Funds vs Syndicates. What’s the difference?

Since founding Daring Capital, one of the more frequent questions I get asked from (understandably) confused founders is: how much money do you manage?

The answer to that question is: £0.

I don’t manage a pot of money – I manage a group of investors that only commit on a deal-by-deal basis.

It struck me that lots of founders don’t understand the differences between a fund and a syndicate. Like so many other aspects of investment and fundraising, there is very little information out there and nobody is transparent about how things actually work.

So I thought I’d shine a light on some of the key differences between a fund and a syndicate.

Big difference #1: Who the decision makers are

A fund is a pot of money raised from investors and managed on their behalf by a fund manager, who makes all the decisions.

A syndicate is a collection of individual entities (usually angel investors) who have signed up to receive a curated flow of deals from the syndicate lead. They do not have to invest in any of them as they make the decisions on a deal-by-deal basis.

If you are applying to a fund, you only have to persuade one entity with one set of interests. If you are applying to a syndicate, you first need to persuade the syndicate lead to open the door and then you need to pitch to the members of the syndicate.

If you do succeed in securing investment from a fund, you will have one point of contact going forward who manages the relationship. With a syndicate, you may be dealing with multiple investors.

Big difference #2: When they’re likely to invest

Unless you’ve been hiding under a rock, you will have noticed that VC investment has taken quite a hit since the heyday of 2021 when everyone felt flush with cash. One consequence of this is that a lot of funds have retreated into slightly more established businesses, often known as ‘seed’ stage businesses.

In contrast, syndicates are still generally willing to invest at an earlier stage when the business may have limited traction or even be pre-revenue.

Big difference #3: levels of activity

As mentioned in the previous post, VCs have gone through a rough patch in the last couple of years but angel networks are still going strong. According to Beauhurst, 2022 saw an increase in the number of equity deals involving angel investing syndicates at a time when VC investment was already decreasing.

The use of the Enterprise Investment Scheme (EIS), which offers generous tax breaks to angels who invest in eligible start-ups, is often seen as a useful barometer of angel investing and in 2023 £1.96bn was invested via the scheme. Although this was a drop of 15% in comparison with 2022, it’s still 8% higher than in 2019.

In other words, syndicates are still very active at a time when funds are deploying far less capital.

Big difference #4: Expectations on return

This is a big one: a fund will have promised its investors outsized returns, which means that they usually aim to make a 10x return on their investment in 5-7 years. The consequence of this is that they need to find businesses that can grow at breakneck speed to be enormous, billion-dollar, multinational behemoths. Only a very small number of companies fit this profile so most founders won’t be eligible for VC finance.

In contrast, angel syndicates often take a much broader view about returns. They often look for niche businesses in areas where they have expertise and can generate meaningful returns. With the benefits of SEIS and EIS, a 5x return is still very attractive to angels and so they are often more flexible about who they invest in.

Big difference #5: The amount they invest

Ticket sizes vary for both so it’s hard to generalise. It also depends on the stage of the business - more developed businesses will be able to raise more.

In general, investments from a fund will usually be in the region of a few hundred thousand up to £1m, and certainly not below £100k.

Syndicate investments can be anything from £10k up to a few hundred thousand.

It’s worth bearing in mind that bigger is not necessarily better: syndicates often have simpler processes that move faster. VCs often have much more in depth due diligence processes which can take up a lot more of your time.

As always, let me know what you think? Are there any differences I’ve missed?

Jem and the team at Daring Capital

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