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Angel groups finding syndication can give them big impact

Groups finding syndication can give them big impact

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Tom Sullivan knew TrustEgg was going to be big the first time he heard the pitch. It was a startup and therefore untested, but it had the potential to upend the way families provide for their children.

The idea was this: Create a website that would allow parents to collect money from friends and family members and create a trust fund for their children. It would lower the cost for consumers, take banks and lawyers out of the equation and still invest those trust fund dollars in a top-notch Vanguard fund.

But Sullivan's early-stage venture fund, Innovation Garden, couldn't afford to finance TrustEgg all on its own. He needed help, so he called a few angels.

Lucky for him, angels work well with others.

Innovation Garden took the lead on the investment and was able to pull in capital from several angel investor groups in a process known as syndication to create a total of roughly $1 million.

It's a process Sullivan said is changing the venture capital game.

"What's happening here is the market is hot. There's tremendous competition for capital flow. There's a need to extend the runway," he said. "You have to be able to access a little more capital and leverage the relationships across a syndicate that can move them to the next level of funding."

Katherine O'Neill, the executive director of JumpStart New Jersey Angel Network, one of the most powerful in the state, agreed.

"If a company only needs a couple million dollars, maybe you get four or five angel groups together and they'll go on to the next level," she said. "No VC needed."

JumpStart is the sole investor in about 60 percent of its deals. The other 40 percent are syndicated, O'Neill said.

"But it could be 50/50 soon," she said.

Part of that is because there's really no downside to syndicating, she explained.

Syndicated deals can take a little longer since there are multiple players involved, but it's a great opportunity for entrepreneurs, particularly given that venture firms invest in so few companies compared to the tens of thousands of startups that are springing up across the country, she said.

And having more angels involved in a company creates a bigger network for entrepreneurs to draw on.

"The money is actually not the thing people are after. It's the connections and the introductions," O'Neill explained.

Money, of course, does matter.

Usually, the deals angels get involved in are smaller than venture capital deals. But as more and more angel groups begin to syndicate, that is changing.

The 2013 Halo Report, produced by the Angel Resource Institute, Silicon Valley Bank and CB Insights, found that angel investors closed more high-valuation deals in 2013 than the previous year. For angels who co-invested with non-angels, deal amounts were at a three-year high in 2013.

But big bucks don't necessarily mean big brother.

For most, syndicated partnerships are relatively loose, said Jeffrey Nicholas, the managing partner of Delaware Crossing Investor Group, an angel group with chapters in New Jersey and Pennsylvania.

Some groups will formalize the agreement with a treaty of sorts. But Nicholas, also a venture capital attorney at Fox Rothschild, said such treaties basically read like a version of the Golden Rule.

So in the end, syndication all comes down to trust.

"You assume that if they're putting their money into it, they're not leaping into it without having looked under the hood. But still, you're trusting that they did look under the hood," Nicholas said.

Sullivan and his team at Innovation Garden take that part very seriously.

The fund has invested in five companies so far, and three of those deals have been done through syndications, with financing ranging from $500,000 to $1 million.

To find companies worthy of such hefty investments, Sullivan said they evaluated roughly 500.

"We spend a lot of time once we narrow the funnel down to good quality candidates — doing research, digging into their business model, doing due diligence," Sullivan said.

That strategy will continue as Innovation Garden looks to put together an even bigger fund with a broader group of investors, Sullivan said.

"I think it's really exciting that we've got some very, very smart people that have joined together to create something special and unique," he said. "There's a need for capital. But how you deploy the capital appropriately and smartly and with the right opportunities is the trick."

E-mail to: maryj@njbiz.com
On Twitter: @mjohns422


The money tree

For startups, the need for capital trumps all else. And there are plenty of ways to get it. Friends and family are a typical first stop. Crowdfunding, through sites such as Kickstarter and Indiegogo, is a fast-growing option. And venture capital investments are the ultimate get, funneling big money to entrepreneurs as their full-time job.

Somewhere in the middle of all that are angel investors, a group largely comprised of those investing their own money into companies as a hobby, a side gig, not a full-time endeavor. They take an active role in the fate of a company, too, lending time, energy and expertise in addition to dollars so the startup stands a better chance of becoming a success.

State of innovation

Big businesses tend to get a lot of love from the state of New Jersey — and for good reason. Big companies mean lots of jobs and substantial tax revenues. Although startups are seemingly low men on the todem pole, the state hasn't forgotten them.

The Economic Development Authority has created an angel investor tax credit program, which offers a tax credit of 10 percent up to $500,000 for a qualified investment in a New Jersey-based emerging tech business.

"The very palatable thing about the New Jersey angel investor tax credit is that you get it as soon as you're approved. You can use it for that tax year that it's approved," said Kathleen Coviello, director of the EDA's technology and life sciences division.

The credit has even prompted some investors to look at moving businesses into New Jersey so they can take advantage of this. "It is a very strong economic development tool," Coviello said.

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