What is a Syndicate and how does it work?
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Do you feel like you reached your professional growth? Do you feel you are no longer moving anywhere? If so, then this is a good time for you to start investing in startups. It is the best way to support the next generation. In addition, the startup world is extremely interesting. You can see new technologies and meet incredibly smart startup founders with a huge motivation and desire to change something. One way how to invest is through a syndicate. It's a great way to invest a smaller amount, so you can afford to invest in more startups and diversify investment risk. If you want to find out more about syndicate and its benefits keep reading.
What is a syndicate in terms of startup investing?
A syndicate is a temporary alliance of people that joins together to manage a large transaction, which would be difficult, or impossible. The so-called SPV (Special Purpose Vehicle) is composed of private investors or funds that invest in one startup under one entity. This method is well-established in the world, but it is not yet widely practiced in the Czech Republic, partly because of the Czech legislation. Someone must take care of the syndicate legally and procedurally. We do this within DEPO Syndicate and offer our investors complete syndication, including startup management and reporting for 5 years.
It is necessary to realize that the syndicate is capable of a minority investor, so it is not possible to close the investment round without the so-called Lead Investor. He invests the highest amount and is committed to do Due Diligence. In addition, he has a strong negotiating position in determining the terms with the founder.
Syndication allows you to create a diversified portfolio of investments. E.g. let's say you're a start-up investor and you have € 100,000 at your disposal. If you invest individually, the money would cover your investment in 2-3 startups, because startups require a minimum investment amount (Every startup has it differently, some may want 20K, some 50K, and some 100K - depending on the size of the investment round, ie how much money the startup requires).
If you syndicate, you can easily invest 10K in 10i startups, which is a sufficiently diversified portfolio to spread your risk and have a better chance that you will not lose money.
The syndicate simplifies the financing process, so you can spend less time on administration. It is also beneficial for startups because it simplifies their financing process. DEPO Ventures help create the syndicate procedurally and legally, thus simplifying your life and saving you time.
Another benefit that syndicates bring is, in addition to mitigating risks, is peace of mind. These "smaller investors" don't have to worry about their investments at all, because Lead investors have proven results and are accredited in exactly this type of process. This helps to invest as easily as possible.
Learning from more experienced investors
The syndicate is a great opportunity to establish contacts with other successful investors who have a passion for investing, and you can learn from their experience. You will see a lot of business deals, and you will start learning what a great opportunity looks like (versus a riskier), what a complete team should look like, how much traction is an indicator of product / market suitability, etc. You can also join due diligence. Some syndicates still keep in touch with the startups they invested in a year or two ago, so you get an update on how they're doing. This will give you a great overview of why some companies are not achieving their goals.
Effective for startup founder
This is even good for startups because they have access to higher investment amounts. In addition to financial capital, they will also receive human capital, ie the experience, expertise and business contacts. This indisputable advantage can dramatically speed up the startup process and increase the competitive advantage.
In order to create a syndicate, an SPV (Special Purpose Vehicle) is created, which is similar to s.r.o. But everything costs something. Be ready for the costs of processing, establishment, legal services, administration, transaction documentation, administration for 5 years, reporting, etc. Of course, the more investors in the syndicate, the lower the cost per person.
How is the Syndicate with DEPO Ventures
In case of interest of more minority investors or we find an investment opportunity that can be interesting for us and our investors, we launch a DEPO Syndicate. We establish s.r.o. intended exclusively for the investment project. The onset of syndication depends on how quickly members agree. These syndicates are accessible to members of our DEPO Angels Network.
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Pro-rata gives you the right to participate in the next round of financing and thus maintain percentage ownership in the company. This rule is not common in syndicates or crowdfunding platforms and its communicated individually with the startup founder.
The syndicate can be exciting and it's a great way to invest. But it's not a walk in the park. That's why we cover the whole process legally and procedurally, thus minimizing your risk. Syndication itself has more advantages than disadvantages, but it depends on what type of investor you are and what suits you. In any case, it is important that you carefully consider your goals and decide accordingly which type of investment is best for you.