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📈The Rise of Angel Investing & Syndicates

Over the past decade or so, the landscape of venture capital has witnessed a significant transformation with the rise of syndicates (and angel investing). Originally, venture capital funds have been the primary vehicles through which investors deployed capital and resources to support promising startups. However, the emergence of syndicates has introduced a more dynamic and decentralized approach to backing startups. 

Syndicates enable individual investors, often led by experienced investment professionals or "syndicate leads," to collectively invest in specific startup opportunities. This shift not only democratizes access to venture capital but also empowers investors to build their portfolios, refine their investment abilities, participate in deals aligned with their interests, and leverage the collective wisdom and networks of the LPs/syndicate members. In this evolving paradigm, the rise of syndicates marks a departure from conventional models, opening new avenues for both seasoned and novice investors to engage in the exciting and high-risk world of early-stage investments.

In this week's newsletter, we are going to discuss some of the key factors that led to this shift, including:

• The Rise of Angel Investing

• The Regulatory Advancements

• The Emergence of Angel/Investment Platforms

The Rise of Angel Investing

With more startups and more success stories, angel investing has gained major traction over the past decade. The startup ecosystem has been thriving with many Seed to IPO success stories growing wealth for individuals.

Here are some of the primary reasons we believe angel investing has gained considerable popularity and momentum in recent years:

1. Increased Access to Startups → The internet and platforms have democratized access to information allowing angels (or anyone for that matter) to learn more about startups and research their business, their customers, their team, their funding etc. With increased transparency in the private markets, the barrier to entry has been lowered for angels/individuals.

2. Being an Entrepreneur has Become Way Cooler → Celebrity Status of Founders - In today's business landscape, startup founders like Mark Zuckerberg and Elon Musk are treated like celebrities, featured prominently across media and culture. Their superstar status, genius mythos, and meteoric success add to the "cool factor" surrounding both entrepreneurship and VC. This is partially responsible for the massive shift of an increasing number of ambitious and talented individuals, who previously may have pursued careers in areas like finance or consulting, now aspiring to become entrepreneurs and found their own startups. This shift speaks to a growing desire among top talent to build an innovative company from the ground up, fueled by the vision of creating the next generational business and tackling many of the world’s largest problems. As this grows, and there is a greater need for capital at the earliest stages, more angel investors are jumping in and playing a crucial role here.

3. Angel Networks → Over the past decade many different angel networks have evolved. They act as a way for groups of angels to combine deal flow, access, and expertise and work together to explore investing in companies and both a group and individuals. These groups have certainly attracted more angel investors into the ecosystem and operate similar to a community.

4. Wealth Creation in the Tech Sector → Many of those successful founders or early-stage employees had major life events upon an IPO or acquisition that created significant wealth. They now have capital to invest back into the startup ecosystem and industry knowledge to pass along with it. These have become highly sought after people for early-stage founders to bring onto their cap table. Two weeks ago, we talked about Martin Tobias and how he made meaningful amounts of wealth at Microsoft in the 90’s which led him to angel investing, which led him to running syndicates, which then led him to starting a fund. This is a perfect example.

5. Trends in Venture Capital → Venture capital has attained exceptional levels of glamor and appeal among both investors and participants across startup ecosystems in recent years. The rapid growth of high-profile unicorns, alongside cases of extraordinary returns earned by VC funds, have attracted growing interest in exposure to private companies. This movement has opened up a funding gap at the earliest stages of the startup journey. Eager to back ideas in their infancy, angel investors have mobilized more personal capital to fill this void by writing smaller checks than traditional VC counterparts. Angels are providing founders with the first outside financing often necessary to build initial products and traction.

After going through these points above, I can’t help but say thank you to all the angel investors out there. It’s actually amazing to take a step back and see all the value and capital added to help entrepreneurs chase their dreams and create amazing companies. 

Now back to the show. 

Two additional developments have catalyzed transformations in the angel investing landscape beyond an increase in activity levels - 1) regulatory changes and 2) infrastructure platforms supporting and enabling angels. 

First, the regulatory part. 

The Jumpstart Our Business Startups (JOBS) Act is a piece of legislation in the United States that was signed into law on April 5, 2012. The primary goal of the JOBS Act is to facilitate capital formation for small businesses and startups by easing certain securities regulations. The act introduced several provisions that impacted various aspects of fundraising, including crowdfunding and the ability of startups to attract investment.

Here are some key provisions of the JOBS Act and how they affected angel investors:

Title II - Accredited Crowdfunding

Title II of the JOBS Act lifted the ban on general solicitation for private securities offerings. This means that startups could publicly advertise their fundraising efforts. For angel investors, this increased transparency and made it easier for them to discover and access investment opportunities.

Title III - Equity Crowdfunding

Title III introduced equity crowdfunding, allowing startups to raise capital from non-accredited investors through online crowdfunding platforms. While this was primarily aimed at opening up investment opportunities to a broader range of individuals, it also provided additional funding sources for startups, potentially involving more angel investors in the process.

Title IV - Regulation A+

Title IV expanded Regulation A, allowing startups to raise larger amounts of capital from both accredited and non-accredited investors. This increased the fundraising options for startups and potentially attracted more angel investors looking to participate in larger funding rounds.

Easing of General Solicitation Restrictions

The JOBS Act made it easier for startups to publicly announce their fundraising activities, potentially reaching a broader audience. This change may have increased the visibility of investment opportunities for angel investors.

Increased Investor Caps

The act increased the investment caps for crowdfunding investors based on their income and net worth. This allowed individuals to invest a higher percentage of their income or net worth in crowdfunding campaigns, providing startups with access to potentially larger individual investments.

Reduced Regulatory Burden

The JOBS Act aimed to reduce the regulatory burden on small businesses and startups seeking to raise capital. The intent was to streamline the fundraising process, making it more efficient for both companies and investors, including angel investors.

Now you can understand why the JOBS Act was so crucial to the startup scene and angel investors. The other massive accelerant to angel investing was the rise of angel platforms. 

Angel Investor Platforms

While these platforms got more popular due to some of the points already discussed, the democratization of private investing is the key factor related to their success and traction.

These platforms include:

• AngelList

• Sydecar

• Carta

• Republic 

• MicroVentures

• EquityZen

• SeedInvest

• CrowdStreet

• Crowdcube

• And more.

The emergence of angel investor platforms has democratized access to early-stage deals in a meaningful way. Previously, backing a startup often relied on finding a connection to founders through closed networks unavailable to most individual backers. Now, these platforms allow a broad pool of potential angels to efficiently discover, evaluate, and invest in promising ventures sourced from across ecosystems. 

Startups can complete funding rounds with qualified investors that align with their vision rather than just those within their immediate proximity, meaning an individual in Des Moines can invest in a startup in Silicon Valley. By expanding and simplifying deal reach and connectivity, these platforms have successfully lowered barriers and unlocked startup investing for a whole new category of interested backers.

In turn, this opened up a new pool of capital that did not previously exist. As more and more angel investors became users of the various platforms, it enabled more opportunity for those who had access to high quality deals. 

This is a large part of where Zach and I found our opportunity.

We had seen the role fund admin platforms played in not only enabling investors to  invest in startups, but also the ability for new syndicate GPs to emerge that had access to these startups. It became evident that there was a great and engaged audience of angel investors constantly looking to identify exciting founders and startups to invest in, therefore  we started syndicates to seize this opportunity. For the first time, I was now able to invest into startups with other interested angel capital allowing me to put together SPVs that were $100k or more. My personal checks were never that large so having access to a larger pool of capital that allowed for more meaningful sized checks from me was a total game changer when talking to founders. 

The Rise of Syndicates

Much of the initial credit for the rise in syndicates should go to AngelList. They were the first to build a platform that took on all the back end and back office work to allow syndicate leads to focus on doing deals and investing in the best startups. 

They provided people like myself with access to founders a way to put together an SPV, manage the SPV legal and admin, market the deal to accredited investors, and manage the investment all in one platform. It made it probably 10x easier for individuals to put SPVs together versus the manual/offline previous approach. 

You can see the explosion in SPVs on Assures’ (no longer in business) platform in the chart below. When Assure was in business they went from under 200 SPV’s completed in 2017 to just about 1,000 in 2020, which would be about 5x growth in 3 years. I’d imagine AngelList’s growth is even greater.

While the market was piping hot from 2018 to 2021, we’ve seen it cool off and I’d imagine the SPV volume at present is not where it was in years prior, but the infrastructure to support people doing SPV’s has only gotten better.

With other platforms like Sydecar & Carta emerging, SPV’s will not only be here to stay, but you will see more and more GPs starting syndicates or layering on syndicates to their fund in the future. 

In Summary:

1. Angel investing activity has expanded significantly over the last two decades as fueled by the growth of the startup ecosystem and interest in it, growing the total addressable market (TAM) of individuals deploying more capital into startups.

2. The 2012 JOBS Act eased regulatory limitations on fundraising and solicitation for private companies in the US. By enabling simplified disclosure requirements and permitting general solicitation of accredited investors, the act made it easier for startups to access a broader range of interested backers at their early stages.

3. The emergence of streamlined online platforms and networks focused specifically on investing has reduced frictions enormously. These portals allow individual backers to efficiently discover, evaluate, coordinate, and invest into compelling opportunities sourced from across ecosystems. Automated and simplified special purpose vehicle (SPV) creation and administration on these platforms also enable collective investment.

Together, these developments have cultivated a more mature, accessible, and founder-friendly early-stage financing landscape. For those interested in participating, it's simpler than ever to explore investment opportunities, whether via reputable angel platforms or other specialized syndicates. The venues highlighted in this summary can serve as a solid starting point for evaluating options.

For those interested in exploring more investment opportunities, you can back our syndicates (below) to see more quality deal flow or email us directly for other syndicates we recommend backing!

Our Syndicates:

• Riverside Ventures

• Calm Ventures

If you enjoyed this post, please share it on LinkedIn or Twitter and tag Alex Pattis & Zachary Ginsburg and we’ll send you a DM to answer 3 syndicate-related questions you’ve got!

We’ll be back in your inbox next Wednesday on our next topic. Thanks for tuning in!

Questions? Comments? Feedback? We welcome all, and would love to hear from you!

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✍️ Written by Alex and Zachary