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Key differences between startup syndicate funding and equity crowdfunding

Category: Understanding startup investment

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As many of you might already know, at Startupxplore we’re firm believers in the impact that syndicate funding can have in the overall startup investing landscape. In fact, it’s our main business model and we’ve already started testing it in Spain with a limited number of startups and investors.

Syndicate funding is not the only new way of startup investing to appear over the past few years. Equity crowdfunding or even P2P lending platforms are also viable ways for startups to raise capital, especially at the early stage.

However, lately we’ve noticed that some people tend to mix equity crowdfunding with syndicate funding and at Startupxplore we believe there are significant and relevant differences between both models. In this post we’ll try to explain those differences and describe a bit more -and better- how syndicates work.

Syndicate funding and equity crowdfunding: two interesting, but different, beasts

As we’ve previously discussed, equity crowdfunding and syndicate funding have emerged as interesting funding alternatives for startups looking to raise capital at the early stage.

Equity crowdfunding is a form of crowdfunding that is vastly different from reward-based crowdfunding. Equity crowdfunding platforms allow startups to create campaigns to showcase themselves to professional investors. These investors, after analyzing the startup’s financial information and data, can invest in such companies, getting equity in return or a percentage of future sales, revenue or profit.

Syndicate funding platforms, on the other hand, add value by putting together three elements: a startup, a lead investor and backers.

We’ve already explained how syndicate funding works, but it’s worth highlighting the importance and advantages for these three entities.

Leaders can invest more money per deal, reaching certain startups that might have higher minimum commitments. They also get paid a carry in return for their leadership, following and help provided to the startup.
Backers have access to dealflow and startups they wouldn’t have otherwise. Plus, they also get to learn from the very best investors in the industry.
Startups get more capital than usual and don’t have to deal with numerous and different investors. The leader takes care of the fundraising process and they’re responsible for managing its relationship with his or her backers.

Download our syndicate funding guide

Key differences between both funding alternatives

Equity crowdfunding platforms allow accredited investors -and in some cases and countries, non-accredited investors as well- to invest in startups that the platforms themselves have chosen. Investors can independently decide to invest in the startups and, if a minimum investment size is reached, the deal is closed between the pool of investors, the equity crowdfunding platform and the startup.

In return investors will get equity in return or a percentage of the startup’s future profits, while the platform charges a comission based on the fundraise or future exit.

The main issue we see with this form of investing is that it tries to apply some aspects from reward-based crowdfunding systems to a field that is vastly different:

Knowledge: in traditional crowdfunding backers know the product or service they are backing (via videos, photos, etc). Startups are harder to understand and, in a lot of cases, they’re selling their own vision of the future. Valuing that vision of the future with no previous investing experience is hard.
Time: in reward-based crowdfunding you wait months, not years, to get a return. However, returns in startup investing are much more different and can take years (in some cases a decade) to happen.
Risk: in traditional crowdfunding you commit low sums of money in something that’s somewhat tangible, thus lowering risk levels. In equity crowdfunding investors usually commit more capital with very low success rates but potentially very high rewards (one or two out of every ten investments might provide a return, if that).

At Startupxplore we’ve analyzed all of the above and we firmly believe that syndicate funding -by following a co-investment model where there’s a lead investor- helps diminish investment risks. Why? Because backers are investing with the help of a lead investor that understands and knows much better the market and the startup than the average person. In addition, this lead investor tends to have access to better investment opportunities (deal flow).

On top of that, syndicate funding platforms (such as Startupxplore) also offer the opportunity of following the investment and the startup.

It’s important to note that with this post we’re not trying to claim that no startup or investor should fundraise via equity crowdfunding platforms. But we think there are significant differences between both systems and we wanted to highlight them.

If you’re still interested in knowing more about syndicate funding, here are a few interesting and relevant links:

Photo | jarmoluk