Incisive Ventures is Upgrading the Syndicate

Assassin’s Creed Syndicate

Angel Syndicates have been a huge upgrade to the early-stage fundraising ecosystem delivering over $3B in capital recently and the pace is accelerating. Syndicates promise to add value and reduce friction for both investors and companies. Unfortunately, as an investor in over 300 syndicates, I have often been underwhelmed and frustrated. So I decided to upgrade the Syndicate process with Incisive Ventures.

Over 25 years of investing and as a CEO, I have directly invested in over 120 companies, am an LP in 12 Venture funds, have been a Venture Partner at a major fund, and raised over $500M for my own companies including a NASDAQ IPO. Overall, my direct angel portfolio is up 6x while my venture portfolio is only up 2x. After extensive analysis of my decision process versus returns, the key to superior angel returns became clear: The ability to separate weak investment signals from excessive noise in the very early stage incomplete information environment. My angel returns have outperformed by taking calculated early risk on non-obvious ideas with very weak traditional investment signals. As information becomes more complete and the investment signal grows stronger and obvious, returns go down: see Venture Capital returns. The only way to outperform is to be right about an idea that is non-obvious at the time you invested.

Over 10,000 start-ups in the US received their first outside funding last year. Each one thinks they will change the world and be a unicorn. They all have a story, some customer traction and some investors who believe in them. That is a lot of noise. I want to make 5-7 material angel investments a year with a high degree of confidence for a 10x+ return. To get more capital into companies I have high confidence in, I have added Syndicates to my investment stack.

Angel syndication has grown for many good reasons. Syndicates typically invest in VC quality deals, often alongside VCs, with half the fees of a venture fund. There are software platforms that have significantly reduced the friction to create and manage syndicates as well as crowdfunding. While the smallest direct Angel investment check is usually $25,000, syndicate minimums can be as low as $1,000. Investors make a deal by deal decision rather than a fixed capital commitment. Investors often get access to deals they otherwise would not see at their local angel group, or through their limited friend network. Syndication has exploded lately, there are over 3,000 syndicates on Angellist alone. I was quite hopeful that Syndicates would be an effective filter layer to improve my Angel Investments. Unfortunately, this has not been my experience.

An explosion of Syndicates has created new problems for the Angel investor: Which Syndicates are any good? Does the lead add value that outweighs the cost of the carry? Some of the frustrations I have found as a syndicate investor include:

An Opaque Filter. When separating signal from noise, the PROCESS, and CONTEXT of HOW THE FILTER WORKS are all important. Many deal memos I get from syndicate leads are little more than regurgitations of the pitch deck. Many times I will get 2-3 deals a week from a syndicate lead. Is it really possible to find 2-3 unicorns a week? Every syndicate lead lists the impressive places they have worked before and a handful of successful deals, but most are very light on HOW they screen deals for syndication. Many leads also present deals across various stages and markets without any consistent theme. I call these “Any Good Deal” leads. How do they judge “Good”? Why, as an LP, should I trust your judgment? The most significant value a syndicate lead can bring is to share how and why investors should pay attention to this particular deal. Why do they have a strong conviction that it will deliver superior returns? Can a lead really be an expert in all stages and all markets? Sadly this process and context are lacking in most syndicates.

Misaligned incentives.. One of the first things that struck me on the first syndicate deal I received through Angellist was that the lead was only investing $1,000 into a $300,000 allocation. Basically, a no-cost option on 20% carry on $299,000 of other people’s money. If the investment doubles, the lead makes $1K on their investment and $60K in carry. 60 times more in carry! When the rake is more than the risk capital, you are playing against the house, not WITH the other players. I understand how that is great for the lead. I don’t understand how that is great for the investor. Many platforms will also drive investors to your deal, making the incentive for the lead to throw up as many deals as possible while putting as little of their own capital at risk. In many ways, syndicate leads are incented to be a POROUS FILTER which I find weird. Angel investing should not be a casino where the house has no risk capital and always wins.

Momentum overweighted.. It is tempting to mistake deal momentum for deal quality. Nearly every syndicate mail I receive has one or more of these trigger phrases: “Oversubscribed”, “Last check-in”, “Famous investor X, Y, and Z investing”, “Growing 30% M/M”, “YC Batch X”, or my favorite, “I had to fight for the allocation”. Reading many syndicate deal memos you could get the impression that deal momentum is the only thing that matters. “Buy before Midnight tonight!” Paul Graham puts a very fine point on the dangers of overweighting fundraising momentum:

There’s no correlation between the percentage of startups that raise money and the metric that does matter financially, whether that batch of startups contains a big winner or not.

Except an inverse one. That’s the scary thing: fundraising is not merely a useless metric, but positively misleading.

Paul Graham, Swan

If you ask most syndicate leads for their returns, you will see they are very close to Venture Returns. Why? They overweight momentum and only invest after VCs. To outperform in Angel Investing, you must focus on primary signals. Management, product traction, market traction, CAC/LTV, customer reviews are primary signals. Momentum is a proxy signal. I have found that overweighting momentum is lazy investing and doesn’t end well. Theranos anyone?

I started Incisive Ventures to solve these problems. To be the upgraded Syndicate I wanted for myself and my friends. To be a truly value-added filter reducing the noise and improving the investment signal. Upgrading the syndicate is a long-term project for us at Incisive Ventures, and here are a few of the ways we have started the process.

A fine-grained, transparent, filter.. It is clear some filters work better than others. When the recent fires on the west coast kept most people coughing inside, I happily drove around in my Tesla X with Bio-Weapon Defense mode engaged. The key to a great filter is that it is fine-grained and built with data-driven, proven technologies. There are many different ways to design filters and even poorly designed filters will work some of the time (a broken clock is right twice a day). At Incisive Ventures, we have built ours through a detailed data-driven analysis of 25 years of angel investing and continue to improve it with every new investment. By focusing on primary investment signals which have been proven to correlate to superior returns in the very incomplete information environment of early-stage, we have consistently been able to deliver superior returns. Our model focuses on what characteristics Unicorns had BEFORE they were unicorns. During the Seed stage. We have shared parts of our process with LPs through our Meta Themes and Deal Funnel posts. Our filter has been designed for early-stage technology investing. For different markets and different stages, one would design a different filter. Our filter has been backtested and we show you our work in every deal memo. Incisive Ventures is a low volume, high conviction syndicate. While not a guarantee of future returns, we put our money where our confidence is which leads us to…

Aligned incentives. At IV, we are investors first, syndicate managers second. I put a significant PERSONAL check into every syndicate deal. With this commitment, our LP investors are truly investing WITH me, not handing over a free option on their hard-earned capital. While a few syndicate leads also follow this strategy, it is often from a FUND they manage and receive management fees on. Since they are paid to deploy the money, the bar for deploying it could be lower than for a personal check. I follow the same filter and deal memo process for every check I write. The Incisive Ventures syndicate is simply an extension of that process to share my work and get more money into deals I have a high degree of conviction on. Since the incremental work to syndicate is very low, I do not need to charge management fees to support the work. While VCs and syndicate rolling funds charge a management fee plus carry for the privilege of investing in every deal, through our Preferred LP program, we don’t charge management fees, reduce the carry, give you early access and guaranteed allocations in the hottest deals. You are not playing against the house at a Casino. We are truly investing together.

Execution focus. Ideas are free. Execution IN THE CURRENT BUSINESS is the key to all early-stage startups. This is why Management carries a 50% weight in our filter. We dig past the prior successes, fancy companies and degrees, to understand how management is executing against the specific opportunity we are investing in. How personal is solving this problem to management? Is that passion shared across the management team? There has to be a compelling WHY that drives management? We test management resilience, war game market dynamics, pivots, competitive responses, dig into the company culture, and do reference checks. We dig into the primary signals that show how the company is executing against product development, market traction, and regulations (total 30% weight). External validation of execution like other smart investors, or celebrity endorsements are considered, but only as secondary, proxy signals after we have validated the primary signals. These tests for execution take time, another reason why we target 5-7 deals a year instead of dozens.

Unique pipeline. There is definitely deal fatigue out there in the Angel community. Do I really want to see another YC company? If you do, there are syndicates who specialize in that. At Incisive Ventures, you are likely to see a unique stream of companies you will find nowhere else. Obvious problems have many people rushing to solve them. That is a red ocean. We like the Blue Oceans. Many of the companies that fit our Meta Themes are tackling non-obvious problems with proprietary technology in a unique way. We want to fund the leaders in a new fast-growing niche. In addition to the Venture firms, angels, and CEOS in my network, I always have a couple of personal theme areas that I am looking to fund the best company making a product that I want to buy. An example of this is my recent investments in companies that bring Continuous Glucose Monitoring (CGM) from the diabetes market over into the general health and fitness market. I have worn a CGM for three years (well before it was “hot”) and tried every company in the space. I found the best ones and invested.

Curated, value added Angel Investors. Paul Graham has said that “Angel investors are the most critical.” and we tend to agree. Many angels have been founders themselves and have large networks to leverage. One of our IV Meta Themes is to only invest when we can be personally helpful to the company. Founders we talk to are increasing asking “Who is in your syndicate and how will they help us grow the business?” Many times, we receive an allocation because we delivered value BEFORE the company raised money. IV syndicate members were very active beta customers with in the CGM product space. When we approached the leader about financing, the CEO already had received value from our beta participation. Ability to deliver value over and above capital will become increasingly important for Syndicate leads. This is something Incisive Ventures is hyper focused on.

At Incisive Ventures, we have a high degree of confidence our companies ability to solve big, non-obvious problems at the time we invest. We know where to look by our Meta Themes. If we are right, our returns will outperform.

Angel investors should join syndicates to improve your reach and leverage your capital. Just make sure you understand and agree with the filter process and meta themes of the syndicate lead. Make sure the lead incentives are aligned with yours. We have a proven process to separate the investment signal from the noise. I have designed Incisive Ventures to be my dream syndicate. I hope you find yours.

One thought on “Incisive Ventures is Upgrading the Syndicate

  1. Wow thanks Martin for the article. I became an angel investor recently on angellist and having already invested in 8-9 startups during last few months, felt that something isn’t right about the way pitches are made and how leads either participate with very low amounts or with a fund instead of large personal checks. Thanks for articulating that feeling with clarity. Looking forward to investing in incisive ventures.

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