An Angel = a high-net-worth individual who provides financial backing in a start-up founded by an entrepreneur, mostly for ownership equity in the company. They provide cash and, sometimes, expertise.
A syndicate = an alliance of businesses/individuals that join together to manage a large transaction that would be difficult to execute individually.
An Angel Syndicate = a group of investors clubbed together to invest in an early start-up.
In this article, we’ll cover:
- What’s the aim of an angel syndicate
- How they do it
- Practical considerations when investing
What’s The Aim of an Angel Syndicate?
As defined above, an angel syndicate is a group of investors clubbed together to invest in an early start-up.
Their aim is to pick winners – very rare and hard to find:
- ‘Popular’ or well-known start-ups are usually at a sufficiently large stage that they have been invested in by venture capital funds. These guys are different to an angel syndicate as they raise a ton of money from institutional investors (e.g. pension funds) first and then deploy that. Angels invest on a deal-by-deal basis using their own money.
- An angel looks for the undiscovered, the potential and typically invest earlier than VC funds.
- Venture capitalists accelerate startups who are doing well while Angels predict winners.
- Some people will be naturals at this but usually, the best angels are those who have gained experience, invested with those who have experienced and learnt from them or are business owners themselves so know what to look for.
There’s a never-ending discussion about what investors should look for in a startup. Most would say the idea and the team are really important. Furthermore, angels and VCs alike usually also look critically at the target market and its potential size.
Usually, there’s a “lead” investor in a syndicate. Their job is to negotiate the terms with the start-up. But sometimes the start-up may themselves group a number of syndicates who’ve been approached by individual angels to invest in.
Angel investors are in it for the long term (it’s their own money). Contrast this to a venture capital fund that typically exits 5-7 years in (their money is from their investors, so the VC fund’s aim is to get a return back to them).
Angels in your investor base provide considerable benefits to the start-up. Angels will often have run successful businesses of their own and can even be potential customers for the right start-up.
How to Get Started in Angel Investing?
- Find a network or friend
- Get a lawyer
- Educate yourself
Find a network or a friend
If you did want to find companies yourself, there are two places to look at:
- Public deals – these are usually only public as they have often already been looked over by a mainstream VC and not been invested in.
- Private deals – these will only ever come to you if you are in a particular industry (usually the tech sector) and are an active angel investor. Its tough to get going in this field but it is possible.
It’s all about networks. And there is a shortcut.
The easiest way is to find a friend who already does it and try to get included in his syndicates. From there, all you’ll do is splash out with the money rather than deal with the headache of actually finding a start-up yourself.
Or even better, you find a professional angel syndicate led by people who have a good rep and network themselves. That way you know they’ll be getting solid deals.
At IslamicFinanceGuru we run an angel syndicate called IFG.VC.
Note, there’s a difference between (articles coming soon):
- Crowdfunding & angel investing
- An angel syndicate & a venture capitalist
If you have no angel investing friends and have already signed up to IFG.VC but want more, there are lots of angel syndicates you can join out there, such as:
The crucial things to watch out for in angel syndicates are:
- The credibility of the lead. If they are not credible, you won’t get the best deals. And in venture capital, getting the best deals is absolutely vital as only the top 25% of start-up deals have a good prospect of actually succeeding.
- Do they charge the start-up for raising money for it? If they do, you can guarantee that they will be missing out on the best deals as the best start-ups are very competitive to invest in and not short of suitors. They are not going to pay you to invest in them.
- The fees you have to pay for investing. Paying a single-digit administration fee and a single-digit profit share is relatively common and good value for money. Where you go into the double digits in fees, that’s probably too expensive.
Get a lawyer
If you are investing on your own, it is probably best to get a lawyer to look over some of your early deals. However, if you are investing with an angel syndicate, this is one less problem to worry about as they’ll take care of all the legal negotiations.
Look to see if the start-up is using an established provider like Seedlegals for their legal documentation. If they are, that’s good as it’ll make your life more straightforward.
Angel investing is a complicated field and it takes a while to get the hang of when you are going it alone. The quickest way to speed up your journey is by investing alongside an angel syndicate whilst also searching for your own deals. That way you can contrast the deals you are seeing with what the professionals in this field are seeing.
We have also created what we, with all modesty, consider one of the best angel investing courses out there right now. Incredibly, it’s completely free.
You should also check out essays by Paul Graham, Elad Gil, and Bessemer Ventures to start off with.
Okay now you’ve got the basics, let’s take a look at some practical points.
Practical Considerations When Investing
Here are some important practical considerations to keep in mind when investing:
- How much you’re putting in.
- The valuation of the company.
- Your input in the company.
Note: Dividends in an angel syndicate are rarely paid. They are a payment made by a corporation to its shareholders. So the crucial thing to remember with angel investing is that you’re looking for a capital gain. This is not like investing in a buy-to-let where you can just sit back and earn the yield.
1 – How much you’re putting in
It’s up to the angel how much they want to invest. The amount can vary from £1000 to millions.
Only invest what you can afford to lose and start small. Start-ups will sell you a dream, but most fail.
Also, look to invest with discipline. Set aside, for example, 20% of your overall portfolio for angel investing and then look to invest in 20-30 different companies with that money. That way you diversify your risk and increase your chances of picking a massive winner.
2 – Valuation
The valuation defines how much stock you’ll get. Let’s use an example.
You invest £10,000 into a start-up whose pre-money valuation is £1 million. This makes the post-money valuation £1.01 million. Therefore, your investment will give you 0.99% of company stock (£10,000/£1,001,000)*100.
A week later, the start-up has raised more money. The new investor will now take some of the company away from you and other existing shareholders (just like you did). If the start-up sold 10% of the company to this new investor, then your 0.99% is reduced a little bit.
Your share has now diluted, which is ultimately fine.
You’re usually in the same situation as the founders as they are also diluted the same amount. They won’t dilute themselves unless it is not a good deal for the business as a whole. Therefore, after every investment round, you’ll have a smaller share of a more valuable company. So your actual shares will individually each be worth more.
Hopefully, at one point, you’ll end up with a tiny % of the company when it will go from private to public – i.e. it has an IPOs (initial public offering). Yay! Your 10k investment is now possibly worth £100k or £1 million!
Pre-emption rights can help prevent dilution. This is where the company rules have rights allowing you to maintain your share percentage in future investment rounds. Note, if the start-up does well, you will almost certainly get diluted. They will continue to raise larger and larger rounds that you just can’t participate in as an angel investor.
How much valuation to offer
The lead investor will usually decide this. If you’re investing yourself, it’s open to you. Valuation is not a fixed science. If it’s an early start-up, think about how much they are offering:
- Is it a high valuation because they don’t need you or they are getting ahead of themselves?
- Is it a low valuation because they are desperate for you (for your money or expertise)?
Your main concern should be whether you believe the company has potential – rather than valuation. Ultimately a few percentage points on the valuation is not a deal-breaker if you end up investing in the next Uber.
3 – Your input in the company
This could be a lot or nothing at all. Agree on this in advance.
We’ve gone over the basics and there’s much more to read and learn. Check out what is probably the best angel investing course out there right now – and it’s completely free too: The Ultimate Startup Course.
Remember, IFG runs an angel syndicate – IFG.VC.
We’ve also answered the question of whether start-up investing is sharia-compliant here. In short, the answer is yes.
We also have our own podcast – Millionaire Muslim – where you can listen to our interviews with start-up founders, investors and other participants in the VC ecosystem.
This article is part of our angel investing series. Check it out here.
IFG – Startup Investing – What is it and how can you get started?
IFG – What is venture capital/angel investing / startup investing?
IFG – Muslim Startups are not getting Venture Capital funding – This is Bad For Our Economy
IFG – Really Sizing the Muslim market for Islamic Economy Startups