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July 28, 2010

Deal Syndication in Micro VC Land

As part of my transition from angel to VC, one of the issues I’ve had to grapple with is that of syndicate construction. I have always been a huge proponent of syndicates, seeking to get parties around the table with the best mix of domain experience, contacts and attitude to help de-risk the investment. While there are myriad ecosystem benefits to taking this approach, e.g., playing well with others, sharing good deals, it is also highly rational. My friend David Beisel just wrote an interesting piece on deal-sharing in the Micro VC space, positing that the three biggest reasons for “large and friendly Micro VC syndicates” are: (1) being capital constrained; (2) as a vehicle for deal sourcing; and (3) due to the immaturity of the asset class. While I believe these reasons to largely be true, they don’t address perhaps the most important element of syndicate-building: the tactics around syndicate construction. To lead or to follow? When and how to build a syndicate? How do you work with the company on syndicate construction? How a Micro VC, or a VC, for that matter, deals with these questions can often determine the level at which an investor can play in a deal - if at all.

In general, I view the syndicate construction question in much the same way as I view the management of an early-stage company: one lead founder is fine; equal co-founders are great, provided that one is the CEO; more than two co-founders without a clear understanding of who is the CEO is bad. While there are exceptions to this rule I find it holds in most cases, and provides an accurate metaphor for how a Micro VC should view syndicate construction. I believe every deal benefits from a lead. Ambiguity around this issue can be costly, causing a firm to lose an investment opportunity because of distributed decision-making and slowness in getting a term sheet issued and signed. It is not simply a matter of capital provision but of deal leadership, serving as the primary point of contact during the deal negotiation/term sheet stage, being ultimately responsible for getting the deal done and advising management on the most value-added syndicate members. It is important for syndicate members to know their role in a deal.

I believe strongly in working closely with management to build the best syndicate. Sometimes more experienced entrepreneurs already have a wish-list of strategic angels they’d like to include in a round. This has to be respected and built into the syndicate sizing and composition discussion. One can have a reasoned discussion concerning capacity, etc., but fundamentally if an entrepreneur wants a particular investor in I am going to make room - period. Other times a first-time entrepreneur brings no investors to the table and is looking to me for guidance on building the best investor base, and that is fine, too. Either way, the entrepreneur is an essential part of the syndicate building process.

Bottom line: someone needs to own a deal. Coming to the table as a two- or three-headed syndicate beast without a clear leader is a big, big mistake. How many VCs like investing into situations where there is “management by committee?” Answer: zero. Why should syndicate-building be any different? You like the deal? Step up and issue a term sheet. You can get your BFFs in line afterward. I have played every syndicate role in my relatively short time as a VC: lead dog, strong #2 and a subordinate syndicate member. And each role is fine. Just make sure you know which role you want to play and by all means, if you want to own a deal, step up and make it happen. Otherwise, someone else will.

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