Syndication momentum starts with an organized plan.
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Knowing how to pull a good closing package together is one thing, but finding enough investors to actually fill your round is another. In the angel world, this process is referred to as “syndication,” and it is the key to getting a company financed.
Not only do you need the money, but you want it fast – the faster you can fill your round, the faster you can get back to making hires, talking to customers and growing the business. Syndication is a straight-forward concept, but it has its tricky aspects. In this article and the next two in this series, we will cover the fundamentals you need to navigate these tricks.
Put the Basics in Place Early
First, it is important to recognize that filling a round can take a long time, so it is critical to start earlier than you might think, and plan ahead. The fact is, only a very small percentage of investors may be willing to move quickly and write a big check. Unfortunately, these prized investors are usually the exception, not the rule. Raising money is one thing, but raising money from quality investors takes time. Most investors will need some time to consider the all of the details before coming on board. And professional investors working in groups may take even longer. Most groups will have a process in place that requires securing a presentation slot and moving through a diligence review process.
Although this group process may seem long and challenging, it is an extremely valuable mechanism. Among other things you will likely find your lead investor along the way. Every successful syndication requires a strong lead who can provide three key things:
- a written due diligence report other investors can rely on
- a market reasonable term sheet that fairly balances founder concerns and investor needs
- good connections for introductions to investors who may want to join the syndicate.
Create a Plan and Timeline
Once you’ve started the syndication process, you will quickly find that it’s nearly impossible to keep all of the details in your head. That’s why you need to have a plan with a timeline and an organized tracking system.
Given the number of people you will be communicating with, its important to keep detailed records. From a tracking perspective, identify whom you have spoken to, when, what their interest level is and what your total soft-circle commitments add up to. Something as simple as a link to web form that you can give to prospective investors to use to indicate their soft-circle commitments can be very helpful in keeping track.
Whatever method you use, being able to quickly access information and provide answers is paramount. You will find this especially helpful whenever you hear the one key question every single investor will always ask you: “where you are in the fund-raising process?” Obviously, it sends a very bad signal if you waffle and don’t have an accurate number ready right off the top of your head at all times–if you hesitate and dissemble, you’ll look like the round is struggling and you are making up an answer and likely overstating your progress.
Build a Momentum-Generating Process
You also need to build a process that will create syndication momentum–both literally to keep thing moving, and also figuratively in the eyes of prospective investors. There are a couple tricks to doing this that every entrepreneur should be aware of.
The first way to build momentum is the most strategic: do everything you can to have a first close on some portion of the early money. If you’re smart, you’ll try to get to that first close as quickly as possible. Why? Not only can you use the initial money to invest in the business right away, you can also project confidence; there is a lot of power in being able to say you’ve already had a first close, but you “might be able to fit” someone into the second close.
Another idea worth considering is to offer slightly better terms on the first close to encourage some investors to move early and quickly. One caveat: make sure that you don’t over-complicate things. A little sweetener is plenty, psychologically speaking. For example, if you are doing a convertible debt deal, you might offer a higher discount on the money coming in by a certain date. Optionally, if you are doing either a stock deal or convertible debt deal, you can offer some warrants for investors in the first close. Your goal is simple: offer a little extra incentive to convince people to move and to get to that first close as quickly as possible.
Finding enough investors to fill your round is hard work. Angel syndication requires time and patience. However, when you organize your efforts using a good plan and a strategic process, you’re likely to not only get the money you need, but also fill your round faster so you can get back to your real job–building a successful business. Next up in this series we’ll talk about moving a syndication along quickly and avoiding traps for the unwary.