Building a Book with AngelList Syndicates

Building a Book with AngelList Syndicates



There has been a lot of talk recently about the impact AngelList’s new Syndicates feature will have on the Venture Capital industry. I’ve heard a wide variety of opinions, ranging from absolutely no effect to a complete disruption of the VC industry as we know it.

Interestingly, most of the debate is taking place from the point of view of the investor.  My question is: how do founders feel about this new feature?

The response to the surge in online seed stage investing has generally been positive. While there are definitely some open questions around the negative effects of so much seed capital flooding the market and whether this will result in a series A crunch, I think founders believe it is easier than ever to easier than ever to raise the first few rounds of capital.

But what about at the series A/B level? The funnel is narrower at this point, and there is more information available about traction, making the stakes higher for both entrepreneurs and investors. When I asked one founder recently if he would consider raising money through an AngelList syndicate, he responded, “I don’t know. My product and market are complex. What if investors don’t understand it, and I don’t fill out the round. Isn’t that a negative signal?”

He raises an interesting point. Having high quality lead investors with some skin in the game is meant to increase confidence in due diligence efforts. What happens if this isn’t enough? Currently AL is playing it smart and only slowly allowing deals on the platform, vetting each deal and lead investor. With this strategy, AL is aiming to build enough trust in the process that there is sufficient liquidity in the investor pool to successfully fund (and likely oversubscribe) each round.

This strategy has limitation, however, with a passive listing model. At some point, unless the available liquidity vastly outstrips available deal flow, AL will need to consider outbound marketing.

Enter Book Building.

In the equity capital market groups of investment banks, book building is the process where bankers poll the buy side on their appetite and desired price for a company’s capital raise. As investors respond, a banker builds a list of investors to complete the round. Once he has polled all the available investors, he can set the price and provide allocations.

One of the most important functions of the equity sales team in the process is proactively reaching out to pitch the stock and build investor interest. Though there is arguably room in this process for conflict of interest for the investor, it is a critical part of building the investor pool to fully subscribe the raise. It will be interesting to see when AL starts to focus its efforts on the outbound marketing – not necessarily on a sales commission basis like at an investment bank, but at the very least to ensure that a founder’s raise is successful.

When AL is ready to focus on this, it will have a wealth of information to begin targeting investors—from data on previous investments syndicates have made to their personal connections on AL and the companies and sectors they are following or advising. All of this constitutes an amazing set of data on which to build investor preference profiles. This could form the basis for an outbound marketing strategy, pushing potential deals to those investors that statistically are the most likely to invest.

Wall Street has historically relied on qualitative decisions by salespersons, as well as brute force sales tactics. Hopefully AL can use its wealth of investor data to build a much more analytically driven capital raising process as it pushes for larger rounds. I know that some people will smell a potential for conflict, but if they use a data-driven method, the marketing is more likely to result in a positive experience for both parties. After all, at the end of the day, investors still want to find opportunities, and founders don’t want broken rounds.

Image credit: CC by James Russo

About the author: Karl Antle

Karl is a Managing Partner at ValueStream Labs. He has significant experience advising and launching innovative financial services companies and projects across the US, Europe, the Middle East, and East Asia, most recently as a senior member of Oliver Wyman’s Financial Services and Private Equity groups.

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