May 21 2014

Syndicate Funding on AngelList – A Company’s Perspective

A few months ago AngelList announced Syndicates – enabling investors on AngelList to create fund-like groups of investors to invest together in AngelList companies (following a single lead investor). It’s a great idea and at Foundry we quickly decided it would be an interesting experiment to form our own syndicate. We were the first formal venture fund to do this. Since then we’ve completed about 10 deals (I say “about” because we have a few things in various stages of completion as I write this – the intent of FG Angels is to make 50 AngelList investments – about 1 per week).

We often get asked how the process works and while what’s below has specifics about working with FG Angels it also contains some great advice for anyone raising money on AngelList in general, and through Syndicates specifically. I’ve edited the text and added some things of my own, but this is largely the work of Carrie Requist, CEO of UGrokit, a company we recently funded through FG Angels.

How AngelList Syndicates (and FG Angels) Works

It’s important to understand that AngelList syndicates work somewhat like an opportunity fund, where AngelList investors sign up to “follow” a syndicate and pledge to invest a certain amount of money. The key here is that this isn’t a hard commitment – each syndicate member makes a deal by deal decision to invest. As a result the syndicate size isn’t the total amount of money you’ll raise – it’s the maximum you’ll raise from the syndicate. And depending on how many members there are to the syndicate and what crowdfunding exemption you use (more on that below) the actual limit will likely be quite a bit less than the total you see next to the syndicate name on AngelList. And, of course, it will also require some work on your part to pull syndicate members into your actual deal. Syndicates aren’t automatic capita – you’ll still need to work for your money.

There are 2 parts to the FG Angels or any AngelList Syndicate investment:

  • Foundry Group (or your syndicate leader) invests their portion – in FG Angels case this is $50,000
  • In parallel they open the investment to their syndicate members on AngelList

AngelList shows for each syndicate the amount that the syndicate leader will invest and the amount pledged by all the syndicate members as a whole (shown as “backed by” on AngelList). At the time of FG Angels investment in U Grok It, their syndicate total was $426k (that total excludes the FG Angels portion).

It’s worth reiterating that unlike a mutual fund, the investors are not committed to investing in every company that any syndicate backs, so the $426k from the members of FG Angels represents the maximum investment if every member decided to contribute (and again, as a practical matter given the number of members in the syndicate and the exemptions that AngelList relies upon to fund these syndicates the actual maximum is below this number). Members have not given any money to AngelList or FG Angels for the syndicate and ultimately, the investor must make their own decision on each deal and then transfer money on a deal by deal basis.  Many things can effect your actual deal participation including how many deals the syndicate has completed, the pace of the syndicate’s investments, the type of investment (ie., note or equity), the stage of the company, how much the company is raising, specific deal terms, and members personal preferences.

U Grok It was actively raising on a convertible note and had already closed a portion of it, so we already had terms in place. Foundry reviewed these terms before committing to invest and both FG Angel’s $50k and the syndicate member’s total amount are under the terms of this note. This means we did not negotiate deal terms with Foundry or with AngelList, the investors accepted the terms we already had for the convertible note (or choose not to invest). There are syndicate deals where the lead investor does negotiate terms (Foundry does this on other FG Angel deals) but syndicate members don’t – they either accept the terms or don’t participate. And they do look at terms so structuring a fair deal is important.

Syndicate Dynamics:
To sign up for FG Angels, an investor must be approved by Foundry Group and agree to their terms, which include a carry. The carry is a percentage of the returns on the investment that the investor will give to Foundry Group for managing the syndicate and investments (note that AngelList itself takes a carry as well). The carry is between Foundry Group and the investor and has no direct impact on the AngelList company. This is beneficial to the startup because neither AngelList nor Foundry Group take any of the investment funds -there is no “finders fee” or other fee to the startup for being part of the syndicate. FG Angels and AngelList will get their carry straight from the syndicate investors upon an exit. The terms for being a syndicate member and the specific carry vary between syndicates, but the key for founders here is that this is all taken care of outside of any specific investment and any investor listed as part of the syndicate will have already agreed to the terms and carry.

The AngelList syndicate shows the number of members in FG Angels and lists each syndicate member as well as the amount they have pledged per investment. There is a portion of syndicate members who rarely invest in any deals and some who invest in every deal. A smaller group performs due diligence on each deal before they invest and makes a deal by deal decision whether or not to participate.

The Timing:
FG Angels Syndicate investments go FAST. Foundry committed to invest through FG Angels on a Friday. Over the weekend we revised our note and updated our AngelList profile. On Monday our deal went live and almost all the funds raised from the FG Angles syndicate were in process by the following Monday (within one week).

Be Ready for the Syndicate Investment to go Live on AL:
FG Angels is a popular and fast moving syndicate with 219 members at the time of the U Grok It investment – with an explicit goal to launch a new investment each week. This means that the interest in your startup will shoot up as soon as the FG Angels investment goes live on AngelList. Here is a graph of the investor views on U Grok It’s AngelList profile over the two weeks that the FG Angels Syndicate investment was live:

ugrokitgraphThe first short bar is the Monday it went live (we launched towards the end of the day). The big spike is Tuesday. What this means for an AngelList company is – be completely ready for investors before giving FG Angels the green light to go live.

506(b) vs 506(c):
These refer to two of the SEC rules that regulate “crowdfunding” financing. 506(c) is the new Jobs Act provision that, in part, allows for what’s called a general solicitation (on AngelList, this is shown as a “public” fundraising). FG Angels Syndicate investments are NOT general solicitations and some syndicate members do not want to invest in companies that are using this exemption. Check with your lawyer to make sure you have not engaged in general solicitation and make sure you DO NOT CLICK on the AngelList button that says “Activate” under “Raise Online On Your Own.” (this can’t be undone, so make sure you’re careful about this step). Your AngelList company profile shows “Investors Only” in the upper right under Fundraising if you are 506(b), which is likely you want (this isn’t legal advice – talk to your lawyer about the pros and cons about the various exemptions but understand that, broadly speaking, few institutional investors will ever invest in your company if you use the new broad solicitation rules – they simply don’t work as intended (yet).

What the FG Angels Syndicate Wants to See:
Closing an investment is just another form of closing a sale for your company. Investors just have a different pain they are trying to solve – they want a big return on their investment. Make sure your investor messaging is clear on this in your AngelList profile. Be sure to have your profile polished. For example, you’ll want:

  • Video of your deck – if you have a good quality video of yourself presenting your deck, great. If not, record your audio and put that with your slides. We did this in house (the production quality does not have to be stellar, just clear) and put it as an unlisted video on YouTube. You can then put the link in AL.
  • Product demo video
  • Product shots / screen shots
  • Every part of your profile completed
  • Current investors and total investment amount for this round. AngelList will show how much you are raising and how much is left in the raise, so make sure the numbers are up to date by updating each closed investor prior to launch
  • AngelList comments and references for both your company and the founders. If you don’t have these, ask for them. Your networking should have brought you into contact with many people who are rooting for you – this is a way they can help you without investing money. We had some high profile supporters who gave us comments just before the investment went live and this was a big help
  • Your website – Make sure your website is up to date because the FG Angels Syndicate members will go from AngelList right to your website to see what your customer messaging looks like and how you position your business.

What Happens After the FG Angels Syndicate Investment Goes Live:
You will have a lot of fundraising work to do in the week after the investment goes live. Members start to make reservations in the investment – you’ll see that is shown in the activity for both FG Angels and your company on AngelList. Members can also increase the amount they want to invest in your company. Members can also withdraw or cancel from the investment.

AngelList will show your company as having raised the total backing amount of the syndicate (which is overstated for the reasons already discussed) and separately show the total backing amount + FG Angels $50k. These are shown on your company’s Stats page > Fundraising > Manage > Overview. This total will initially be the full backing amount of the FG Angels Syndicate and will go down slowly as members withdraw (yes, slightly disheartening). Remember that this will be a good investment both from the funds standpoint and by having Foundry Group’s support.

Note that most FG Angels members will neither reserve nor withdraw. Your company will also get a lot of follows (mostly from FG Angels syndicate members) and a lot of request for intros. You should follow everyone who follows you and have a message prepared to send to each one. U Grok It’s message thanked them for following, invited them to watch the pitch deck and demo videos and to contact us with any questions, giving direct contact information. Also reply to each request for intro and expect these people to email you back, usually with questions. The request for intros are often investors who do more diligence about the investment. Some followers and request for intros are from investors who are not members of the FG Angels Syndicate, but watch what the syndicate does to find new investments. Plan that most of the your week after the FG Angels Syndicate investment goes live will be spent courting AngelList investors.

In our case, we were also contacted by people who follow FG Angels or one of the Foundry partners but who are not part of the FG Angels syndicate. These people can become outside investors (we are still conversing with a few that may be interested in our Series A round). Some syndicate members may also wish to invest directly in addition to their participation in the syndicate. U Grok It has a new investor in this round who has a small amount in the FG Angels syndicate, but is investing substantially more directly (this is a bit of an end around Foundry, so be careful here who you let in and whether they’re trying to simply piggback on FG Angels w/o paying the carry associated with doing so or if they’re legitimately interested in participating in the syndicate and so excited they want to invest more). So don’t discount a syndicate member just because their syndicate participation may be low. Also to this point, less than half of our syndicate investment came from investors at $5K or higher. The majority was at $2,500 or lower.

Closing the Investment:
At your direction, AngelList will begin to close the FG Angels investment. This will allow syndicate members to start transferring their investments into the fund (more on this below). AngelList will then select a closing date (about a week after you start closing). Our investment opened on Mon, March 24 and AngelList started closing on Wed, March 26 with an initial closing date of Tuesday, April 1.

Here is where you start to get an indication of how much you will actually raise from the FG Angels syndicate. Members will start transferring their investment and in the Stats > Fundraising > Manage > Manage page you will see the amount that has been collected (starts as $0) above a four-tabbed list: All, Not Started, Pending and Collected. In the “All” list, you will see only the members who have not previously opted out of the investment and then you will see some members cancel.You will see the pending amount increase and then the collected amount increase as the pending amount decreases (funds move from pending to collected). Starting to close doesn’t lock anyone out of the investment. Any member of the syndicate (even if they did not opt in, as most of them didn’t) can transfer their investment during this part of the closing. AngelList will send a message to the FG Angels members when the investment starts to close and another one a few days later reminding them to transfer their funds.

This is a great time to update the FG Angels Syndicate members in the Not Started group. If you ask AngelList, they will send you a spreadsheet of the members with their email addresses so you can do a group BCC: email with send you the link they need to click on to make their investment. Include some update on your company (in our case we received a new, glowing profile from a high profile AngelList member and we were opening our online sales). Come up with something to update them about. Make sure this email goes only to the Not Started group. AngelList is also generally happy to extend the closing date if your pending investments are still going up. We extended from April 1 to April 7, but the vast majority of the investment was in Pending by April 1. When investments slow or stop (in one to two weeks), AngelList will close the investment – this does keep members who have Not Started from joining the investment, but keeps things open until the pending investments have been received.

The Investment Paperwork and Details
The FG Angels Syndicate investment is overseen by Foundry Group (for which they receive the carry if the investment generates a return). The company will have only two new investors: FG Angels and FG Angels Syndicate. The FG Angels Syndicate members who invest in your company become part of a fund setup by Foundry Group through Assure Fund Management. Someone from Assure will contact you after the FG Angels syndicate investment goes live on AngelList to set up your funding vehicle (this is separate from FG Angel’s direct $50k investment).

If you have filled your round and are closed, that is great. If you still have room in your round (we did since we had extended the round to ensure there was enough room for the FG Angels Syndicate), then you can keep raising.

CONGRATS – Now What? – Investor Relations with the Syndicate
Technically, you only have FG Angels and fund(s) managed by FG Angels as your investors. However, some syndicate members will want to connect with you directly (in our experience often on LinkedIn), some will ask for updates and some will offer their help (services, connections, advice).
This is evolving so there aren’t really any norms here yet. On the one hand, it is impossible for a small startup to effectively manage 100 new investors. On the other hand, these investors all now have a stake in your success and many are willing to help make that success happen, so they can be quite beneficial to your startup.

You can send updates to the syndicate investors as a group through AL in Stats > Fundraising > Manage > Manage where, once the deal is finalized, you will see a list of Closed investors and Didn’t Close and on the right a Message box with a link to “Update Investors or ask for advice.” These updates are only visible to you and your investors. We updated the investors when the round completely closes and plan on providing them major updates and perhaps a quarterly post while right now I send out a monthly (or so) email to our direct investors as well as field calls and make calls when there is a topic to discuss.

Hopefully this overview is helpful in gaining an understanding of the AngeList syndicate process in general and the FG Angels process in particular. Of course this is a new and therefore evolving method for funding your business so check for updates from AngelList (and here where we’ll post new developments).