The angel groups in New England began holding rotating quarterly syndication events in 2005 and have conducted six syndication summits in the last 18 months. “We’ve seen about 35 companies and around half have received funding through syndication,” says James Geshwiler, managing director of CommonAngels in Lexington, MA. “We are sharing due diligence and the angels are getting to know and trust each other.”
Syndication may have different meanings to different people, but among the New England angel groups, it means “bring a term sheet.” “Everyone buys the same security and then lives under the same terms as the lead group,” Geshwiler says.
Syndication benefits both angels and entrepreneurs
There are many reasons angel groups might want to co-invest. More available money leads to better deal terms, produces more quality deal flow, and allows entrepreneurs to focus less time on fund raising and more time on building value. Larger rounds help bridge the capital gap and may better protect angel investors’ positions from cram downs. Broader and more diverse angel participation may also improve due diligence as well as provide a larger pool of mentoring expertise to new companies.
The New England syndication model is an extension of the traditional angel group approach. Most of the 20 angel groups in the region are participating. Some groups may be syndicating one and two together beyond the summit because they are close and want to get a deal done.
“One of the reasons our model works for us is because in our region angel groups are within one to three hours of each other,” Geshwiler says. “It’s physically easier for us to syndicate, and having geographic proximity is also more forgiving. You see each other more in person and have more interaction. This leads to the number one principal of co-investing—trust.”
Stephanie Hanbury-Brown, managing director of Golden Seeds of New York City and Boston, agrees. “Trust develops as you work on deals together,” she says. “When we work with another angel group, we see their rigor and due diligence, and they see ours. Doing real work together is what creates trust.”
New England angels seek process efficiencies
“We started off these regional summits inviting everyone,” Geshwiler says. “We had 180 people show up at the first one. It was good and validated interest, but it was too cumbersome. We couldn’t even serve lunch fast.” The region next tried a Senate approach with each angel group having up to four delegates.
This made meeting logistics more manageable but because participation was limited, the angel groups then wanted the company to come to present to their group before they would invest. The compromise was to enlarge the regional summit attendance which has partially addressed but not eliminated the desire of individual groups to see the company for themselves as a group.
In advance of the summit, angel groups submit companies to a regional committee that decides on the best deals which are then scheduled for presentations at the next summit. “Before you bring in a company, you should have a deal leader, a term sheet, and have started due diligence,” Geshwiler says. “Ideally we want groups to bring deals that are certain to move forward.”
CommonAngels invests only in deals where the local angel group also invests. “We want to see the higher quality opportunities from local angels,” Geshwiler says. “They have more clout with the entrepreneur and are in a better position to negotiate later on with the VCs.”
Participating New England angel groups now keep an opening on their group meeting calendar for companies they see at a summit presentation. That way, if a group likes a company from the June forum, they can invite them in for July; otherwise the timeline stretches out too long. “We’ve all agreed that our investment decisions should be made in 90 days or less,” Geshwiler says, “and generally we’ve managed to stick to that.”
Once a co-investment is made, the groups work together to determine who sits on the board. Since the entrepreneur likely doesn’t know people from the other groups, he or she tends to rely on the lead angel’s opinion and advice about board seats.
When not enough board seats are available for all investing groups to be represented, difficulties can arise. “We will need to become comfortable with board members representing the interests of the syndicate, rather than specific groups,” says Hanbury-Brown. Observation rights may be one way to alleviate this concern.
“We have more people seeing a company at the regional events,” Geshwiler says, “but there is still this reaction that angels want the company to come to their group. So we’ve improved the qualification step, but we’re still working on how to improve the efficiency of the individual groups and the entrepreneurs.”
Another challenge is that by gaining exposure to most of the angel groups in New England simultaneously, an entrepreneur may be taking an all-or-nothing risk. “All it takes is one person to lambaste the deal, and up to 20 angel groups could lose interest,” Geshwiler says.
Focus on biggest pain points and alleviate the issues around those
Both Geshwiler and Hanbury-Brown say that much of the success of the syndication process rests on the deal lead. “It’s best if an investor from the angel group that originated the deal attend every time the company presents to other angel groups,” Hanbury-Brown says. “It’s important to recognize that along with the benefits of raising more capital, it is still a lot of work for the lead angel or group to coordinate with multiple groups and to help the entrepreneur navigate successfully through the process.”
Geshwiler says, “We also need to put ourselves in the shoes of the entrepreneurs as they trudge from one group to the next. One goal of co-investing is to mitigate risk, and one of the best ways to do that is to help the entrepreneur have more time to invest in growing the business by spending less time raising capital.”
Legal fees are another consideration. “We have learned to be cautious about syndicating with certain groups that want to take out legal fees over and above the ones incurred by the lead investor,” Hanbury-Brown says. “We don’t want each group to require the company to pay for a legal review of the documents.” She also says that issues can arise when one group wants to take a percentage of the dollars invested, especially if the group wants ownership based on the gross investment amount.
Developing process for shared due diligence
Hanbury-Brown recently led a multi-group team working to harmonize regional due diligence. “Reduced due diligence is a reasonable goal,” she says. “You avoid duplication of work, and it also helps the entrepreneur—but you must recognize that it is not necessarily going to work for all groups. Our goal is to find a balance that allows a significant percentage of groups and group members to work together to more easily and efficiently co-invest.”
The New England due diligence working group drafted a two-page beta document of minimum due diligence standards for a lead angel group and has structured a due diligence process to facilitate deal syndication. The groups have learned that sharing of due diligence isn’t quite as straight forward as it might at first seem. Hanbury-Brown says that angels are fairly comfortable sharing market research or patent search or valuation, but that even though angels say they want to share diligence, there is often a tendency to want to duplicate.
“The problem is that people are prepared to say, yes I will share mine with you,” she says, “but not as comfortable agreeing to not repeat what has already been done—for example reference checks or interviews with beta customers, which can become a real issue if a half-dozen groups query the same customer.”
She suggests that technical diligence can be shared if angels first consider the credentials of a person who has already reviewed the technology and then discuss that expert’s their findings with them rather than engaging another technical expert of their own to perform an independent review. “Of course if you have a conversation and feel the original reviewer isn’t qualified,” Hanbury-Brown says, “then it’s in everyone’s interest—including the lead group—to find another person to assess the technology.”
One of the most important ways for angel groups to get to know each other is to find out who the industry and technology experts in other groups are. “When things don’t go as planned,” Geshwiler says, “having access to this additional expertise and resources is a real benefit.”
To help ensure that all groups are comfortable sharing their due diligence, the New England working group also drafted a treaty that is essentially an agreement between groups not to rely on another group’s due diligence for your own investment decision.
In consideration of this issue, Golden Seeds has already modified their membership agreement. “We now include a clause that states that Golden Seeds members will not rely upon any due diligence received from anyone else, including their own members, Golden Seeds staff, and other angel group for their investment decision,” says Hanbury-Brown. “This could be an interesting clause for other angel groups to adopt in their own membership agreements.”
The New England groups also have an agreement that information shared during the co-investing process will be kept confidential. Although these agreements aren’t legally binding, Hanbury-Brown says they are a start. “We’re trying to create a regional alliance,” she says. “You join it for the purpose of syndication. If you opt in, that sets the dialogue about how things should proceed.”
Co-investing beyond regional geography
Another option for co-investing is to focus on expertise instead of proximity. “Venture firms often follow this model,” Geshwiler says. “You look to co-invest with the people who are the best fit for the deal or the company, or who are the most like you. There is a lot of merit to it, especially if geography doesn’t work in your favor. It would actually be great to blend the best aspects of both models, but you rarely have the triple alignment where angel groups are geographically close, look alike, and have complimentary expertise.”
Golden Seeds will invest anywhere in the US. “New Yorkers have always been a source of capital for people across the country,” Hanbury-Brown says, “so we’re used to investing other places. That’s why we are so eager to get to know other angel groups.”
When investing beyond the region, Golden Seeds looks for prior investment by other angel groups. “We invested in a Colorado company, Solidware Technologies, Inc.,” Hanbury-Brown says. “CTEK Angels (Denver, CO) had already invested in the company, and if they hadn’t, I’m not sure it would have been as easy for us to invest. We were able to talk with CTEK Angels and several of their investors. This approach could be a model for areas that are short on deal flow.”
For groups who choose to syndicate, it may make sense to develop at least a baseline definition of deals by agreeing on stage, size, use of proceeds, and terms. “There is no particular end game that you expect to be implemented globally,” Hanbury-Brown says. “There are so many nuances that I don’t think anyone can really architect something and say this is how we all should do it.”
New England angels say co-investing is worth the effort
“It’s definitely worth it,” says Hanbury-Brown. “Our latest investment is a really good example of that. River Valley Angels (Springfield, MA) really liked a deal we were doing that they saw at the syndication summit. We showed them our work, and they added to it. We invested $575,000, and they did the same. We each have a seat on the board.”
”Syndication before has been an ad hoc and a case by case activity,” Geshwiler says. “Now we have angel groups putting thought into the processes to make it better. We are breaking new ground and setting the highest standard I’ve seen. Co-investing takes time and investment, but the good thing is that 60 or more angels are getting together once per quarter to look at deals, and transactions of $1 to $1.5 million are getting done in 90 days.”
