Angel Group Syndication of Series A Rounds

Bill Payne , Angel Investor , Frontier Angel Fund

8 May 2013

US angel investors have been a robust source of seed stage capital for years.  More recently, we have experienced significant growth in the number of funded seed stage deals, due to the emergence of accelerators, super angels and new seed stage funds.  Unfortunately, we are now suffering a Series A startup funding crunch, that is, a lack of seed stage follow-on capital in the range of $1.5 to $7 million, funding which a decade or more ago was the sweet spot for venture capital.

Over half of angel rounds reported recently by groups who are members of the Angel Capital Association were syndication among multiple groups (from the Halo Report).   Formal seed stage syndication activities are operating among US angel groups in the Northeast, the Pacific Northwest, the states of Ohio and Texas and elsewhere.  These syndication efforts routinely fund round sizes up to $2 million, but few larger rounds.  Can we devise a syndication model which would enable US angel groups to syndicate Series A rounds between $1.5 million and $5 million, or even higher?

The following model has been proposed*:

• Form a trial working group of at least a dozen angel leaders with specific business vertical expertise and representing a significant number of deep-pocketed investors with interest in funding Series A deals in this business sector.  (If this model is successful, expand by forming additional working groups in different business verticals.)
• Any working group member could bring a Series A deal to the group.  The assumption is that, in most cases, the group local to the deal likely participated in a seed round earlier, assisted in governance since the seed stage funding, has completed due diligence for the Series A fundraising  and plans to invest in the Series A round.  But the local angels need substantially more capital than is available within their group to close the Series A round.
• After a short review, the working groups agrees the proposed Series A deal is likely to generate enough interest with participating groups to close the round.
• When the working group’s response is positive, the company is submitted to an agreed-upon third party for the following analysis:
  • Deep due diligence
  • Total funding requirements assessment
  • Extensive exit appraisal (value, options, timing)

Estimated cost for analysis:  $10-25K, paid for by company

• When the analysis is complete, the independent third party reports to the working group.  In those cases when the report is appropriately appealing, the angel groups represented by the working group close the Series A round.

In order to test the feasibility of the proposed model, nine leaders** representing angel groups across the US were interviewed and asked for their comments.  These comments were consistent among the responses:

1. Most importantly, there is significant need for a syndication process among angel groups to facilitate Series A funding for promising startup companies in angel group portfolios.
2. A model similar to the proposed model may be feasible; however, it is unlikely that angel groups will agree to pay a fee for independent third-party expert analysis on deals that are ultimately not funded.  Taking the expert fee from the proceeds of a round is reasonable.  Expecting angels to fund experts for unfunded deals is not.

Additional findings from the interviews are as follows:

• A key to syndication success is familiarity and trust.  Networking among members of the Angel Capital Association has led to substantial seed stage syndication in the US.
• There is a relationship between proximity and the likelihood of syndication.  Neighboring angel groups have co-invested in deals for many years.  However, national networking opportunities are leading to greater interest in national syndication.
• Co-investment among those angel groups with specific industry segment interest and expertise is growing.
• Making syndication work requires human resources – drivers who are willing to spend the time necessary to keeping the activity on any single deal moving forward and committed to championing the ongoing effort over an extended period of time.
• There are some efforts underway to promote Series A syndication, especially in the Clean Tech and Life Science sectors.  Unfortunately, these efforts have not, as yet, been highly successful, perhaps due to lack of appetite for Series A deals or due to under resourcing of human and financial capital.  These efforts to syndicate Series A deals do not seem to have been as successful as those activities with a focus on funding seed stage startups.

Summary

There is uniform agreement, indeed enthusiasm, for a working model for Series A syndication among US angel groups.  Unfortunately, it would appear from this survey that this enthusiasm is not as yet matched by a consistent commitment among all parties to provide the resources necessary to operate the activity.

*Full credit goes to Tom Churchwell (ViMedicus, Inc.) and Rick Herbst (Sikich), working with the author, to develop of the proposed model.

**A hearty thank you to the following angel leaders for this input:

From the US East:  Michael Cain (Wilmington Investor Network), John May (DC Dinner Clubs) and Catherine Mott (Blue Tree Angels)

From the middle of the US: Karin O’Connor (Hyde Park Angels), Jamie Rhodes (Central Texas Angels) and Tim Keane (Golden Angels),

From the US West:  Steve Flaim (Tech Coast Angels), a leader of the Sierra Angels and Sacramento Angels, and the author (Vegas

Valley Angels and the Frontier Angel Fund)

Each provided important information however the author assumes full responsibility for all findings and conclusions.

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