By David Drake. This is what I want to see: The likes of Angel Capital Association (ACA) and European Business Angel Network (EBAN) embracing and starting to take a proactive role in the new ecosystem where deal flows are coming in quicker and proof of concept brings in regular people investing alongside the angels.
Angel investors, through syndicate funding, are now taking the lead in embracing equity crowdfunding. Syndicate funding is a financing model where the crowd of new and small investors can invest alongside angel investors. This system of co-investing in the same deals between professional investors and crowd investors is the trend now in the U.K. as well as in other parts of Europe, such as Belgium and Italy.
This is a mutually beneficial arrangement for both the angel investors and crowd investors. Angels, as lead investors, can comfortably invest on a high tech startup in a single deal with a crowd of small investors filling in the gap to meet the required amount. Crowd investors know that these professional angel investors only invest their own money into businesses they believe will give them a great return, so it’s only smart for the crowd to follow where the angels lead.
The first ever Syndicate Funding partnership was done between Syndicate Room (SR) and the Cambridge Capital Group (CCG).
Syndicate Room launched this partnership in August 2013. It recently closed its first deal with a £590,000 ($960,000) investment in Eagle Genomics. The lead investor, requesting anonymity, led the round with £300,000 ($480,000). Syndicate Room’s requirement is that a lead investor or investors puts in a minimum £50,000 ($80,000), or 25% of the company value, whichever is lower. Ideally, Syndicate Room wants to focus on firms in need of £500,000 to £1,000,000 ($800,000-$1,600,000).
“Membership in Syndicate Room is free,” says its founder and CEO Goncalo de Vasconcelos. Its members, or SR investors, can invest in as little as £500 ($800) directly into real business angel investments.
Cambridge Capital Group is an exclusive and leading business angel group of 50 investors and private venture funds that annually invest £1-2 million. It has been investing in high-tech businesses and backing technology startups since 2000. Membership in CCG is an application process, and is normally initiated through introductions by existing members. CCG members have invested millions of pounds into its current portfolio of more than 30 companies.
While SR investors will not be able to influence a startup company’s direction and strategy, they will get exactly the same economic deal, as well as make the same profit pound for pound, as the experienced and larger business angels. Small investors looking for financial returns through equity crowdfunding have access to the same deals led by the professional business angel investor who do it for a living.
Syndicate funding makes it possible for the angel networks to find and train new angels from the crowd of small investors. We see crowd investors eventually becoming angel investors themselves, and joining the angel networks. Crowd investors will greatly benefit from this as due diligence and realistic valuations are facilitated by the lead investors increasing deal quality and return for their investment.
We may see some of the challenges of equity crowdfunding addressed by syndicate funding. In the future, a similar strategy could be applied to hedge funds which could lessen the risks in investments when the more sophisticated and seasoned investors lead. As crowdfunding grows, what other innovations do you think can be created through similar collaborations?
David Drake is an early-stage equity expert and the founder and chairman of LDJ Capital, a New York City private equity firm, and The Soho Loft, a financial media company helping funds and firms advertise to investors, QIBs, and family offices in compliance with new SEC alw 506c. You can reach him directly at David@LDJCapital.com.
