Investor Syndicates, Putting Value Together

This post is by Jeff Carter from Points and Figures

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I thought this tweet by Charlie O Donnell was interesting. He received quite a bit of pushback on it.
I can appreciate that people invest real dollars in startups and that their investment should be counted, but when you invest less than $10,000, are you really an angel? Are you really a “seed investor”?

Technically, you are. You are on the cap table in some form. You are investing in an early round. However, I get Charlie’s sentiment. Are you really an angel?

I don’t know about you, but to me angels should be more than just a small singular check in a deal. You ought to bring something to the table than money. When we started Hyde Park Angels, we had a few requirements and I think they are worth considering for context.

  1. Had to invest a minimum of $10,000 in any one deal
  2. Had to invest a minimum of $250,000 in deals presented to the group over five years.

As a seed stage fund, we won’t write a check unless there is room for at least $500,000 in the round.  The reason is we want a big enough equity stake and we want conviction.  Venture is won by providing outsize returns, not just making a little money.

If you don’t invest enough in any one deal, you won’t make any real money.  You might get lucky and hit on an Uber.  Seriously, how many of those types of companies are around?  The reality is that most companies don’t exit at well over a billion dollars.

As an investor in a round, I want to see other investors in the round with conviction too.  It makes a difference.  I am going to pay more attention to the angel who put in $50k than I am a $5k investor or even worse, a no name syndicate I can’t figure out how to leverage from a crowdfunding platform.  It’s not that I don’t respect the money, I do.

The thing is, if you are a very small nondescript investor inside a syndicate on a platform that I can’t navigate, how committed will you be if I gave you a ring and asked for an intro to a particular customer target, investor target or some other strategic acquirer for the firm?

Ironically, as a seed investor with conviction the thing you might want to do is take the whole round down and exclude everyone.  But, it’s a better idea to form a group of investors with different networks and experience to give the company a better chance.  Entrepreneurs should really think hard about how they finance their deal.

This is why it’s important to put together a syndicate of committed investors that will pull on different ropes to propel the entire company forward.

I remember once talking to a much more experienced trader than myself.  I asked him how much size to trade.  He told me it has to be big enough so it matters, but not so big it can put you out of business.  It’s got to “hurt” a little bit.  By that he meant put some constraints on yourself and if you lost money, you’d pay attention.

Investing less than $10,000 doesn’t hurt a lot, and if you lose, you won’t pay attention.  I think that is what Charlie was getting at and I agree with him.