As an investor, you will agree that one of the challenges that come with investing in Startups is the possibility that such startups may be a bad investment as a result of the inability of the latter to meet up with growth projections and expectations. In addition, the unstable state of the global economy hasn’t made the Startup ecosystem any easier, with the mass layoff of employees.
To this end, most institutional investors such as Venture Capital (VC) firms, have become more cautious when it comes to investing in startups. This is where the Syndicate investment Structure comes in as a protective measure for investments.
In this article, we will be considering in detail, what a Syndicate Investment Structure looks like from the Investor’s perspective. We will also consider how Syndicate Investment works and what Syndicate Investors need to look out for before investing in a Startup.
WHAT IS A SYNDICATE INVESTMENT?
A syndicate investment is an investment vehicle, made up of a group of individual or institutional investors in which a lead investor also known as (the syndicate lead) sources for investments, conducts due diligence, and secures allocations for other investors referred to as “backers”.
Usually, this kind of investment model is carried out in such a way that a special purpose vehicle (SPV) is set up. An SPV is simply a company that is incorporated specifically for the purpose of carrying out an investment transaction.
In most cases, Syndicate leads are often experienced angel investors, startup founders, or VC firms with a vast and great depth of knowledge and experience within the startup ecosystem. The backers on the other hand either do not have investment experience when it comes to investing in startups and if they do, they prefer Syndicate leads to choose startups to invest in and manage their investments.
HOW DOES A SYNDICATE INVESTMENT WORK?
Investing through a Syndicate structure goes through the following steps;
1. The Syndicate lead discovers a startup that he/She/It considers a great investment opportunity, which he shares with other investors.
2. Interested investors indicate interest and are provided with detailed information about the deal
3. Where interested investors sign in on the investment project, an investment vehicle (i.e. a company) is formed strictly for that purpose
4. After investments are made into the company, the Syndicate lead is responsible for monitoring the startup and keeping other investors updated on the performance of the startup
5. Where the investment goes well, all investors receive their return on investment, and should the investment fail, the investment vehicle is dissolved.
In practice, all of the above steps are carried out within or through a platform.
WHAT INVESTORS SHOULD LOOK OUT FOR BEFORE INVESTING IN ANY STARTUP
Below is a summary of what investors considering investing in startups should look out for;
1. Market opportunity. What is the overall market size for the product or service offered by the startup? Are the huge prospects for clientele or users? At the end of the day, a startup needs as many users to stay profitable in any market for a long period of time.
2. A unique and viable product and business plan. Does the product or service solve a problem? Is the strategy for offering such a solution viable?
3. Character and Commitment of founders. As an investor, you must ensure that the founders have a proven track record of dedication, discipline, and commitment toward the company in question.
4. Find out who the team members that make things happen within the company are.
5. Investors should ensure they have good knowledge about the business sector of the startup they wish to invest in. This reduces the chances of risks.
6. As an investor, ensure you have a clearly defined exit strategy that enables you to leave the investment with little or no loss on your investment capital.
BENEFITS OF SYNDICATE INVESTING FOR INVESTORS
Syndicate investment structure has benefits on the part of investors. Some of them include;
1. By investing in various startups, an investor can build a diverse portfolio. Having a diverse investment portfolio is a great way to reduce risks on investments as an investor.
2. With a syndicate made up of a group of investors, the latter has the opportunity of participating in larger deals with fewer funds, which will be highly unlikely if they were to invest alone.
Investing through the Syndicate vehicle has become a popular trend, particularly in the startup and venture capital space due to the benefits it provides for both startups and investors as well.
However, setting up an investment vehicle, sourcing for deals, and concluding investment projects has various legal implications as well as requirements to be satisfied to ensure that the interest of the syndicate lead, backers, and startups to be invested in are protected.
We, therefore, recommend you seek the services of a lawyer or law firm that understands the terrain, to ensure your interests are well protected in such transactions.
Need a lawyer for your investment projects or transactions, or legal advice in this regard? Please reach out to us here or through the Whatsapp icon on the lower right part of the page, and we will be delighted to assist you.