The Future Of Syndicated Investment

Contributing in the coming age of transparency in venture capital.

These words from Fred Destin have been rattling around in my brain: “I am convinced there is a day where crowdfunding will apply to startups as it applies to products on Kickstarter, but we need to make sure it’s done well.”

This is certainly true, and Angellist, probably through a trailing mix of accident and conviction, is showing us the way towards the purest form of early stage investment schemes through Syndication.

Syndication is great as it allows backing investors to:

• Benefit from the expertise and deal flow of syndicate leads who are usually recognized as experienced investors among their peers.
• Enjoy a deal by deal liquidity with lower stakes, mutualizing the network and the risk with other investors into more deals.

It’s also interesting to notice that the syndicate lead puts himself at risk:

• It does not take 7 to 10 years to prove himself as a good investor, but rather the first 10 to 15 deals as they should provide signal pretty quickly.
• Syndicate leads usually take no management, only carry, therefore aligning their interests with those of the backers.

In terms of deal management, it’s naturally more powerful and effective:

• The operation is managed by one single investor who deals with the negotiation and makes sure that the information is passed on to the other investors.
• The entrepreneurs can benefit from their backers’ network, while the person in charge of the investment remains the syndicate lead.

Syndication must, and will, evolve into its best form when education, network and information emerge in a near future with standard protocols and mainstream tools used by everyone. The way I see it:

• Education - Syndicated investments will become more and more popular, causing less experienced backing investors to come along. They will naturally need the necessary education to understand the mindset of early-stage investment and why backing early-stage companies goes far beyond financial expectations…
• Network - Syndicated investment is not only about blindly following a syndicate lead, but building a network. Tools will allow a better connection between syndicate holders, backers and entrepreneurs. The influence of syndicated networks will become as powerful as we can see it in other open-closed ecosystems as in the Valley but worldwide.
• Information - The mission of the syndicate lead is to source opportunities, to go out, to take care of the due diligence, to spend time with the founders. Once the deal is closed, his mission is not finished. He must make sure that founders communicate well on a regular basis and leverage on the network of backers. Here too, we’ll see great tools and standards emerge. The art of communication, besides being crucial in the relationship between founders and investors, is not completely mastered yet by most entrepreneurs.

I’m thrilled to see all those patterns emerge over the next years. The standards and tools built around Education, Network and Information will be the pillars of a sustainable ecosystem around syndicated investments.

Individuals should embrace this coming trend. Those are not risk-free initiatives of course but the rules are pretty clear . Early stage investment being 30% knowledge and 70% uncertainty, failure always lurks behind the scene.

But for once since venture capital was born, individual investors are not in the dark anymore, put away from an exciting journey or learning the hard way in an ecosystem that requires full-time commitment, experience and knowledge.

This is just the beginning. The best is ahead of us.

Post-Scriptum: A few rules that I tend to apply

• Seed means volume. Never let the deal flow take control.
• Investing is the result of a decision, not an arbitrage.
• Teams are great, lawyers and sheets are not.
• Don’t let signals distract your assessment.
• Time is a best friend and a worst enemy.
• Listen to your peers, but make your own decisions.
• Don’t make things more complicated than they need to be.
• You are mostly wrong until you’re right.