Alex Fatuliaj
July 4, 2023
Startup Saturday

TLDR: investors benefit from syndicates, but projects can organise their own syndicate rounds by bringing soft commits together to close them. A lack of perseverance is as big of a problem as a lack of lead investors in the space.

Note: this article has been edited with the comments of our Co-Author, Amro Shihada.

Syndicates


Syndicates are a temporary alliance of individuals or businesses who pool their expertise and financial resources for a common cause. In the realm of investing, syndicates are formed to collectively invest in promising ventures, ranging from investing in a startup company to a real estate project. Usually, syndicates are thought of from the perspective of the investors, however, a startup company can also lead its own syndicated round to help with investment.

Investing Syndicates – Investor Perspective


There are three main benefits of syndicate investing: deal flow, combined expertise, and the ability to pool capital, which helps with huge deals and in times when capital is limited.

Firstly, more investors equals more deal flow. Now, a key note here, this deal flow may not be up to the tier 1 investor standard, but there is still more of it.

I believe that you can get access to better deal flow if you have alignment within the syndicate. Even at scale eg Citizen Capital (Neo Tokyo) are LPs to Sublime VC, that is about 4-5k individuals writing checks in the $500-$5000 range. If the mission and values are aligned and due diligence is done in rigour you are able to get access to tier 1 deal flow as you are able to get your check size and frequency high enough to not be bullied out of early-stage start-ups that have clear traction and growth.

The challenge of the syndicate is the centralization of decision-making. In traditional syndicates, you have KOLs as you do in any sector where herd mentality and follow the leader are crippling. This is the case with most syndicate venture groups the leaders emerge and bully the group and the focus is no longer on alignment but on pursuing the vision of another thus access to tier 1 deal flow is lost and startups in fact will often pass on that capital especially in Web3 under the assumption that there is not unity and they run the risk of a fracture, losing capital or violations of TSA, SAFTs and the need to return and KYC all members. Which should have been already completed by the syndicated which is the third point. Syndicates pose as VCs more often than not to attract deal flow and de-risk as the “savvy” investors become leaders and as mentioned hurt rather than help. This has led to a don’t don’t tell policy between web3 startups and “VCs” (syndicates).

This not only violates regulations but creates an immediate loss of trust amongst all parties. The root cause can largely be attributed to massive exits and technical founders having liquidity with no networks and thus seeking and trusting, even paying to join Syndicates which are more like investment clubs. That or they fracture the funding market further by establishing their own Micro-VC which cannot afford to lead, and is highly risk averse merely adding to the problem of needing lead investors and killing the proliferation of innovation. The solution is ecosystem-based investing, aligning not on check size or geography but on passion or sector that the accredited investor, or fund shares and in aligning on values leading a round the risk is shard, the information is transparent and trustless syndication can occur organically.

- Amro


Secondly, combining their unique skill sets, investors can make more informed decisions and ultimately achieve higher returns. Having one investor specialise in law, one in software, one in product, etc. – the due diligence conducted will be as solid as they come.

Thirdly, investing as part of a syndicate also opens doors to opportunities that may be too large for one individual or firm to handle alone. Moreover, from the other perspective, if an investor has limited capital (due to a lack of liquidity or a strict investment strategy) joining a syndicate allows them to pool their resources, meeting the minimum investment requirement set by companies they want to support.*

*This is where the opportunity for a project arises to lead their syndicated round; we’ll get onto that later.


Established investors that have access to high quality deal flow, boast a seasoned research department, and have no concerns with capital in relation to their investment thesis, would likely not benefit from joining syndicates; paying fees for no real benefit.

But, this goes to show that investors that see a less deal flow, have a more novice research department (or none at all), and have troubles reaching minimum requirements, would be better off joining syndicates.

There are two types of common syndicate investors:

Funds – big funds and venture capital firms use syndicates to diversify their portfolio and join additional cap tables.

Individuals – angels, or any other accredited investors, pooling funds and expertise.

The psychological and behavioural science is truly remarkable as syndication is a risk mitigation tool. It signals we agree this is worth X and thus we are willing to put Y. However herd mentality, lead of leads tier 1a funds like A16z bully these groups out of deals in favour of controlling the process and bringing their co-investors into increase the probability of success in a very ego-driven manner. This can be linked to the fall of SVB where more funds were invested than in recent history, however the way a bank operates is by taking money in and lending it out, earning on interest rates to reward those who are injecting capital with the interest payments of those who need it. However, the lack of diversity and no customers needing funds left them with no way to generate returns in a traditional banking model. This led to the critical error of not stress testing and ultimately over-indexing on T-bills leading to their downfall.

- Amro


Generally, the way they work is as follows:

1. A lead investor selects a startup and conducts due diligence.

2. The lead investor gathers funds and creates a Special Purpose Vehicle (SPV), utilizing platforms like AngelList and StartupXplore to find backers.

3. The lead investor keeps the syndicate members informed about the startup's progress.

4. The syndicate exits or liquidates its investment just like any individual investor would.


To join a syndicate, it's as simple as searching online for one that aligns with your investment parameters and criteria, and applying.

Investing Syndicates – Startup Perspective


This is where it gets juicy.

Just like investors can join a syndicate and participate in a round, startup founders can create their own syndicated round. As a founder, if you can't find a lead investor for your fundraising round, combining small tickets into a syndicated round can be a game-changer.

This is the best part and I believe this if done correctly can be the best solution to eliminate the need for a lead. The issue is the provenance and ground truth in the data rooms of early stage capital startups. Unfortunately the dot com and recent bull run has again put immense distrust back into the process. To solve for this the concept of being your own lead is a smart one however it must be done carefully and with honesty. The fact that we are not utilizing VDRs that are on chain with multi-signature requirements to show changes to any data submitted during an open round is baffling it is the inherent value of any blockchain, immutable records.

If a founder were to issue their funds due diligence process publicly, not the data room fully as it contains trade secrets but the txn hashes that show no tampering was done, audits the now immutable records to create an on chain representation of their VDR and provenance of data is put first. The ability to create hype and attract follow on investment by already having a lead is incredible in terms of the velocity of the capital that follows on. This is not a novel practice and is often run and obfuscated through founder family offices or SPVs. However, the truth of the matter lies in the fact that the only organic aspect of markets in our times and this industry is that they are inorganic. Solution, due diligence, due diligence, due diligence. Conducting thorough third party diligence is paramount even if you are a specialist (entity, investment bank or HNI). Like a second opinion before accepting a surgery this can save your life (figuratively).

Last section needs to be about syndicates not thinking through EXIT STRATEGIES IN DILIGENCE being a problem that creates a cascade of illiquid capital placements and why many favor token plays over equity these days (although that trend has reversed).

Until we have tokenized equity and secondary markets for RSU and ISOs etc.. We will have misalignment in that token purchasers have a polarizing set of motivations versus equity the investment is aligned to push the success of growth and an exit.

The concept of needing a lead needs to pass with the generation of wealth transitioning as if it does not we face more perilous loss in trust and in innovation.

- Amro


Without a lead investor, other investors often don’t commit. A classic, “I’ll do it if they do it,” said everyone – a catch-22 multiplied by n investors. However, turning this fear into an official syndicated round can save your fundraising. Here’s the plan, as put by Y Combinator:

  1. Find interested investors.

    Some investors say “no” straight up, others say, “We don’t lead rounds.” The latter might be convinced to participate in a syndicated round given it is de-risked by other investors who are joining at the same time as them.
  2. Apply pressure.

    a. Secure "yes" responses for smaller tickets to build momentum and attract bigger investors.You need $1M? Start by getting $10k, then $50k, then $100k tickets.

    b. Get bigger investors to set terms for the syndicate, even if they haven't committed capital yet. This attracts smaller investors.

    c. Keep everyone informed about progress and maintain pressure on potential syndicate members.


What you’re doing is slowly inching towards everyone committing, just like a 3D printer prints layer by layer, until the final stretch where everything comes together.

A key note is that the startup doesn’t need to create an SPV – a syndicate in this sense is simply a group of investors that are committing capital as a single unit, led by the project founders.

So, whether you're an investor looking to maximize opportunities or a startup founder seeking funding, syndicate investing is a powerful strategy that brings collective expertise to the forefront.

Industry Opinions

We asked industry experts how they think investors will react to a founder organising a syndicated round. The concerns they raised are centred around a lack of lead investor to conduct the necessary due diligence, amongst some other key things; interestingly, the point remains that the drawbacks and potential risks of a syndicated round could be negated by a diligent and efficient founder.

Payam Samar, from Samar Law, structures fundraising deals.

"While the prospect of a founder leading a syndicated round is not devoid of merit, it could raise concerns among investors. They often prefer to have an independent lead investor who can undertake comprehensive due diligence, bringing a level of assurance and validation to the investment opportunity. This is especially true if the lead investor is not already vested in the company, as they may offer an unbiased evaluation and negotiate robust legal terms, thus minimizing the risk for other investors in the syndicate.

Additionally, a founder-led syndicate might dilute the perceived benefits investors generally associate with syndicates, including access to diversified deal flow, collective expertise, and the ability to pool capital for substantial deals. If a founder is at the helm of the syndicate, these investors may question the quality of due diligence, the impartiality of expertise, and the potential for conflicts of interest.

It is therefore likely that such a scenario would elicit a cautious reaction from investors, who would need to weigh the potential advantages of participating in a syndicated round against these perceived risks. Ultimately, the effectiveness of a founder-led syndicate would be contingent on the founder's ability to demonstrate clear advantages and manage these potential concerns."

- Payam Samar - Samar Law


Michael O’Connor, from FunFair Ventures, invests into start-ups.

“It's an interesting discussion point. 9 times out of 10 though I’ve seen valuations being driven by the founders / or CEO / or just general market conditions being more favourable, and once the project achieves traction (i.e. a grant / angel money) then other investors join in, with each deal being completely different. In terms of legals / terms, this is often driven by the founders themselves (but sometimes working with a significant contributor).

Once an investor receives a share and subscription agreement, it can be [up to] any of the participants of the round to query / spot anything. I've spotted several clauses in agreements like 'non-compete' or issues on warranties and other terms, and [even] agreements changed. I would have expected a lead to spot these things. Even share allocation calculations have been calculated wrong before.

Anyhow, this is my take on how deals are done in my 2 years of working on the venture side in Web 3 with over 26 deals put together now, and working with some big investment names. I've also worked on the other side raising $63M but this was pre blockchain.”

- Michael O’Connor - FunFair Ventures

Question for Amro: How do you think investors perceive founders organising a syndicated round? Are they more likely to invest?

If done correctly, investors should not perceive that the founders have organized a syndicated round. If done in earnest, the founders fund should have an objective third-party validating the ask, the valuation and the coordination of proper diligence in financial, technical and team evaluations. Publishing the process is the first step, a public process of evaluation is critical and not meant to be an indication to invest but rather evidence that regardless of the lead the process is being done correctly. This will also allow less sophisticated or more targeted funds or investors to expedite their diligence as they do not need to deploy resources for the most basic fact-checking which accounts for roughly 40% of the data comprising a data room (think articles of inc, licences, tax returns, templatized contracts) in fact soon these documents will be sorted and validated by applied AI allowing again the process to be the focus. The process-focused syndication allows all participants to focus on the core aspects of evaluating an investment:
  1. The team: Founder fit, competency, experience. Can they pull this off?
  2. The technology: Is this a solution or a passion project looking for a problem and PMF?
  3. The Financials: Historical and projected financials. Are they realistic and do they support the narrative from the pitch? Do they account for best and worst cases? Are they honest in sizing the market or the cost of acquiring revenue or market share?
These are the elements that, if re-organized or re-imagined the investment playbook would focus on most. Not what brand VC is involved, or if someone is betting on themselves with honest and transparent practices, and least of all if it is a syndicate or co-investor. All capital is almost always good capital, especially in these climates. In Web3, there are extreme all-time lows of funds raising money, and thus, not deploying only adds more stress and scrutiny to a broken system.

The answer is one of science and technology. Employing more trust, breaking the behavioural rabbit hole of follow-the-leader investing, and utilizing the convergence of artificial intelligence and blockchain/DLT technology can return trust and more importantly, diversity into what, how much and the velocity of capital being deployed. Adding more creativity and diversity only adds more solutions to our collective problems and propels innovators to be confident that they will be seen if they are willing to drop the egos and need for validation and instead focus on why they started their venture, to begin with, or why anyone is investing, to make money but to make your impact and grow your wealth, wisdom and legacy.

- Amro


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