. The changing math required to fund promising companies explains why: the median deal size for angel groups in 2014 was $800,000 (according to the Halo Report) and the average angel group invested $250,000 (per the Angel Capital Association). Finding ways to plug this $550,000 funding gap explains why a new Halo Report also reported that about 70 percent of angel group deals in the last five quarters were syndicated between multiple angel groups and other investors such as individual angels, venture capitalists, family offices and private equity. These facts represent a shift in angel investing. Syndication is the solution funding high growth companies.
Cognition Therapeutics (CogRx), is an excellent example. CogRx is a Pittsburgh based company focused on discovering and developing disease-modifying therapies for Alzheimer’s and related neurodegenerative diseases. The complex company was seeking a Series B round and in the end, the syndicated deal was bigger than the company originally sought: $12 million, a very large round for angels. The deal was led by Golden Seeds(New York and many cities), which brought in some of the top angel groups in the field from literally throughout the country, including five other ACA members, including Tech Coast Angels(Southern California), Cowtown Angels(Fort Worth), Maine Angels, Pittsburgh Life Science Greenhouse Accelerator Fund, and Ariel Southeast Angel Partners(Savannah), as well as a number of other life sciences investors.
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Syndication on this scale doesn't come without challenges. Sometimes it’s the seemingly incidental things such as figuring out how to work with parties spread across a wide geographic area. Or it’s the details around how to corral and organize a disperse group of investors so that company leaders can meet with them in person, in an orderly manner.
Ken Gatz, CEO and Founder of ProSeeder Technologies, walked me through this deal and what was needed to make large syndicated deals (like CogRx) successful. ProSeeder is a web-based software company that investing organizations (including Golden Seeds, Cowtown Angels and Tech Coast Angels, in the CogRx syndication), use to manage deals and organizational operations.
Gatz clarifies that there are three stages to syndication process:
- Deal Sharing, is the first step and is the process of making other investment groups aware of a proprietary deal or opportunity. These deals may or may not lead to syndication.
- Collaboration, which starts after investment groups begin to organize, to share due diligence, and leveraging each other’s expertise within their own group and between organizations.
- Syndication formalizes the process and usually involves a deal lead who is the main point of contact between the company and the syndicate to help coordinate investment amount and deal terms. This phase is also about creating an efficient way for the investors to communicate with the company, post-transaction.
Beyond understanding the deal syndication stages, most successfully syndicated deals come together with a framework based on three fundamentals - trust, a strong deal lead and technology.
- Trust: Syndicated deals require trust between angels and any other funding organizations. Trust, often built over a long time, is facilitated by investors with established relationships who are connected through multiple organizations where they have had a chance to meet and get to know one another. Associations like ACA can play a special role in building syndication among early-stage investors because they sponsor events that facilitate opportunities for investors to meet and develop both personal and business relationships. In fact, this is how six of the investing entities in CogRx met.
- Strong Lead Investor: Deals also require a strong lead investor to help manage the process. This role includes aligning interests, capabilities and the expertise of investors in various industry sectors, in addition to finding investors with the ability to invest in future rounds.
- Technology: As deals become more complicated with more players, technology tools like ProSeeder helps streamline the details. Using the right technology makes the process more efficient for everyone involved. In addition to software, I'm also seeing an increase use of new tools such as a “non-reliance letter” in many syndication deals. This letter allows investment groups to share due diligence but states that investment decisions are independent.
Is there one way to put together a syndicate for a deal? Of course not, but these deals are more complex, so we should expect them to be more difficult. However, this kind of syndication also offers angel investors the opportunity to take part in the expanding number of larger and more promising deals. Equally important, syndication offers a new way for angels to learn and grow from each other as they collaborate more closely—and that’s a good thing because as the research shows, we can expect more of these deals in the future.
If you’re ready to try syndication, start with the fundamentals that have created success elsewhere: Branch out and meet new angels so you can build a network of fellow investors that you know and trust, keep your eyes open for angels with the right skills to be strong leaders, and learn about syndication technology and tools so you can find what works for everyone involved.
