The past two weeks have seen a lot of talk about the implosion of early-stage seed funding. The numbers may be somewhat deceiving, since founders and funds don’t always report their rounds (and with convertible / SAFE notes don’t have to).
But the trend is clear — the fundraising environment for seed stage start-ups has changed.
That means if you’re entrepreneur, your fundraising strategy needs to change.
And that includes raising money from an an AngelList Syndicate. AngelList Syndicates are the single best financial innovation for start-ups in the past five years.
Here’s why.
Fundraising for seed stage start-ups has changed
PitchBook and the NVCA published their Q3 2017 Venture Monitor in October. The report picked up steam with coverage on Techcrunch and Fred Wilson’s take on the “the early stage slump”.
On a dollar basis, the decline has been fairly mild. On a deals basis, things look not so good. The number of closed seed rounds per quarter has come down from its peak in Q2'15 of 1,495 to 788 in Q3'17. That’s roughly half the deal activity from just two years ago.
And it doesn’t look like that trend will stop.
For the enterprise, platform shifts across mobile, cloud and SaaS that drove a lot of seed investments in 2012–2015 are in full swing. Seed investors are waiting for their early bets to play out.
On the consumer side, bigger themes like “on-demand”, “sharing economy” or “millennials” have seen their fair share of failure and consolidation. Investors are spending their capital to double-down on the winners.
Two uphill battles
Combine the decline in deal volume with a pessimistic outlook on who’s got the negotiation power. In 2015, according to First Round’s State of Startups 2017, 64% of founders agreed that entrepreneurs had more influence when negotiating terms. That has flipped. 53% of founders now say that investors have the negotiation power.
In short, early stage start-ups are facing two uphill battles:
- lower odds of getting funding (lower deal volume)
- less leverage when raising money (investors have the negotiation power)
Ouch.
Enter AngelList Syndicates
But there’s hope. Great companies will always find a way to get funding, even in a tough market. And one source of funding that I believe founders have paid too little attention to are AngelList Syndicates.
Let’s look at the traction of AngelList startup investments — quite a different picture! The upward trend is obvious.
Since 2013, AngelList has closed well over 1,800 investments worth $685 million, across over 200 active Syndicate leads.
A shift to institutional money
Syndicates have evolved. Fast. With the launch of the AngelList Platform Funds and Maiden Lane, the first online venture fund built on AngelList, syndicates have shifted from angel funding to include institutional money. Consider Hone Capital, which has one charter: Deploy $115 million via private syndicated deals on AngelList.
As a result, the ticket size (larger) and structure of syndicates (more actors) have changed.
A new paradigm
Conventional wisdom on various founder and accelerator blogs suggests to “finish a seed round with AngelList”.
I’m making the opposite argument. You should start with a Syndicate.
Based on our own experience, I recommend including an AngelList Syndicate into your fundraising strategy from Day One.
In order to do so, you need to understand three things:
- how a Syndicate fits into your capital mix
- the structure of Syndicates, and
- the roles and incentives of all actors.
In this post, I’ll touch on (1), how a Syndicate fits in your capital mix. (2) and (3) are for follow-up blog posts.
Six sources of capital
An AngelList Syndicate is one out of six sources of capital that I think every start-up should look to tap, particularly when you’re starting from $0 or graduate from an incubator. I call this the “funding ladder” that you need to climb.
In order of typical minimum ticket size:
- Friends, co-workers & family ($5K+)
- Angels ($50K+)
- AngelList Syndicate ($100K+)
- Family offices ($250K+)
- Corporate VCs ($250K+)
- Institutional / seed funds ($250K+)
In September 2016, the average syndicate check size was $390K , with larger Syndicates reaching seven figures. For seed rounds in the $1–$3M range, a Syndicate can therefore contribute anywhere between 10–40% to the round.
That’s a significant chunk, and a key reason why a Syndicate should not be considered as a way to “fill your round”, but rather as a key financing vehicle that deserves top priority when planning your fundraise.
Getting your leverage back
Nothing gives you leverage like traction with your funding and a large top of the funnel with more money that wants to get in.
Everybody on the funding ladder is in the business of generating a return. What’s different is that some may have additional, non-financial goals. Consider the case of the BMW Startup Garage. Their goal is to bring product innovation faster into BMW. The Garage issues a supplier number and purchase order, recognizing the startup as a bona fide vendor.
And then there’s risk. Some investors have a different risk appetite. You can use that to your advantage, and that’s where Syndicates come in.
AngelList Syndicates allow founders to raise money in one shot from a group of accredited investors.
Some of those investors have a higher risk appetite. They want a higher risk exposure for a part of their money. The amount could be as low as $1,000 on a per deal basis. But find a 100 of them, and you have a $100K check.
And that’s one thing a Syndicate does. It pools money with a higher appetite for risk.
Start by finding a Syndicate lead. The first $50K you meanwhile may have to collect in $10K checks. But a vote of confidence by close friends and colleagues goes a long way. A Syndicate lead will look at that. Add the AngelList Funds into the mix, and all of the sudden you may find yourself with $300K in committed capital.
That will attract more money.
And that gives you back your leverage.
Get your house in order
This is material for follow-up blog post, but before you start raising money via a Syndicate, you need to “get your house in order”. Set up a proper profile on AngelList, make sure you have the right email address in your profile, etc.
In 2013, Mark Suster asked “Is AngelList Syndicates Really Such a Big Deal?” — as we enter 2018, I think the answer is clear for founders:
Yes.
But I also don’t want to make it sound too easy — fundraising is hard, and there’s a lot of due diligence, process and heavy lifting involved with a Syndicate. AngelList and the leads make that happen.
So follow me here for my next post, where I’ll cover the structure of a Syndicate.
I’m a co-founder of intermix.io. In 2016, we’ve raised money via an AngelList Syndicate.
Thanks to Paul Biggar, Zach Coelius, Jenny Fielding, Dustin Dolginow, Hiten Shah, Pete Soderling and Sunil Pai for reading drafts of this.
