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.
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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.
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