So, you’re interested in angel investing but struggling with deal flow? You’re not alone.
There are a couple of common hurdles that many angels come across at the start of their investing journey, namely the impact of cap table limits, typical minimum cheque sizes and adverse selection bias.
The good news? There’s a solution. Angel syndicates are a great way for new angels to invest with smaller cheques, amplify their capital and increase their deal flow alongside more experienced investors.
Hurdle 1: Cap table limits & cheque sizes
According to the Australian Securities and Investments Commission (ASIC), no private company can have more than 50 people on their cap table or share registry across all funding rounds. That means you can only raise from the same 50 people, ever.
What this has led to is significant minimum cheque sizes at every stage:
This is prohibitive for many angel investors, who aim to build diverse portfolios of 20-40+ companies. Based on typical minimum cheque sizes, that would require $500k-$1m, which most angels (or investors generally!) don’t have lying around, even when investing over a ten-year period. Additionally, that amount only considers cheque sizes at the riskiest funding stage (pre-seed).
Prohibitive cheque sizes aside, the cap table limit means that often, only the most experienced angels get access to exclusive deals.
Hurdle 2: Adverse selection bias
Compounding this problem for new angel investors is adverse selection bias. Typically, when founders go out to raise, they want to get “smart money” on their table. This means finding investors who are not necessarily smart in the intellectual sense (although they may be) but have some value they can provide to the founder, e.g. industry connections or domain expertise.
As a new angel investor, how can you access deals if you don’t already have a profile or a track record? And when you do get access to deals, how do you know whether you’re being offered an opportunity because you have an advantage or because the founder couldn’t raise elsewhere? This is adverse selection bias—are the deals you’re seeing the right thing to invest in, or do you only have access for the wrong reasons?
Adverse selection bias may not apply if your deals come through personal connections or insider tracks; however, if you’re someone without a proven track record, it can be hard to know if you’re getting access for the right reasons and, therefore, finding the best deals.
So, how do you overcome these hurdles and access exciting deals? One solution: syndicates. Here’s a quick syndicate 101:
Angel syndicates are groups of investors who pool their investment together into a deal. This means you generally don’t have to invest large amounts of capital, as cheque sizes are smaller.
Funds from syndicates flow into one entity, meaning X investors as part of a syndicate only count as one investor on the cap table. This benefits founders due to the 50 investor limit and angels because you can write smaller cheques (more on that later).
Behind any syndicate deal is a syndicate lead. They’re someone who has experience angel investing, unique access to deal flow and connections to networks of angel investors. Essentially, they can leverage these qualities to get great deal flow. There may be more than one lead in any syndicate.
Leads identify a deal they want to invest in and bring it to the syndicate. As part of leading this deal, they’ll usually produce an investment memo explaining why they think the deal is good, perform due diligence on the startup, and manage the relationship with the founder(s). In exchange for doing this work, leads often get rewarded with “carry” from investors—a small percentage of profit from the syndicate’s investment. It’s important to think critically about syndicate deals, even if you have implicit trust in the syndicate or deal lead.
Some syndicates have fees to join or investment commitments, but generally, once you’re in, you can decide when you’d like to invest on a deal-by-deal basis.
It’s also important to note that the majority of syndicates require angels to be sophisticated/wholesale investors. In Australia, that means you must have net assets of $2.5m or gross income of $250k per annum.
Now that we’ve covered the basics, there are a few reasons why syndicates can support angel investors, especially at the start of their journey, as they’re building a track record.
As mentioned above, the cheque size required to invest in a deal via an angel syndicate is usually significantly lower than for solo angels. Most syndicates accept $5k as a minimum cheque, some accept cheques as low as $2.5k. This means you can create portfolio diversity with less capital, e.g. by writing 5 x $5k cheques instead of 1 x $25k cheque.
By investing alongside other investors, the power of your investment is amplified. There are often rights that come with investing bigger cheques that you only get access to by meeting minimum equity ownership requirements, including pro rata rights and rights to receive financial information and regular reporting. Pro rata rights are privileges granted to existing investors that allow them to retain their initial ownership percentage by participating in future financing rounds, thus maintaining their stake in the company.
Access to deal flow
Due to adverse selection bias, getting access to deal flow as a new angel can be challenging. Using a syndicate allows you to access deals you may not have otherwise gotten access to because you benefit from other investors’ connections.
ANZ syndicate list
Below is our crowdsourced list of angel syndicates.
Disclaimer: This article contains general information only, and does not constitute legal, financial or tax advice, nor does it take into account your personal circumstances. You should always seek independent professional advice before acting on any information in this article.