- Gerald Crowford, Analyst at BuyMedias
- 22.02.2024 06:00 pm
undisclosed
Most startup funding trends come to the global market from the US and UK. The syndication investment model is no exception. Financial technology expert Sergey Kondratenko notes that in global practice, syndication investing is a strategy in which investors pool their resources to make a joint investment. Here, both venture capitalists and business angels can act as investors. Moreover, they can invest at different stages, and not simultaneously.
The specialist notes that the syndicate method has gained wide recognition and has become a common tool for achieving diversification of investment portfolios. Its main advantages are effective management and reduction of overall risks.
Sergey Kondratenko is a recognized specialist in a wide range of e-commerce services with experience for many years. Now, Sergey is the owner and leader of a group of companies engaged not only in different segments of e-commerce, but also successfully operating in different jurisdictions, represented on all continents of the world. The main goal is to drive new traffic, create and deliver an online experience that will endear users to the brand, and turn visitors into customers while maximizing overall profitability of the online business.
Often angel investments are made in the form of convertible loans or through SAFE-type agreements. Sergey Kondratenko explains that the role of angels is to serve as a bridge between the need for contributions in the early stages of product creation and the upcoming rounds of funding from venture capital funds in the future:
– Venture capital firms form funds by raising funds from other investors and manage them through investments in startups. This difference implies that angels who invest their funds are often more willing to take risks and prefer to invest in the early stages of startup development. While venture capital firms are often more restrained about risk and are more careful in choosing projects. They focus on the later stages of enterprise development.
According to the expert, an additional difference between angel investors and venture capital firms is the amount of capital that both parties are willing to invest.
Angels individually invest between $50,000 to $250,000. Venture capital firms invest significantly larger sums in business. The average size of such a transaction is about $11.7 million, according to SBA data.
According to Sergey Kondratenko, another significant difference between angel investors and venture capital firms is the degree of their involvement in the operating activities of the invested company:
– Angels tend to be established individuals who already have other businesses under their belts, and therefore their involvement is limited primarily to advisory roles. The main goal of venture capital firms is to invest and profit from these investments. This implies closer control and an active role in management compared to angels.
Angel investors, according to Sergey Kondratenko, are focused on short-term investments. They may be a more suitable option for early-stage startups that are looking to grow quickly and achieve market penetration in the coming years. Venture capital firms, with a longer investment horizon (often 7 to 10 years).
Which investment option to choose depends on the circumstances of each startup. According to Sergey Kondratenko, it is strategically logical at the initial stage to choose a business angel who will help quickly invest start-up capital in the project. At later stages of development, it is better to turn to venture funds that are ready to invest a lot and for a long time, but at the same time require a profitable profit from the transaction and a place among the shareholders. If this process of combined financing from angels and venture funds can be called sequential, then syndicated investment occurs simultaneously and can also have a global effect. We’ll talk about this in the next section.
Transaction syndication is an investment strategy in which participants pool their funds into a common financial pool. Their roles can be played by professional investors and private business angels. This pool is managed collectively and is used to invest in agreed projects.
At first glance, syndicates resemble venture funds, but at the same time, they differ in a more democratic approach to the financial management of a startup.
– In a venture fund, the management company is a separate legal entity responsible for managing the fund and making investment decisions. A syndicate, on the contrary, is most often managed by its participants themselves, and a collective approach to making investment decisions is formed, explains Sergey Kondratenko.
The specialist adds that in the modern world, deal syndication is widely used for several reasons. Such as:
➔ Risk minimization and diversification: Transaction participants can reduce financial risks by avoiding the creation of formal venture funds.
➔ Early-stage financing: syndication is convenient as a form of financing at the pre-seed and seed stages when the formation of a full-fledged fund is impractical.
➔ Creation of a team of experienced professionals: Syndication allows you to combine the competencies of participants for the successful development of the project.
Along with angel and venture investment, which can be called sequential, but not partnership, a new type of investment is emerging – a syndicate. According to Kondratenko, it is being created on a mutually beneficial basis and may well become a successful collective contribution to the common cause.
Today, an impressive number of startups are registered in the world, the total value of which reaches $1.215 billion. The most valuable in the global industry is considered to be the manufacturer of the popular TikTok application, ByteDance. In turn, JUUL Labs became the most funded American technology startup. Statistics show that one in five startups fail to survive their first year. The main reason for failure is a lack of finances.
Based on data from the American analytical company PitchBook, Sergey Kondratenko reports that venture investments in 2023 decreased by 35% and reached $345.7 billion. The number of transactions also decreased. If in 2022 51,894 transactions were carried out, then in 2023 this figure decreased by 27% to 37,809. The volume of funds raised by venture funds in 2023 decreased by 47.5%, amounting to $160.9 billion.
As the expert notes, the largest volume of investments was attracted to the United States – 51.8% of the total volume (approximately $179.1 billion). Asia ranks second with a share of 26.4% or approximately $91.1, and Europe is third: 18% or approximately $61.9 billion. 38% of all venture deals were concluded in North America, 30% in Asia, and 25% in Europe.
Among the reasons for the decline in venture capital deposits in 2023, Sergey Kondratenko highlights increased risks due to rising bank interest rates, high global inflation, and a tense geopolitical situation. At the same time, the specialist says that the startup market continues to actively develop. It assumes that 2024 will bring a change in the vector of financing from the capital of venture capital funds to business angels and united syndicates. New investors who rely on digital financing will also claim their rights.
