Angel Heaven: Building the Ultimate Syndicate Vehicle

Continuing my recent onslaught on articles about angel syndicates. (Last one before I go back to hibernation.) Here is my dream wish list for the ultimate angel investing vehicle.

The Killer Angel Vehicle combines the best of institutional asset management with ease of shopping on Amazon. Let’s have an instrument that delivers filtering, scale, governance, diversification, benchmarking, standard documentation, access, and actionable low cost passive indices. Oh yeah, and make it easy. And easily transferable in a secondary market.

I think AngelList Syndicates has a shot at pulling off most if not all of this. I’m already committing to their v1.0, but here’s where I hope it goes.


FILTERING:  My biggest problem is lack of time. So the last thing I want to do is try to kiss 1000 frogs trying to find a prince. One of the great things about going to a demo day at YCombinator or TechStars is knowing that they have already separated a lot of the chaff from the wheat, making my job as an early stage investor much easier. I found AngelList compelling back in 2010, when it essentially was a curated list of high quality startups filtered by Naval and Nivi. But their dream was always to democratize the whole financing process via the power of the interwebs, whereas I want strong filters. For me, it’s like the old Yogi Berra line about a popular restaurant: “Nobody goes there any more—it’s too crowded.” (But if you still want to comb through the individual deals on AngelList or are new to it, here’s how to best do it.)

What’s the best filter? People you respect who put their hard-earned bucks at risk. What do you take more seriously, a recommendation of a company from someone who doesn’t invest, or from someone who does? And the more tight that filter, the higher the likelihood, in my opinion, of a good outcome. To quote Ring Lardner, “The race is not always to the swift nor the battle to the strong – but that’s the way to bet.” I’m happy for syndicate leaders to do the filtering for me.  I’ve signed up for Salil Deshpande’s syndicate: he’s a partner at Bain Capital Ventures, and he is syndicating all of his deals. So first of all, there’s no anti-selection, where you keep your good deals to yourself and only syndicate the ones which can’t get filled otherwise. Two other angels who have pledged not to anti-select are Wayne Chang and Naval Ravikant, and I’m going to join in those syndicates as well.  What really makes Salil’s advocacy such a strong signal is the limiting fact that as a VC, he will be sitting on boards…and there is only so much of him to go around. Which makes for a doubly strong bet, and a really great filter.


Another good signal is if anyone will restrict their syndicate or lower their carry. Sorry, Jason Calacanis, I like your podcasts like this one with @naval on syndicates, and I respect your hustle and nose for opportunities, but as far as I can see, you are optimizing for YOUR gains, not mine. How are our values not aligned? Well, if you put up 100k, but charge 15% carry net of AngelLists’s 5%) on $1 million of follower money, your profit is 50% higher, with no risk, on other people’s money than your own. Same reason why I’m passing on Tim Ferris, or Scott and Cyan Bannister (30% fees!! Come on, I don’t care HOW good their connections are.) The highest expected value for such an investor is to make tons of bets, because their return is more tied to other people’s money. If we’re going to go with wildly popular syndicates, give me someone like Kevin Rose, or the other professional VCs like Wesley Chan (also of Google Ventures) or Salil Deshpande of Bain Capital Ventures, all of whom are waiving their share of fees as they look at the grand experiment. They know that having a syndicate can help put some friendly wood behind their portfolio companies, and that is incentive enough to do it.


SCALE:  To make this truly scalable, a platform has to be able to handle a lot of volume. For someone my modest size of investments, this isn’t a problem, but as long as we’re dreaming, I’d like a platform wherein I can invest with the same or better efficiency and price as someone like a huge state pension fund. For me, investing via angel groups doesn’t scale—it takes too much time for due diligence, and not enough good deals come around.  I physically can’t join 20 angel groups, but I can commit to 20 syndicates with 2 mouse clicks each.  To make it to institutional strength, however, will need some serious infrastructure and tackle all of the following points like…

GOVERNANCE: As a former institutional investor as well as a trustee of two foundations, I’m well aware of the layers of protection that are necessary. That means independent boards, well-known counsel and accountants, regulatory supervision, the works. I’d love to see some people like former FDIC chair Sheila Bair, Mary Schapiro of the SEC or John Bogle of Vanguard on a board to make me feel safe. I know this is antithetical to the free spirits of Silicon Valley, but embrace audits—you KNOW there is going to be a great scam in crowdfunding, make sure that your funds are not caught up in it.

DIVERSIFICATION: I’d like this to be so easy to do that I can create my own fund of funds, but without the fees on fees. I’m a big believer in diversification, and as defined above this is not spray and pray, but rather reduce risk and increase expected returns. But it’s important for me to be able to know what the makeup of both the assumed portfolio of any syndicate as well as any actual one. I, for instance, used to invest about 40% of my angel funds in healthtech and medical devices. Going forward, I see that at no better than 10%. So, for any syndicate, I’d like to have some statistics of what the manager has invested in over, say the past 4 years, as well as what they believe they want to invest in going forward, since investing strategies can change. I’m not super strict about the concept of “Style Drift”, but I do want to know what people do. The amazing Manu Kumar of K9 Ventures makes it clear—he invests in a tight area around Palo Alto. Foundry Group has defined investment themes. (Their VC fund is way different than their to FG Angels syndicate, which may end up anywhere for as much as I can tell. I’m still backing FG Angels at the minimum amount for fun–it’s my money, I don’t have to always be internally consistent, so no needling, please.) But back to focus: please have the leaders of syndicate be as specific as possible in their writeups about what they want to invest in. I’m not necessarily disqualifying someone who says “whatever I feel like”, but the more definition they have, the more likely they are to appeal to me.


BENCHMARKING: I mean two types: the intellectually rigorous kind, and the consumer comparison kind. Let’s start with what an institution needs. You know how it takes a few years to get organic certification, and then those foods command a higher price? Similarly, I happily will pay up to know that I’m getting a certified financial record. I believe that anyone who uses the platform should sign a pledge to have audited financial performance. This should be easy in the case of AngelList, in that their fees are expressed as a percentage of the carry, and to my knowledge, the investment vehicles will be some type of pooled vehicle. Hence, AL will know all the dollars in, all the dollars out, and can perform consistent IRR and Total Return calculations across all syndicates. It will take a few years, but this is what is necessary to get big institutional investors involved.

And while you’re taking a page out of the world of investment managers like Cambridge Associates, you can establish not just investment returns for individual managers, but also all activity through the system. None of this self-reported crap that groups like the Angel Capital Association, NACO, EBAN, the Kaufman Institute or academics have had to rely on. But cold hard numbers. With knowledge of the individual deals, you can not only rank managers, but geographies, returns based on pre-money valuations, sector, the works. Be the shining light of truth! (And if at the same time, AngelList, if you can provide a format for me to privately include and calculate the returns of my non-syndicate investments, incorporating those numbers into my personal return, that would be awesome.)

As for comparability, take a page out of all of the ecommerce websites: allow us to compare one syndicate to another, ranking not just by size, but by fees (it currently takes multiple clicks in AngelList, that needs to get friendlier), sector, etc. I don’t mean the Netflix “if you liked this movie, you’ll love this one”, but think easy tags and search.

STANDARD DOCUMENTATION: A pet peeve of any angel investor is that despite best efforts, docs are always different. At the very least, let’s have a consistent documentation for any syndicate, with a lookup table clearly defining wherever there are different parameters, such as fees.


ACCESS: This is where AngelList should shine, and one of the reasons I am jumping in with both feet. The standard angel group no longer has access to the best deals, because they are based on old pre-internet technology. An entrepreneur might have to wait a few weeks to be seen by an investment screening committee, then wait again for the next open monthly slot to present to the membership, then wait for those part-time angel members to organize to do due diligence, then re-circulate to see interest among all members, then work on a termsheet, then discuss syndication…it’s a nightmare for an entrepreneur, and the very reason why when I funded both of my companies, I never approached an angel group. (One exception—I asked one group head to give me the names of the angel investors in his group most familiar with fintech.) The only way an angel group can access a hot deal is if they have the ability to commit to a sizeable, fast check, and few groups can compete with “super-angels” in this regard. Who are going to be the most successful syndicate leaders? Those very superangels who don’t have to go through committees to make a decision.

ACTIONABLE, LOW COST, CUSTOMIZABLE INDICES:  The first “pool” I bought via AngelList was a participation in all of the TechStars Seattle 2013 class. (See “Filtering” above.  FWIW, I and others have been asking for this for years, as in this June 2011 blogpost on how to pick a commingled fund.) While the cheapest way to participate in a broad TechStars bet is as a Limited Partner, this is the next best thing. (Provided that all of the companies opt in or out at the beginning of the class, so there is no anti-selection of just getting the less popular companies who aren’t already oversubscribed.) Investing in TS Seattle 2013doesn’t just give me filtering and deal diversification, it also gives me geographic diversification, something I discussed 2 years ago on this Frank Peters podcast.

What else would I love? The ultimate would be to mix and match offerings identified by individual syndicates. For instance, my favorite focus is on companies that tap into the unique benefits of mobile phones: like CardMunch (acquired by LinkedIn,) LocalMind (acquired by AirBnB,) and UpNext (acquired by Amazon), each of which were on AngelList back in the glory days of 2010-2011 when the dealflow was better curated. What if I could designate a group of, say, 15-20 syndicate leaders I don’t otherwise invest in, with the ability to join their syndicates when they committed to a company doing mobile phone apps? To put it into portfolio terms, I have an “approved list” of the syndicate leaders, and give an order to fill me up with a diversified mobile app portfolio, say, $100k based on the first ten $10k investments available/originated from those groups? In that way, anyone could create their own specialized funds, and even benchmark it via the AngelList “mobile phone app” universe that would include all backed syndicate deals, not just those on my approved list. And that mobile phone index could also be compared to any other index. For those of us who believe it is easier to spot a trend than pick a company, this is just the ticket.


EASE:  Believe it or not, this is probably the biggest reason I want to see syndicates succeed. Anything is an improvement on the hassle of angel paperwork. I just spent 40 minutes in my little Vermont bank waiting to get a wire approved for an angel investment. What is the iron test for ease of use: the ability to execute or confirm an angel trade in under a minute. Even the supposedly low-maintenance commingled funds I am in now have capital calls, which are a big PITA. 10 capital calls over the life of a deal seems to me like 9 too many. So make my life easy. I realize most angels probably don’t want to hand over all the money at once to a registered broker/dealer, so instead just copy the Amazon “1 Button” sale. I set up all my info in a master account once, including electronic signatures, SS#s, bank ACH instructions linked to my debit account or brokerage money market fund, links to my Vanguard or Mint accounts for communications, a preferred notification approach (text or email), and then notice that a deal is due. I have one centralized place to access all paperwork, and searchable pdfs of all deal documents get delivered into my secure account. When I get the notification, I have 3 days to hit the button to confirm or opt out, and if I don’t see the email, someone will track me down with a phone call. If I don’t respond, I’m not in, and you have every right to kick me out of future deals. (Hell, you have that anyway.)  And, I give you a total limit of amount I am willing to commit to any one syndicate and overall. When I get to that limit, I get an auto-notification to see if I want to do more, but it doesn’t automatically roll–it’s just a reminder for me to review my top-down allocations and revisit my assumptions.

Give me a reporting dashboard where I can see the total I’ve invested, some big picture overview, links to any messages sent to me by other investors or syndicate leaders, and a way to print out stuff to give to my accountant after each calendar year. And lastly, give me a way to list a transferable ownership interest in the syndicate pool and make it available to other accredited investors in the pool or outside of it. I’d be happy to pay a transfer fee of a few percent going in or out on a secondary trade.

That’s my dream. Please make it happen.

PS–Got any comments? Please leave them–I know you have something to say, Chris Douvos! (Who has the best top-down LP oriented blog around.)

4 thoughts on “Angel Heaven: Building the Ultimate Syndicate Vehicle

  1. Jon Bittner Reply

    Great post Ty – I like this vision, and I hope that AngelList syndicates do play out this way. The Vanguard of start-up investing is a good idea: low fees and passive participation via syndicates, and benchmarks and statistics in the long run. People without deal flow or time are able to diversify Markowitz/portfolio style by investing in great start-ups, picked by those who spend their sweat evaluating and sourcing.

    On the entrepreneur side, velocity and some standardization seem like a win, and one would hope it grows the pie of efficiently deployed capital by removing friction and economic rent-collecting. I hope it works out this way, and I think it might.

    Have you heard from any entrepreneurs who have been on the receiving end of one of the syndicate investments how well it worked?

  2. […] Angel Heaven: Building the Ultimate Syndicate Vehicle […]...

Leave a Reply

Your email address will not be published. Required fields are marked *