On the 19th of March a new online equity investment platform called Syndicate Room launched in the United Kingdom that created a new model of finance based on the well-established process of investor's syndication. This platform allows its members to co-invest alongside Business Angels, who become the lead investors of the funding round. This resolves the following hidden issues of equity crowdfunding mentioned on a previous blog entry "The hidden problems of equity crowdfunding":
- Valuation - set be the entrepreneurs and likely to be too high;
- Inadequate due diligence - no single large investor investing enough capital to justify a detailed due diligence;
- Lack of financial discipline - nobody is looking to see what the entrepreneurs are spending the capital invested;
- Poor understanding of finance - nobody is helping the entrepreneur through the harder parts of starting a business;
- Lack of corporate governance - key to any Business Angel but completely lacking in crowdfunded companies;
- Poor communication between company and shareholders - no real incentive for entrepreneur to communicate adequately with existing shareholders.
Syndicate Room operates an innovative model of finance called Syndicate Funding 2.0 whereby sophisticated crowd investors can invest alongside Business Angels. Syndicate Funding 2.0 resolves the issues mentioned above:
- Business valuation - the valuation is not set by the entrepreneur. Instead, sophisticated investors invest at the same valuation as the Business Angels (lead investors), a valuation which is the result of negotiations between the Business Angels and the entrepreneur and likely to be considerably lower than what initially asked by the entrepreneur (hence better for investors). Sophisticated investors are therefore more likely to get a larger upside from successful companies than crowd investors.
- Due diligence - whilst for legal reasons investors cannot rely on each other's due diligence, there is a clear alignment of interests between different investors. Business Angels will be investing significant amounts and therefore carrying out their own due diligence whilst the sophisticated crowd of investors represent a 'reality-check' that votes with their money.
- Somebody is actually looking after their own money - Business Angels will be looking after their investment and whilst they are not responsible for investment by any other investors, with such a strong alignment of interests and the same economic rights, if they make money, so do sophisticated investors that invest alongside them. Sophisticated investors share the risks with seasoned investors that are looking after their investments rather than with a crowd where nobody is actively looking for their investments.
- Adequate corporate governance - it may sound pointless for innovative startups to have formal board meetings but having the involvement of the right Business Angels can be the difference between spectacular success and resounding failure. Which boat would you put your bet on - one full of rowers without a cox and no way of knowing where the next bend is or one with a fully synchronised team of rowers and a cox calling out the danger ahead and steering towards the finish line?
Syndicate Funding 2.0 is not for the wider '£10 crowd' with investment starting at £1,000. As a result of every deal posted having to already have lead investors putting forward significant amounts of capital, members get to see far fewer deals than in crowdfunding platforms. Syndicate Room highlights that Syndicate Funding 2.0 is about deal quality, not quantity, aiming for a funding rate of well above 80% in sharp contrast with current crowdfunding platforms that have a funding rate of 20% or less. Such a high funding rate will attract smart money and as a result a more sophisticated level of entrepreneurs.