AngelList recently started supporting syndicates, where a lead investor into a startup can solicit for other investors to join them in exchange for carry on the deal (a share of their profits). Some speculated that syndicates would immediately compete to disintermediate traditional VCs and while this may be true over longer periods of time, I’m thinking syndicates nearterm will be more powerful in other ways. Here are three examples:
1) The New Placement Agent: Essentially AngelList on steroids. Let’s say you’ve gotten direct commitments of $1m in a $1.5m seed round. Rather than try to round up an additional $500k in $10-$50k checks via individual LPs on AngelList, you use one of a new class of AngelList Placement Agents, who can round of that amount into a syndicate. These new Placement Agents would be a new type of intermediary who knows how to leverage AngelList, not just a rolodex of high net worth individuals. Benefit to entrepreneur is faster fundraising and single LP on cap table (since syndicates perform as a LLC) so they might start to move their more passive angels into this structure as opposed to direct investment.
2) Giving SuperAngels More Deal Leverage: There are a class of angel investors or technologists whose reputation and value-add exceed their bank account. Today these folks might write a small check as part of an investment and also get advisory shares but the leverage model still isn’t great. With syndicates, they can tell a startup that their involvement is tied to getting a larger chunk of the deal and filling via AngelList. This gives them upside on the carry without non-paid in capital dilution that advisory shares would otherwise bring. It wouldn’t surprise me to see some of the best individual angels “professionalize” in this manner – rather than raise a fund or become scouts for Sequoia, just do a few syndicates.
3) Going Where VCs Fear to Tread: Porn, marijuana, and even, gasp, internationally-based businesses. These are just some of the categories where startups have trouble raising seed rounds from US-based early stage VCs. I frequently get emailed from friend-of-friend founders in Japan, Brazil, Canada, Europe, etc who are wondering which seed stage US funds will invest abroad. The answer is very very few. But on AngelList, a “flash fund” can be created using a syndicate. Individuals with country-level domain expertise or ties to very specific industry verticals will be able to rep these deals now on AngelList.
So overall I’m very excited about AngelList’s continued movement towards open investment platform and expect syndicates to have a market-expanding effect as opposed to being competitive with VCs in the nearterm.