New study: Angel syndicates formed frequently by two different processes – angel syndicate formation still rather informal
August 26, 2021
Finnish angels form syndicates commonly in two ways: either through FiBAN’s formal investment process or informally via investor networks, reveals a master’s thesis by Paula Väätänen published in University of Jyväskylä. The study utilized both investment data collected by FIBAN between 2013-2019 and eight angel investor interviews.
According to FiBAN’s statistics, around 80 % of angel investments are syndicated with other investors. For business angels, the motives for syndication relate to better risk-sharing, the ability to make larger total investments, and provide follow-up funding. Operating in syndicates improves the quality of how the investments are assessed, given more knowledge is available through multiple investors. Furthermore, syndication acts as a great learning opportunity and a way to accumulate larger future deal flow, which is essential if wanting to invest in the best deals.
Networks are important in angel syndication
Based on the study, syndication is frequent among the Finnish angels as none of the study’s eight participants invested alone. FiBAN’s active role in hosting regular pitching events and having formalized investment processes has provided a platform for the angels to pursue syndication. Angels typically form syndicates either formally through the FiBAN’s investment process or informally through their networks.
Despite FiBAN’s formal investment process, angel syndicate formation is still rather informal because the angels seem to rely heavily on their networks for syndicate partners and investment opportunities. A visual mapping of the syndication network produced from the investment data supported this as it revealed a small but dense investor network. The angels tend to syndicate with those investors whom they have invested with in the past and who they trust. However, repeated syndications require similarity in the investors’ investment activity and focus.
Angel syndicates structured around the leads – lack of engagement a potential obstacle in syndicate formation
The syndicates often structure around the lead investor as they drive the investment process forward and activate the syndicate members in the pursuit to invest. This increases the crucial role leads have in syndication as they are usually responsible for both pre and post-investment activities. Lack of engagement from the lead during deal structuring or the failure to find a lead in the syndicate serves as the potential obstacle in syndicate formation. Besides the crucial role of leads, another noteworthy aspect is the allocation of roles and responsibilities in the syndicate, so that everyone knows what is expected of them.
“The strength of the syndicate lies in its ability to provide more than what a single investor could, but for it to work properly it has to be an alliance”, Paula considers in her study.
Implications of the study for business angels and startups
Angels, especially those new to angel investing, should join a syndicate with experienced angels because it offers an easy way to learn the ropes and help avoid any rookie mistakes related to startup investing. However, many experienced angels tend to syndicate through their network, which can reduce their activity in the FiBAN’s investment process, emphasizing the role of investor networks in syndication. The availability of other investors is key in syndication, which makes networking even more important as the absence of a network is a barrier for co-investing.
Entrepreneurs, in their quest for funding, should be aware that angels rarely seem to invest alone. However, they can adopt an active role in syndicate formation by bringing potential individual investors together, improving their chances to secure funding.
Want to learn more about syndicate formation? The author of the thesis, Paula Väätänen will be speaking about the topic in our upcoming New Nordic Leads training on September 7th, 3 – 5 pm.
New Nordic Leads is a lead angel training and investment program to facilitate cross-border investments put together by #FiBAN and Estonian Business Angels Network (EstBAN) and is funded by Central Baltic programme.