SVIC Guide: How To Invest In Startups With Angel Syndicates

 The Silicon Valley Investors Club is excited to have Dan Hightower join us for a talk about How to invest in startups with angel syndicates. Dan is two time venture-backed founder and Angel investor. You can find more of his writing at Product Market Misfits & on twitter: @danhightowerjr. 

If Jeff Bezos can turn a $250,000 angel investment into $1.5B, then maybe you can do the same thing, just on a smaller scale, right?! The idea of investing in startups for huge returns is intriguing to say the least. But it’s not all sunshine! 

Every investor has a theory when it comes to successfully investing in startups. But, even the best venture capital firms in the world invest in complete disasters all the time, and they also mistakenly pass on some seriously successful ones. 

And it’s even less straightforward for me, a solo angel investor in 18 startups. I started my journey by founding a few startups and raising around $7M along the way. One of those startups worked out, so I have the financial breathing room and startup experience needed to angel invest. 

Still, not coming from a ton of money, I don’t have the luxury of blindly writing checks. Rather, I had to diligently learn about angel investing as an investment class. Here are some questions I can help you answer:

In this post we will cover the following topics:

  • Is angel investing right for me?  
  • Why should I start now?
  • How to start: angel syndicates 
  • How to pick a syndicate and do your first deal

Is Angel Investing Right For Me?

As glamorous as angel investing sounds, and while it’s true that some people do it for the notoriety, you can’t get around the fact that investing is about returns.

Some public data exists on expected returns for angel investors (TLDR: ~3.5-6x total return). Other sources cite a 17-38% IRR. Anyone would be thrilled with those returns, but then there are the dismal reports that startup mortality rates are 70-80%.

So, if you’re going to turn $1 into $10 through angel investing, you’re going to have to decide if you’re comfortable with the very real risk that your $1 could magically disappear.

Additionally, there are timescales to consider. Startup investments are less liquid than stocks for example. You’ll need to be able to hold these investments for years before seeing returns. (I used to think the illiquidity of investing in private companies was a bad thing. Now I realize the illiquidity is sorta nice. By default, you become a long-term investor!)

That’s a lot of uncertainty to stomach, but there are a few silver linings: 

  • It works as a power law – A 70-80% mortality basically means 2 in 10 startups will survive to potentially generate a return. But, hitting one winner can return a lot, to compensate for losses. If you get into angel investing, building a portfolio is key to de-risking, and can significantly increase your chances of hitting your power law.
  • Small checks are okay – To help you build a portfolio, don’t feel compelled to write large checks if you don’t have the dry powder. Sub-five-figure amounts across several investments are fine- as little as $1,000 can work.
  • It is so much fun – If you invest early into a team that develops a real business, it’s incredibly rewarding to be a part of that journey even if you’re a small investor. The best investors find ways of adding value beyond the money, and you might provide an insight that unblocks a team all the way to unicorn status.

The current lack of angel investing return data also means that in 10 years, as more data surfaces and paints a clearer picture, it might become obvious that you missed out, forced to relive that time you almost bought 10 bitcoin at $200/btc. 

So, if you have the financial means and you feel like the uncertainty is worth the potential reward, then angel investing should absolutely be a small part of your portfolio, right alongside real estate and your 401(k). 

Related Interviews: SVIC’s Guide On How To Invest In Startups

 

Why Start Angel Investing Now?

Now you’ve bought in, and you’re ready to back the next Google! You’ve got great timing!

Historically, it has been very tough to invest in startups even if you wanted to. Before, you would need hundreds of thousands—if not millions—in capital. You would need access to the right deals. You would need experience evaluating those deals. But that’s all changing thanks to a few paradigm shifts:

It’s now more likely that you’re an accredited investor:

Modernization of the rules governing who is allowed to invest in private markets has led to an explosion in the number of accredited investors available to private companies. Now, you can invest in startups if you check any ONE of the boxes below:

  • Make >$200k in annual income or $300k with your spouse
  • Hold a Series 7, Series 65, or Series 82 license (I tweeted a guide to getting your Series 65)
  • Work at a private equity firm of some kind, aka a “knowledgeable employee”.
  • $1M in net worth

There are fewer barriers to entry for you thanks to tech:

We’ve come a long way from the days when it was hard to view your 401k online and E*trade  could get away with charging $12.99 per trade. We have leveraged technology to significantly streamline angel investing.

For example, AngelList’s Syndicate platform (see deep dive below), makes angel investing as easy as buying socks on Amazon. There are plenty of other syndicate groups, so AngelList isn’t the only way to angel invest- it just might be the easiest.

Related Interviews: Ryan Lundquist | Sacramento Certified Residential Appraiser 

How To Start with Angel Syndicates

An angel syndicate is a private group of accredited investors (~150 active people), led by a syndicate leader, a very experienced investor responsible for finding great startups that are raising money and bringing them to the group. 

Angel syndicates are the most accessible & flexible gateway to the private market. They are all about unlocking deals for the “average accredited” investor, whereas traditional VC funds have been more of an exclusive club with each of the VC’s backers typically investing tens of millions into a single VC fund. 

Angel Syndicate Overview

With angel syndicates, you can invest as little as $1,000 in amazing startups you wouldn’t have found on your own.

The members of the syndicate collectively invest in the startups that the syndicate lead finds. That investment is made through a Special Purpose Vehicle (SPV), which is just a legal entity created to make a single investment in a single startup. 

An angel syndicate’s average total check size into one SPV is $100-350K, which means each of the ~150 investors like you help come up with that $100-350k. The required minimum investment for you will range, but it’s usually around $1,000-$2,500 – some are as high as $10k. 

You can pick & choose which deals you want to invest in. Don’t like a particular company that the syndicate is raising money for? Then don’t invest! Save that money for the next one! 

This optionality is groundbreaking and fundamentally different than investing in a VC fund, where you rarely get a say in which startups the VC’s management team picks.

Related Article: SVIC’s Guide to Search Funds

How To Pick a Syndicate & Do Your First Deal

To browse syndicates, I recommend that you start your search on AngelList (a different platform, Republic, is coming up pretty fast too). AngelList has over 200 active syndicate leads to pick from, and the platform as a whole has invested $2B into startups… with a B, which is way more than Sequoia’s latest fund.

When you pick a syndicate, you’re really picking the syndicate leader. Syndicate leaders perform two very important functions:

#1 Find Deals-

Good syndicate leaders have deeply connected and their deal flow reflects that. You will see extremely high quality deals from the best syndicate leaders. But if they can’t find deals, then the syndicate members will leave for another syndicate. Beyond the resume check, you will want to experience their deal flow over time. Where do they tend to source deals from? For example, do they just recommend their buddies’ startups to the syndicate? (that’s bad)

#2 Help You Evaluate Deals-

Beyond sourcing deals, syndicate leaders help analyze the deal for the group and present the case for why the group should invest in this startup. More on this analysis later, but your syndicate lead should do a lot of the heavy lifting for you because it’s highly unlikely that you will have direct access to the founders or the full data room to do your own analysis. 

It would be too much of a burden on the founders to have to connect with all 150 syndicate members. To help solve for this, sometimes syndicate leaders will record a Zoom FAQ with the founder(s) for you. But, if all they’re doing is just forwarding pitch decks, that’s no good.

Once you’ve found a syndicate you like, you’ll need to apply. You can be a part of more than one syndicate (no cap to how many you can join), so apply to multiple syndicates to diversify your deal flow. After you’ve been accepted into a syndicate, you will be able to see all of the available deals. If you don’t like anything you see, you can just wait. 

After being accepted, you’ll get an email that will look like this (scrubbed for confidentiality):

When you click “View Deal and Invest”, you’ll see the Investment Memo. This is the moment you’ve been waiting for: doing your first deal! 

Find Investment Pros Via the SVIC Referral Generator

Doing Your First Deal

The deals that good syndicate leads put forward are highly curated and usually of phenomenal quality. Which is awesome, but it also creates a big problem for the solo angel investor who has to pick and choose carefully! At the end of the day, liking a startup and investing are two different things. And you’ll need a framework that you use to decide which ones you invest in.

For me, this is still a work in progress, but here’s how I approach it:

Digest the Info

I always start by reading the Investment Memo, which provides key information on the startup.

Memos are highly confidential overviews of the startups and the investment opportunity. If you’d like to read one for yourself, Bessemer Ventures posts all of their memos online (shopify, pinterest, linkedin, & more), and they’re all amazing reads! Also Sequoia’s investment memo for Youtube leaked a while ago as part of a lawsuit, and you can read it on page 16 of the document here.

In the memo, you should see a brief overview (30 second read): covering the big hairy problem, vision statement, how it works, the syndicate lead’s personal reasons for why they like the startup, and a historical timeline of the startup (like maybe they were a YC company, or who their other VC investors are). You might also get company highlights/stats on the company like historical user growth/revenue growth, cash on hand, etc. Beyond the brief overview, you should expect to see deeper dive paragraphs into problem statements, product, traction, business model & competition, and team overview.

Related Article: Nassim Taleb | COVID Misconceptions, Fed Policy, Inflation

Ask Three Big Questions:

When I’m finished reading, I use a simple framework for picking the startups I invest in:

  1. Can I see a clear path to $1B in annual revenue?
  2. Could I help this startup in some material way?
  3. Will this startup help further humanity?

If Not, I Pass Immediately:

If any of the above answers are no, I’ll pass. 

Also, if I have too many unanswered questions after reading through the material, I will also pass on the opportunity because this is usually all the info that you will be given as a solo angel investor. Keep in mind that from an etiquette perspective, check size correlates with ability to ask questions. If you’re putting $1,000 into a startup that’s raising $1M, don’t expect to be able to ask more of the syndicate leader. But if you’re putting in $50k, then you might even ask for full due diligence materials.

If it Passes the Test, I Dig Deeper:

At this point, I’m usually pretty excited! So, I just want to check a few more boxes before I make a decision. Those boxes are 1) demand and 2) competition.

If I know a potential customer that would seem to be a good fit, I’ll call them and run a “hypothetical business idea” by them (to maintain confidentiality). If they seem interested, that’s huge. If they mention a competitor or two, I’ll shift gears to a competitive analysis. 

If I’m Still Excited, I Invest:

I’m 100% investing if I feel like there is demand and a defensible competitive advantage after my analysis! 

The specific amount to invest is a personal preference and a bit complicated. But my range is anywhere from $1,000 to $25,000. I hope to cover this in depth in a future post. 

Oh, also, these deals move fast. I’ve seen some close in as few as 4 days. 

Wrapping Up

After making the investment, don’t expect too many investor updates. I try to see if I can get on the email distribution list for the monthly updates, or I just follow my new investment on social media. Every once in a while, your syndicate lead will send out updates! 

Instead of asking for investor updates, the better use of your time is to help your new investment. Remember the 2nd qualifying question, “could I help this startup in some material way?” This is a great time to start helping: look at their hiring page, intro a customer, share their social media posts. Then, start looking for your next deal!

For now, that’s a wrap! 

  • Share this article, if you enjoyed it!
  • Leave a comment within the SVIC Facebook or Linkedin community. 
  • Follow the author, @danhightowerjr, on Twitter for more on startups and angel investing.
  • Subscribe to Dan’s newsletter and podcast to hear startup founder interviews.

The content here is for informational purposes only, and should not be taken as investment advice. All views contained herein are my own and do not represent the views of any other organization. 

Silicon Valley Investors Club (SVIC) is a global community of STEM professionals interested in making smarter investment and career decisions.

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2 days ago

Hi all! Really appreciate all the great discussion on here. Most of my experience with investing has been with real estate, stock options, and 401K so I’m learning a lot! I’m looking to open a custodial brokerage account for my niece and nephew to gift stocks for holidays, birthdays, etc. Will probably focus on index funds and/or EFTs in growth industries. I would love any input you all may have on which brokerage accounts would be best suited for this and any thoughts you may have on which industries to look into. I don’t plan on doing much trading so this will be more for long term holds. Of course, any additional advice on this is greatly appreciated as well. THANK YOU!! 🙂 ... See MoreSee Less

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When I was young, I had an aunt who worked for Merrill Lynch and advised me to buy a few utility stocks with dividend reinvestment. As a kid, it was intriguing to see the dividends and see the growth over time. As an adult, I think low cost life strategy is simplest. Why not a little of both? For the actual brokerage, they are all the same, but I might suggest you pick one that you already use for your own investing or 401k that is invested in it he index fund approach, such as Fidelity or Schwab. (Normally I would push Vanguard, but since these are kids, they might get something out of visiting a brick and mortar store.) Last point. If they are old enough to have actual jobs, why not offer to match their savings rate if the commit to put the money into a Roth IRA? If you match $1 for $1, the trick is that they get to keep 100% of their paycheck, with you putting the money into the Roth on their behalf. You can do this up to the limit of your budget (ie, up to $100 per kid). This really helps them connect the idea of saving at an early age.

Vanguard is great for "set it and forget it" investments with good long term funds. If you want an actual brokerage, most are pretty similar. I like Schwab and Ally Invest, myself

I'd suggest looking into a 529 (college fund) plan through e.g. vanguard - you can choose how your investments are structured and there are tax advantages for the recipients (if the funds are used for education related expenses)

I’m on the receiving end of the stock gifts, but my grandpa likes Fidelity for both him and me as he says it’s very easy to transfer stock to me if we are at the same brokerage.

I have set up Schwab custodial accounts for all of my nephews and neice. Every birthday/holiday I get them stocks that correspond to their gifts (e.g. I get them snowboarding lessons and Vail stock). I'm using it as a tool to eventually teach them about stock and time value of investments but having it relate to the gift to help them make a tangible connection. My oldest nephew is 10 and he's already showing interest. One thing to be aware of (or to look more into) is that custodial accounts have to be reported as assets of the child when the kids apply for college & financial aid (or at least that's my understanding).

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4 days ago

Has anyone invested in “turnkey investment properties?” Sounds almost too good to be true but would love to hear what to watch out for or if what the catch is if there are any. Ty!! ... See MoreSee Less

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First one was a dud, and I'll be lucky to walk away without the loan. Didn't do my research well and was too trigger happy to buy something. Second one was doing well with a section 8 tenant, but decided to sell it and invest in a single state rather than two to avoid the overhead. I'm currently trying out the whole BRRRR thing that's popular now. More risk, more reward...

It’s way more competitive now, and all the good turnkey operators are sold out... for the most part you would be lucky to get $100 cash flow given all the expenses and almost annual turn costs... but it’s still a property that is being paid off and appreciating (in the right market). If yuu do the BRRR yourself yuu can save a lot of $, and also spend way more time and potentially make more mistakes...

By the way, having done turnkey, group investments, renovation projects, and stock investing, feel free to DM me about my opinions on real estate investing. Besides one BRRRR that I'm doing, I'm also leaning towards more hands off syndications as an LP for several reasons (more hands off being the main one).

4 days ago

Hi all! Does anyone have experience investing in SPACs? They seem to be all the rage and my cursory research suggests that they're often quite successful with sizable pops once the target company is announced. Are there any unique risks to consider or things to think through if planning an investment in a SPAC? ... See MoreSee Less

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Most of the NAVs are $9-11 for a SPAC, so if you buy it at $16 and investors don’t like the buyout candidate, it can tank 30-50% on you. The trick is to buy when they are under $12 to lower your risk, and buy the ones where you trust the managers. Chamath seems to have a good track record.

I’ve been having good luck with SPACs these past two months. As Aaron mentioned, if the SPAC for any reason falls apart before the merger, you can still sell your shares back for at minimum the NAV of $9-11, so there’s a floor and capped risk. Second, SPACs also have warrants, which are like LEAPs that are a strike ~$1-2, but are 1-to-1 with shares instead of options contracts of hundreds of shares. They offer a levered way at investing into an SPAC company. The risk there though is if the SPAC fails to find an acquisition target or merge then they expire worthless. I’ve only been going after SPACs with a set target and definitive agreement. I came across spactrack.net/ a while back which can help you find SPACs that are at a certain stage.

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