A new design pattern for startup investing.
The world of venture investing in startups is changing fast with rolling funds, operator funds, SPVs, and more. I’ve come up with a new pattern.
A Network Syndicate lets a high affinity network of highly experienced alumni from schools and startups invest in itself.
Exclusively alumni LPs backing exclusively alumni founders
Both a rolling fund for the index, SPVs for per deal
Algorithmic investing based on distributed LP decisions
No carry or management fees
Let’s back up: experienced operators have been investing as angels for a long time. They have direct experience and cash from their success. More recently, some have raised funds as leverage, and many successful CEOs have funds on the side. We also have seen some alumni run SPVs and AngelList Syndicates.
These platforms don’t exclusively have alumni LPs, don’t exclusively invest in alumni, and don’t invest in every alumni deal. They also charge carry, despite the initial value creation coming from the original company or school. Many alumni work at VC funds themselves, whose LPs don’t want to pay carry in both the alumni vehicle and the fund. This lowers the overall funding potential for alumni.
I’d like to see a Network Syndicate for my tightest networks: NYU, CMU, iRobot, YC, Facebook, Dropbox, Lyft, but I’d also hope to see this for other universities and companies. If you’re interested in getting involved, complete this survey:
Let’s define the pattern:
1. Exclusively alumni
All the LPs are alumni and all the investments from the pool are in alumni. Contrast with large syndicates today, where founders need to accept money from a large pool of anonymous LPs. Unlike a VC fund, these LPs need to see their detailed pitch to decide to invest. Alumni increase affinity and lower this cost. Alumni are also more likely to help the founders they back. Backing non-alumni founders dilutes this network, with ample other ways to invest in such companies. You can still work at the company too!
2. Rolling Fund + Syndicate
I’ve talked to other folks that manage networks. Some people just want to support every company, without thinking too much about it. Others want to learn how to assess companies, and would only invest per deal. Many start with per deal and move to the index.
We’ll start this experiment as an AngelList Syndicate. If there is interest from LPs and even a single deal closes, it’s worth spinning up a Rolling Fund. Rolling Funds have a subscription which allows people to contribute over time, which matches how normal people manage savings.
3. Algorithmic Investing
There is some overhead to setting up an SPV in a syndicate. This means enough people need to back the syndicate in order to close. The wisdom of the crowd can decide on the deal. If enough alumni LPs want in, the deal happens. This pitching, sharing deal details, and vibrant group discussion, but the “algorithm” is literally a tally of commitments.
4. No carry or management fees
A background on VC fees: VCs pay their salary with ~2% fee yearly on assets under management. Startups take a long time to exit, so you can’t count on profits from deals themselves. Those profits are the other source of revenue, where VCs take 20%, called carried interest. If someone is investing full time, finding deals, and supporting companies, then this makes sense. But if the decision is distributed among LPs and the LPs are there because of a common connection, neither fee makes sense. There are day to day operations to run these groups, but there is no shortage of people that want experience with investing that will help here.
I personally run Tango.vc and would love to be more systematic about the deals I see with alumni. Better deal flow is all the compensation I need because I’ll get paid in Tango.vc carry.
If you’re interested in getting involved, fill out this form here.
My plan is to explore the CMU and Dropbox networks first because I see opportunity there. If a lot of folks are interested in other networks, I’ll help you get organized too. Share this post with friends who could join.
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