Capital is crucial to the success of any business. In many instances, capital is the first tangible roadblock the would-be entrepreneur must overcome. Some choose bootstrapping; others borrow on their credit cards, and an intrepid few seek out angel investors and vulture (I mean venture) capitalists. Fewer still, are sought out by VC’s and angel investors.
Many entrepreneurs are reluctant to seek external funding because accepting outside money always means that something is surrendered. It may be a slice of ownership interest, an altered trajectory of one’s vision for the company or simply losing some element of control. However, for many entrepreneurs, any such sacrifice is outweighed by the need to keep the enterprise alive.
A relatively new phenomenon is occurring in the angel investing community. It may be a reaction to the rise in the popularity of crowd funding, a counter to venture capitalists or some combination of the two. That anomaly is syndication.
What is Syndication?
Basically, syndication is a network of angel investors, pooling their funds to meet the demands of a startup. By pooling financial resources, a larger investment is possible than a single angel investor might be in a position to provide. Generally speaking, one angel takes the lead, pitching the startup to other like-minded angels and forms a syndicate.
The partnership among the angel investors may be represented by formal contractual agreement, but more often than not it is an informal agreement among peers.
As you might expect, decisions by committee become a bit more cumbersome than when dealing with a single angel investor, but the process is still less challenging than what you would likely encounter with the typical venture capitalist.
Venture capital firms invest in just a fraction of the thousands of startups that are born every day, leaving the rest to bootstrap, rely on friends and family or pray for an angel investor. All too frequently, the angel investor can’t pony up sufficient capital. Syndication changes everything!
What This Means for Startups
The startup community benefits in two principal ways.
1.) Startups are exposed to a large number of players in a syndicate that they would be through a single angel investor. This allows the founder unique opportunities to expand his/her network.
2.) Larger capital infusions are possible which, in some cases, precludes and/or defers the need to pursue venture capital. If and when additional capital is needed, the enterprise is more likely to get the nod from a venture capitalist because; the enterprise has the bulk of its growing pains (risk) in the rear view mirror.
And So …
Although angel syndication is in its infancy, it is gaining traction with each successfully funded startup. Syndication has the potential to create a sea change in the startup universe. If it succeeds in a major way, venture capital firms will have to change the way they approach funding or risk being left out in the cold.
Regulations governing crowd funding platforms are soon to be implemented, and these will lead to the creation of robust platforms. As a result, competition among venture capitalists, angel investors, syndicates, and crowd funding platforms, promises to usher in a new era of innovation, as entrepreneurs gain unprecedented access to capital. I can hardly wait!
Andrew Cravenho is the CEO of CBAC, which offers invoice factoring for small businesses. As a serial entrepreneur, Andrew focuses on helping both small and medium sized businesses take control of their cash flow. Prior to CBAC, Andrew founded an annuity financing company relieving tort victims of financial hardship.