The last 12 month has been exceptional in terms of exit.
I had 4 exits (Uber, Airbnb, FanDuel and Infracommerce) with a 3.7x return. Fanduel is not fully realized and will push this to over 4x. If we were to discount Uber that was 1.65x, I would have hit high 5x. I also had distribution of 6 funds, 2 of which are fully paid back and are now just producing upsides. I currently have line of sight on 2 more exits, one which will be my biggest one to date.
Having excitingly shared all those incredible windfalls with my friends. I have been repeatedly asked how to participated in those investments. Enough time that I started thinking of a model to enable the investment of friends and family, sharing my deal flow, giving more capital to startups and not adding the complexity for founders. I came up with the idea to syndicate the deal I would do anyway.
Below I create a FAQ to explain how an syndicate works, the benefits, the risks and perhaps more interestingly what is a good investment strategy. I tried to be as explicit as possible so that even if it your time considering investing in tech you get valuable information. By for those who wants the TLDR, the basic concept is: Hey, here is deal I am excited about and will invest into. Want in?
Three main challenges exist in tech investments; 1) Dealflow 2) meeting minimum investment requirements and 3) selecting which deals to invest in. The syndication aims to solve all three.
I get my dealflow from friends that are launching new startups, recommendation from said friends and from my relationship with FJLabs, Capital Factory, Antler, Clearco and generally being in tech for a long duration in US, Canada and Brazil.
Today, I get my (small) allocations mostly as favors from friends or due to my role as an advisor or strategic investor. Once I have an allocation, whether I invest as an individual directly or invest on behalf of the syndicate, it won’t matter to the founder. If anything, they will be happier with the larger check. Investing through the syndicate will enable participants to get access to the deal without having to meet standard minimums. The collective buying power of the syndicate will open up the opportunity to meet the minimum requirements.
I will outline more about my investment strategy below. The benefit of the syndicate is to take away all that guess work from you as the investor. I will only syndicate deals that I am going to invest in no matter what and that I would personally be backing even if the syndicate did not exist.
The basic concept is: Hey, there is deal I am excited about. Want in?
First and foremost, if I can share my network and gains with my friends, it would be super fun and personally fulfilling.
On the practical side, there are 2 material upsides:
My checks are modest: $20-50K in startups, $20-100K in funds. If we are able to consistently raise >100K per deal, this will unlock hotter, more competitive deals. It will also enable us to do follow-on investments to double down on the best companies. This benefits me and syndicates.
We will use angel.co syndicate structure to streamline each deal. They will take care of LLC creation, preparing the K1s and distribution.
Each deal will be its OWN Syndicate so you can choose which deal you want to invest in.
Angel.co charges $8K for maintaining the syndicate that they will take from the investment pool. Due to this, it only makes sense if we raise a minimum amount to justify the fee. The minimum will depend in part on how much I am contributing.
The more I invest, (and if it is a fund or a startup) the bigger the minimum will be to clear. This is to prevent a scenario where investing through the syndicate would cost me more than simply investing directly as an individual.
Those are the breakeven points between the syndicate and investing directly post fee and carry.
Each deal will have a blurb, a deck, the amount I am investing and the minimum to clear on the opportunity and will provide a timeline to confirm if you are in or out.
The carry is a percentage syndicates or funds take on the upside of a deal.
Here is an example:
Say the carry is 20%, the syndicate is 100K. The company does really well and the share price increases 10x to $1M. The carry would be on the upside only: ($1M-100K)*20%= 180K, the fund would then distribute the difference: $820K
If there is no upside, there is no carry.
The reason the carry is lower when we invest in a fund is 2 fold. The first is that a traditional fund has the following reward structure: 2% per year fee for 10years and 20% carry. Funds of funds only have a 5% carry because otherwise the carry eats up too much of the upside. The other reason is that when investing in a fund, they run diligence, decisions and admin so there is a lot less to do on my part.
Do not invest money you cannot afford to lose!
We’ll talk about investment strategy below, but diversification and number of deals is crucial. Some deals will return zero, some will break-even and a few will crush it. It is impossible to tell from the onset which is which or when they will exit.
It typically takes about 5ys before getting positive returns. Companies that don’t make it typically fail within 2ys. Investing consistently each year over several years is the only way to start seeing consistent exits.
Say you start investing in 2022 on 10 deals. Expect 2-3 fails after 2 years, 3-6 breakeven and small increase within year 4-6 and a few amazing exits in year 5-7.
To invest you need to have the right expectation, the capital and mental paradigm.
The strategy I recommend:
By the way, I recommend this strategy for anyone that wants to invest in tech regardless if they do it through the syndicate or not. The situation you really want to avoid is putting all your capital, even the one you can afford to lose, into a single early stage company and hope for returns. This will fail all the time.
Hmm… Well it depends. Can they afford to lose the money? Will they follow the advice above? If so, for sure! The more the merrier.
I invest in three types of assets: Early stage startups (seed-series A), Late Stage (Series E-Pre-IPO), Early stage funds.
On a macro level, I invest where I have a comparative advantage in access and understanding.
I know more people in the tech scene in the US, Canada and Brazil, so I get better deals from these geographies. I have deep experience in Fintech, Healthtech, PropTech and Marketplaces, so it is where I tend to focus my investments.
Here are the elements I consider when making investments.
For early stage startups the team is the most important part. I need to believe they have the grit to ride out the lows and the smarts to pivot when the original idea does not pan out.
To judge the quality of the team, I look at education, if they are repeat founders, their industry knowledge and their experience managing a team.
I want to make sure the company is either in a medium size market they can dominate or a huge market they can have a sizable impact in.
I also only invest if I believe the market will keep getting larger. For example: Climate change, Health, and the future of work are all expanding categories. Newspaper, coal, commercial offices are all set to get smaller.
Traction and unit economics depend on size but as a rule of thumb if the company is in a winner takes all market I ll value traction over unit economics. If the market is competitive then UE is key. If the company has both then it is golden.
It is absolutely key to make sure the company will have enough backing to grow into their valuation. Right now all Seed rounds are at a very high valuation so the company will need to prove great traction within the next 12 month to hope to raise their next round within 18months.
Finally I look to see if the team has an unfair advantage through their connection or experience to win the market.
A great example of this being the top hire from Roofstock bringing his entire book in RE investor with him.
Early stage startups:
This is where I had the best returns historically. Particularly when I have been able to enter during the founding round.
Getting in so early requires a bigger leap of faith; they don’t have unit economics or momentum. In those cases, I simply make sure the target market is massive and invest in the team’s capability, rather than the model.
The challenge here is taking time to conduct long due diligence. I will often co-invest with trusted other funds. If I like the space, the unit economics perform, momentum is building and I have trusted partners, it is a go.
Typically successful holds are between 7-10y. Until there is a secondary or a sale the cash is locked in. Good returns are 4x and amazing returns can go to >100x.
I am planning to invest about $100K this year in this asset class.
Late stage startups:
Typically I only have access to late stage deals thanks to Fabrice. When big banks are pricing rounds, they invite him to the table and he is generous enough to give me a piece. Those businesses are more mature but also come with more limited upsides.
I typically invest in them expecting a 2x to 4x return and a hold of 3 to 5 years. If I have access and I believe the business still has some tailwind and momentum left, I will invest.
I have not done any of those deals in 2021 and am not counting on this in my investment strategy in 2022. If I do have access to them it is doubtful I will be able to share access, but will try.
If I have access to those deals I typically invest 30K to 100K per deal depending on my available cash at the time.
This is where I invest most of my capital now. I focus on funds that have either a geographic advantage like Canary (Brazil) or Boon (Canada), or funds that have strong early stage diligence like FJlabs or Antler. I expect a lower return than on a direct investment but they are safer due to their diversification.
Funds that are hosted on Angel.co and Fundersclub make distributions everytime they have an exit. This leads to a better cash flow compared to direct investment in startups that very rarely have liquidity events. Over the course of a 10y fund, you can expect to see some distribution year 3, capital back by year 5, followed by 5 years of pure gains.
I am planning on investing 300K this year in Funds.
What do I not invest in?
I find hardware and biotech businesses really cool but their investment and exit cycles are very different from what I am accustomed to, so I don’t invest in them.
I am doing this for fun, and to share my deals with friends. If I happen to have enough opportunities to make it an important part of my wealth strategy, that would be an exciting benefit. However, it is not my full time job and is simply an opportunity to open up deal flow to people in my life who deserve the opportunity.
If I were to create a fund and charge the regular 2% /year for a 10y admin fee It would be my duty to find deals constantly and deploy other people’s capital.
Right now if there are no deals I like, I simply will not invest. I do not have to source deals or feel pressure to invest. I can simply invest in what comes my way and I am excited about.
The current format enables me to keep the basic concept: Hey, there is deal I am excited about. want in?
As Syndicate Lead, I source the deal, do the investment call, negotiate the allocation and create the syndicate.
I’ll share company updates. Startups typically share monthly or quarterly updates.
You will be responsible for registering for Angel.co as an accredited investor, arranging for the money transfers, and ensuring your taxes are set up for your investments.
Click here to begin: https://angel.co/v/start-investing
You can shoot me an email to be added to the mailing list or you can follow me on my angel.co profile: https://angel.co/p/oliviergrinda