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What makes a good syndicate, anyway?

The causes and dynamics of today’s seed market have been well documented by Naval, Fred, Brad, Mark, and others, but no one has discussed how Founders can best optimize in today’s funding environment.  Entrepreneurs today have lots of choices when it comes to taking on early stage investors.  It’s an over-funded part of our market right now, and there is more money flowing into seed deals than we’ve seen in a very long time.  This is a good thing, but a plethora of choices can be confusing, particularly in the short-term, and forming a seed stage syndicate is something that will have impact on a Founder’s everyday life for years to come.

Today, the trend in seed syndicates is to raise between $500K – $1 million from a large number of angels, each of which invests small dollars (between $50K-$250K).  Syndicates today often include $50K-$100K checks from big venture firms, or in many cases, the GPs of big venture firms.  Remarkably, many of today’s syndicates are “leaderless” meaning that even if VCs are involved, no one firm takes a lead role.   These rounds are often much faster and easier to form than most VC syndicates. This can be a good thing, but it may optimize solely for the short-term.

Short-term trends are dictated by where the leverage point is between entrepreneur and investor, and by the state of the pricing market.  But pricing aside, all entrepreneurs make a choice when they decide to let an investor into a deal.  Sure today is frothy, but what are the long-term trade-offs being made by Founders in today’s market?  Are the syndicates of today better for Founders or will we all wake up with consequences in 12-24 months?

Below is the advice we give our Founders about establishing their Seed Round Syndicate:

1)   Get a lead you trust.

Establish a lead.  This can be a VC or an angel, but pick someone to have the lion’s share of the equity and have that person or group help corral your process. The right lead is your ally in closing the round on your terms and on your timeline.  This is a valuable tool for a Founder.

2)   Bring in valuable angels who can help you.

Bring in Angels who believe in you and can help build a company, especially ones with relevant industry operating experience.  Everyone in your syndicate is an extension of your team . . . so “hire” the best.

3)   Meet everyone!

Don’t take money from anyone you haven’t met.  This isn’t Vegas, this is your baby, and you’re letting someone get involved in your dream.  Don’t pay any kind of “angel tax” by taking a group of angels that are buddies, when what you really want is one rock star in the bunch.

4)   Assume you’ll be with this group for the next 5-10 years.

Picking a syndicate is Founding event. It lays the groundwork for everything you do as a company. If you are right, this is the team that will be with you for the next 5 years, sometimes longer.  And turn this test on your potential investors: is everyone in your syndicate thinking they’re in for the next 5 years?

5)   Take your time.

Things are happening fast right now. Slow down and make good choices. Do references and homework. Call around. Don’t take the first check you receive.  After the dust settles, you have to live with your new family.  Make good choices and you will love them.

6)   It’s about business

Make sure the majority of your syndicate is made up of investors whose business it is to invest.  This sounds simple, but actually it’s not.  It can be uncomfortable to ask a wealthy individual or powerful super-angel how much cash they have in total, or how much cash they have for you, or will they answer your phone call at midnight.  When things get tough, it’s nice to have people whose job it is to work with companies.  It’s important to work with people whose business is tied to yours.

7)   Plan Ahead

Always think about your next round. I know the trend of today is to have angels who don’t follow-on, but frankly, your job as an entrepreneur is to always maintain access to capital.  Seriously this is a big point.  Include people in your syndicate who can go through multiple rounds with you.  One of the most important maxims of all business (throughout all time) is to always have access to capital.  To think not is to dream that today’s froth continues unabated for the next 5 years.

At True, we strive to build syndicates that create strong foundations.  We spend a lot of our time thinking about things like reserve policies, the health of the players in a syndicate, the strength of the individual GPs around the table.   We even monitor the total cash required to keep our entire portfolio going assuming every syndicate partner went to zero.  That’s across 65 companies, and is incredibly unlikely, but we’re in business to support our companies, so we watch risk carefully.

Every single move you make as a Founder can enhance your future stability or threaten it.   As a Founder some of the first choices you make can often be the most important. Operating without a strong seed round syndicate can create a big gap in your company later.  It’s like going for a long bike ride without first downing a banana and a ton of water. . . you just might not ever catch up.


  • Great advice. We are being careful about #1 (Get a lead we trust). And #5 (take our time to do our homework & ref checks) is always a good reminder. So hard to actually follow, because fundraising is expensive in terms of founder time, and we want to put as much of that time as possible into growing value.

    I just heard another glowing recommendation for True from a friend in terms of how you treat founders. Must be doing something right.

  • Jon,

    I feel like you read my mind. After Mark’s post today (http://bit.ly/eLRv5b) I was planning on asking him in the comments about seed rounds and how to evaluate those investors. Do the same rules he outlined for VCs apply? What’s different? How should these relationships be handled when in your earlier funding stages?

    For us, talking more and more with many different angels, it’s hard to know what to expect with this being all of our first start-ups. I know this post will be an invaluable reference as we proceed.

    I think the most important part is to take one’s time. It’s extremely easy to get caught up in the excitement or even desperate to just be earning a paycheck after having quit your full-time employment to pursue a dream. Having to tap the brakes as we go is incredibly difficult, but I’m sure well worth the extra time.

    Thanks for the wisdom and for a glimpse at True’s values. I have a very short list of VCs I feel like I trust, but have never met. This post gives me that feeling about you.

    Thanks again,


  • […] * Jon Callaghan: What makes a good VC syndicate […]

  • Thanks Travis for pointing our Mark’s post. He always does a great job detailing what needs to happen, and I completely echo his thoughts. To answer your question on how to do this with angels, I think you should treat every investor the same wrt the diligence and referencing you perform on them before taking their capital. These folks will forever be in your cap table, and they will influence and impact you in good times and bad. And Founders they have worked with will tell you the straight scoop on who is helpful and who is not. The great thing about the current startup renaissance we’re living through is the tremendous transparency available to all Founders. It’s a remarkably powerful development in the ecosystem.

    • by Jon

    • on December 16, 2010

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