Adapted from an article originally published by the author in Inc. Magazine.
Syndicating a round is one of the trickier and more time-consuming angel undertakings. Knowing how to pull a good closing package together is one thing, but finding enough other investors to actually fill your syndicated round is another matter altogether.
Not only do start-ups need money, but they need it quickly - the faster a company can fill its round, the faster it can get back to making hires, talking to customers and growing the business. Syndication is a straight-forward concept, but it has its subtle aspects. In this article and the next two in this series, we will cover the fundamentals you need to navigate this process.
Make Sure the Basics Are in Place Before You Start
First, it is important to recognize that filling a round can take a long time, so it is critical to start earlier than you might think, and plan ahead. Only a very small percentage of investors are willing to move quickly and write a big check – most will have their own process and timeline. It is an incontrovertible fact: raising money from quality investors takes time. Even though individual investors are a little more nimble, most will need some time to consider the all of the details before coming on board. And professional investors working in groups will take longer. Most groups will have a process in place that requires securing a presentation slot and moving through a diligence review process.
In terms of the basics, the three foundational building blocks of the rounds will come from you as the lead investor. Every successful syndication requires a strong lead who can provide:
- a written due diligence report other investors can rely on
- a market reasonable term sheet that fairly balances founder concerns and investor needs
- good connections for introductions to investors who may want to join the syndicate.
Create a Plan and Timeline
Once you’ve started the syndication process, you will quickly find that it’s nearly impossible for you and the company CEO to keep all of the status details and ongoing conversations in your head and coordinated between each other. That’s why you need to have a plan with a timeline and an organized tracking system.
Given the number of people you will be communicating with, it's important to keep detailed records. From a tracking perspective, you should identify to whom you have spoken, when, what their interest level was and what the total soft-circle commitments add up to. Something as simple as creating a Google form for soft-circlers can make a big difference; once you have done that, you have a link to the web form that you can give to prospective investors to use to indicate their soft-circle commitments, and all the resulting commitments will come in with timestamps and whatever ancillary details you collect, like email for sending documents or telephone number in case of questions.
Whatever method you use, being able to quickly share and access information so you and the CEO can provide answers is paramount. You will find this especially helpful whenever you hear the one key question every single investor will always ask you: “where you are in the fund-raising process?” Obviously, it sends a very bad signal if you or the CEO waffle and don’t have an accurate number ready right off the top of your head at all times – if you hesitate and dissemble, you’ll look like the round is struggling and you are making up an answer (and therefore likely overstating your progress).
Build a Momentum-Generating Process
You also need to build a process that will create syndication momentum – both literally to keep things moving, and also figuratively in the eyes of other prospective investors. There are a couple of tricks to doing this that every deal lead should be aware of.
The first way to build momentum is the most strategic: do everything you can to have a first close on some portion of the early money. If you’re smart, you’ll try to get to that first close as quickly as possible. Why? Not only can the CEO use the initial money to invest in the business right away, the CEO and the deal lead can also project confidence. There is a lot of power in being able to say you’ve already had a first close, but you “might be able to fit” someone into the second close.
A second idea worth considering is to offer slightly better terms on the first close to encourage some investors to move early and quickly. One caveat: make sure that you don’t over-complicate things. A little sweetener is plenty, psychologically speaking. For example, if you are doing a convertible debt deal, you might offer a higher discount on the money coming in by a certain date. Optionally, if you are doing either a stock deal or convertible debt deal, you can offer some warrants for investors in the first close. Your goal is simple: offer a little extra incentive to convince people to move and to get to that first close as quickly as possible.
Finding enough investors to fill your round is hard work. Angel syndication requires time and patience. However, when you organize your efforts using a good plan and a strategic process, you’re likely to not only get the money you need, but also fill your round faster so the company can get back to its real job—building a successful business. Next up in this series we’ll talk about moving a syndication along quickly and avoiding traps for the unwary.