Are you wondering how syndicated rounds of funding work?
Syndicated rounds are more complicated than standard funding rounds because large numbers of investors are expected to cooperate when offering capital. This inevitably leads to startup founders interacting with several investors, which increases the risk of share dilution and disagreement.
However, when an entrepreneur negotiates a syndicated round correctly, it can prove lucrative.
With this in mind, I’m going to show you how syndicated rounds of funding work and how they are structured.
What is a Syndicated Round?
When entrepreneurs look for investment, they do so across various rounds. When thinking about how syndicated rounds of funding work, note that these are stages that usually correspond to specific milestones.
For example, the “seed stage” of fundraising is at the beginning of a company’s journey. It is used to create the foundation of a business, such as product development and infrastructure.
It is during the seed stage where syndicated rounds are most commonly encountered. Traditionally, funding rounds were discrete milestones with an opening and closing date for investment. Entrepreneurs would target the duration of that stage, pitching to investors at that time.
Following this, the investment would be closed until a later date. This would usually be followed in the future by a Series A round, where new goals such as product refinement, market expansion, and subsequent product launches would require capital.
This would usually involve securing the investment of one or two investors, keeping the number of investors low.
Syndicated rounds, however, have changed this standard approach to fundraising. For those using syndicated round, they are abandoning the rigid structure of fundraising rounds and replacing them with open-ended fundraising, where new investment can be secured at any time.
This creates what has been referred to as a “party round”, where many investors are invited to invest together. This leads to reputable investors banding together to each invest smaller amounts in potentially lucrative startup companies.
When wondering how syndicated rounds of funding work, keep in mind that where things get complicated is that there are different types of syndicated rounds, including:
- Crowdsourced: Where online investment websites bring investors together through a leader and backer relationship (more on that later).
- Traditional Syndication: Where investors pool their money together to spread financial risk, investing as a group.
- Inter-Group Syndication: Where existing groups of investors come together to invest, creating a substantially larger amount of investment capital.
It is super important to have all your materials in place before you even think about funding rounds. In this regard, remember that storytelling plays a key role in fundraising and you will need capital to scale things up. This is being able to capture the essence of the business in 15 to 20 slides. For a winning deck, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
ACCESS THE PITCH DECK TEMPLATE
How Do Syndicated Rounds Work?
Since syndicated groups operate largely like venture capital firms – but in this case can be between more numerous smaller investors – I’m going to focus on the more recent innovations in crowdsourcing syndication.
Angel investor and former CEO of LearnBoost, Rafael Corrales, developed a great way to think about how syndicated rounds work. Imagine hosting a big party where your guests don’t know each other very well. As the host, you want your guests to have fun.
Fun, like success, is infectious, so if you can just get one or more of your guests to enjoy themselves, it’s likely others will feel the same way. You look at your guests and you encourage one of the most popular people there to really engage with the party.
Soon, others follow and before you know it, everyone is raving not just about the party, but about you, the host. They then want to come back for future parties.
This is how a syndicated round works. You invite a group of investors to appraise your business, focussing on trying to attract investment from one investor with a great track record, such as an established venture capitalist or angel investor.
Soon, other investors see that VC investing and follow suit, hoping to get in on the action.
However, the interaction between the first investor and those who follow is key.
Syndicated Rounds and Investor Types
Looking at the party analogy, there are two types of investors you will encounter in a syndicated round. Each has a different purpose. They are:
- Leaders: These are informed or reputable investors who have the skill set to identify startups most likely to generate substantial returns.
- Backers: These are other investors who essentially co-invest in a startup alongside leaders, piggy-backing onto their investment.
How these two investor types interact, is what truly distinguishes syndication from other investment drives, giving it a specific structure different from traditional investment rounds.
How Syndicated Rounds Of Funding Work And How They Are Structured
There are essentially five stages to the structure of a syndicated round. They are:
- Initial Investment: Once you have a strong pitch deck and you are pitching to investors, you’ll have a better chance of getting someone on board. It’s best if this person has experience in your niche and a good track record as an investor. Backers won’t follow a leader they don’t trust.
- Proposal: During conversations with this “leader”, you or they will bring up the possibility of syndication. You might do this because you are still far short of the investment amount you require. If the leader is interested in syndication, then you move onto the next step. If not, then you must keep doing standard pitches for the rest of the capital.
- Sourcing: Either the entrepreneur or the lead investor will now begin contacting other investors, using their involvement as a way to persuade smaller backers that the investment is worthwhile.
- Syndication: Once backers are on board, they will collectively invest in the company together. In some circumstances, the lead investor will charge the backers a small percentage of any generated revenue for bringing them into the deal.
- Amendment: It’s possible for other investors to join the syndicate if that is preferred by both the syndicate’s members and the startup founders. As I said before, syndication often means no strict fundraising rounds for a while, so things are far more fluid in terms of seeking future capital.
Of course, this is just one proposed type of syndication, but most syndicated rounds involve either creating new investment groups through the leader/backer relationship or by pitching to existing angel investor and VC groups, which are willing to spread the cost and risk of investment across a larger number of individuals.
Remember when thinking about how syndicated rounds of funding work, that negotiating these complex investor relationships can be difficult, so don’t hesitate to ask for advice, if you need it.
You may also find interesting the video below where I cover in detail how funding rounds work for startups.