Member Blog: Syndicate pros and cons and how to form one
April 18, 2023
In the previous blog about syndicate investing, FiBAN member and co-founder of Sofokus Ventures, Turo Numminen, introduced the basics of syndicate investing. Now he shares his insights on the benefits of investing in a syndicate and how to form one.
This time we take a look at the actual benefits and some drawbacks to syndicate investing, and what every startup founder and investor should know about investing in a syndicate. To read the basics about syndicate investing, read this previous blog about syndicate investing.
Syndicate benefits for startups and investors
There are many benefits in syndication for both startups and investors. The main benefits are
- Access to more investment opportunities.
Access Investment syndicates allow individuals or organizations to pool their money together to invest in larger opportunities that may be beyond their individual investment capabilities. This usually happens when investing in more advanced companies that require higher minimum tickets.
- Diversification of risk.
It’s easier to invest in smaller tickets and spread the risk across multiple investments, which helps to reduce exposure to any one particular investment.
- More resources for the startup.
Syndicate members often have different skills and expertise, which can be leveraged to evaluate and manage investments. Additionally, syndicates may have access to resources such as industry connections, market research, or legal and financial advice that are beneficial for the startup.
- Sharing the workload.
Investing can be time-consuming and complex. By syndicating, members can share the workload and delegate tasks to those with the appropriate expertise.
It’s easier to find investors for the next round if there is a pool of investors. Sometimes syndicate can fill a large portion of the round, and it always increases the network the startup has at its disposal.
The challenges – Syndicates are not for everyone
While investment syndicates offer many benefits, they also present several challenges, including
- Communication and decision-making.
Syndicate members may have different investment goals, risk tolerances, and decision-making processes, which can lead to conflicts or delays in decision-making. It’s important for syndicate members to have clear communication and agreements to avoid misunderstandings or disagreements.
- Legal and regulatory compliance.
Investment syndicates may be subject to various legal and regulatory requirements, depending on the type of investment and jurisdiction. Syndicate members need to be aware of these requirements and ensure that they are in compliance to avoid legal or financial penalties. This applies especially to multinational syndicates with different legal systems.
- Define exit strategies.
Syndicate members need to have a clear exit strategy for each investment to ensure that they can sell their shares and everyone must understand that startup investments are not liquid.
- Fees and expenses.
Syndicate investments may involve various fees and expenses, such as management fees, legal fees, or due diligence costs. Syndicate members need to ensure that costs are transparent.
Most of the challenges are due to poor communication or expectation management. Having everyone on the same page and maintaining regular and open investor communication can greatly reduce the challenges.
Also, it’s important to keep in mind that syndicates don’t have fixed operational mode and some syndicates can be more free-form members and are allowed to have more freedom over communications and decisions while others may have stricter rules and agreements in place.
Tips for forming or joining to syndicate
Forming or joining an investment syndicate can be a highly effective and interesting way to build an investment portfolio. However, remember to carefully plan and manage the process and set your own expectations. Below are a few basic tips when planning to syndicate investing:
- Set goals and criteria.
Before forming or joining a syndicate, define the investment goals and criteria. This includes determining the types of investments the syndicate will focus on, the expected returns, and defining the level of risk that you are comfortable with.
- Identify potential members and skills.
Identify potential members who have complementary skills, expertise, and networks. They should be vetted to ensure that they have a track record of successful investments and are aligned with the syndicate’s goals and criteria.
- Establish clear agreements and communication.
It’s critical to establish clear agreements and communication channels among the members of the syndicate. This includes outlining the investment process, decision-making processes, and the roles and responsibilities of each member. Members should also agree on how they will communicate and share information about potential investments.
- Due diligence: assess risks and opportunities.
Develop a due diligence process for evaluating potential investments. This includes conducting thorough research on the company or opportunity, assessing the market potential, and evaluating the risks and potential returns.
- Ask for advice.
It’s advisable to seek advice from other investors and in case of a cross-border syndicate, remember to verify the legal, financial, and tax implications of the investments.
- Be patient.
Syndicate investments may take time to mature and realize returns. Members should be patient and willing to hold their investments for an appropriate length of time.
Case Catermate Oy – How we formed a syndicate
We recently created a syndicate to Cater to the funding round of Catermate, which is providing short-term work for waiters in events and restaurants. It has a proprietary training program for those coming outside of the profession or wishing to supplement for example student income.
They needed an advisor team that has experience in the events industry, digital level-up, growth funding, and general startup building. Founders had already pointed the Assembly founder Pekka Akko and we introduced finance professional and entrepreneur Andre Maude and serial entrepreneur Niklas Elomaa to complete the investor team. We helped the team with some pre-round issues and took the responsibility for Due Diligence and SHA that was accepted by other parties. Read more about Catermate.
Good luck with the syndicate investing. We, and plenty of other FiBAN members, are happy to talk more on the topic and new syndicate members are always welcome.
About the author
Turo is an angel investor, FiBAN member, and co-founder of Sofokus Ventures. Turo’s mission is to support startups by providing funding, mentorship, and access to resources. He has participated in more than a dozen syndicate investments since 2020.