Thursday, July 30, 2009

The pros and cons of syndicating a venture investment

I wrote this small piece about the costs and benefits of syndication awhile back for something else, but never posted it. I thought it might be useful to some entreprenuers thinking about syndication. I've been working on a project to raise some funding for a health care IT startup and we're looking at syndicating it. Syndication is when a group of venture capitalists or other investors each put in a portion of the money required to fund a business.

What are the advantages and disadvantages of syndicating a venture investment?

Advantages of Syndication
  • Gives entrepreneur more leverage and access to capital in event of another round needing to be raised (for example, a bridge round can now easily be shopped to different members of the syndicate) and more stakeholders whose interests lie in the continuation of the company.
  • It is much easier to do another series (in this case it would be C or a bridge) with an investor that is already involved. The due diligence is less as the investor is already familiar with the inner workings of the company.
  • Multiple good VC brands behind your company helps affirm your positioning in the eyes of the customer
  • Each of the different VCs can open doors to customer acquisition
  • Multiple resources such as people, advice, counsel and guidance
  • For VCs, shares risks and allows spreading money over more companies; For entrepreneur may diversify future funding streams if another round needs to be raised

Disadvantages of Syndication

  • Multiple resources as advice, counsel and guidance can mean too many voices in management’s ear
  • Different members of the syndicate may want control or seats on the board, which may be difficult for the CEO to manage. We saw this in one of the VC vignettes where VCs each wanted to be on the board and the value they added varied. Yet it is hard for the entrepreneur to handle such delicate matters as they do not want to offend major investors.
  • If they both have enough cash, you might want to see them compete for the deal rather than collaborate and pin you down on a valuation.
  • In down times, the different VCs influence one another – A recent speaker at Sloan talked about a situation where a syndicate of VCs had to decide whether or not add money to a company that had run out of cash. One VC refused, and the others fell into line even though they had been positive before.

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