Pros and Cons of Angel List Syndicates: Making an Informed Decision

When it comes to angel investing, particularly for individual limited partners (LPs) who are looking to deploy their capital in a more structured manner, Angel List syndicates offer a unique opportunity. However, just like any investment, there are both advantages and disadvantages to consider. In this article, we will explore the pros and cons of investing through Angel List syndicates and help you decide which one is right for you.

Pros of Angel List Syndicates

One of the key benefits of participating in Angel List syndicates is the sheer volume of dealflow available. Angel List has established a robust platform that sources a large number of deals from various startups, making it easier for LPs to find opportunities that align with their investment criteria.

In addition to dealflow, the process of making an investment is streamlined. Once you have an account set up on the platform, the entire process from finding a deal to making an investment is relatively straightforward. Furthermore, many syndicates have low minimums, making it accessible for a wider range of investors to participate.

Cons of Angel List Syndicates

While Angel List syndicates offer numerous advantages, there are also several downsides to consider. One of the biggest pros can also be a con: the sheer number of syndicates available can lead to information overload. With so many choices, it can be challenging to determine which syndicates are worth backing. Many investors opt for syndicate leads they have heard of or those with a strong backing, which might not always be the best choice.

Another challenge is the varying levels of diligence provided to investors. While some syndicates offer quite detailed due diligence, others may simply provide a pitch deck. This can be problematic, especially for small investments. Additionally, the pressure tactics used by syndicate leads, such as closing deadlines and calls for commitment, can create an uncomfortable and stressful environment for investors.

Liquidity and Carried Interest

One of the significant advantages of Angel List syndicates is the liquidity they offer. As an LP, you can easily exit your investments, which can be particularly useful if a startup is not performing as expected. This flexibility is a strong incentive for syndicators to invest in startups that are perceived as having high potential for success. For instance, if a syndicate lead brings in a super-hot deal, the LPs are more likely to be rewarded with a share of the upside.

Furthermore, the low fees associated with many Angel List syndicates can make them an attractive option for LPs. Kevin Rose and MG Siegler do not charge any fees, meaning you pay Angel List 5% of any upside. Even with small investments, you can find relatively inexpensive options, such as FundersClub, which charges zero/20 for most funds. Kevin Rose, in particular, is seen as a bargain.

Valuations and Track Record

While the liquidity and low fees are strong benefits, it is important to be aware of the potential risks, particularly around valuations. In the current market, valuations are often frothy, leading to potential issues when investing in startups that do not have growing revenues, low costs, or happy customers. The Series A and B crunch can make it challenging to find worthwhile investments.

It is also crucial to research the track record of the syndicators you are considering backing. Some syndicators may be overconfident, leading to poor decision-making in A rounds or maintaining their egos at the expense of investor interests. A thorough evaluation of a syndicator's track record and their ability to manage investments can help mitigate these risks.

Conclusion

Angellist syndicates offer a unique opportunity for LPs to invest in startups through a structured and accessible platform. While there are advantages such as liquidity and low fees, there are also disadvantages, such as information overload and varying levels of diligence. Careful consideration of these factors is essential to make an informed decision about which syndicate to back. By researching the track record of syndicators and understanding the potential risks, you can make a more informed and successful investment.