Having been in the early-stage ecosystem for almost a decade, a question we always tire of answering is
- How do we ensure investors, who invest into early-stage, get the best deal access?
- How do investors make money at the time of exit?
Angel investing into early-stage, even if the most popular subject today, is the highest risk asset class.
If we were to take a step back and understand more – it is about investing early into companies in private markets (in the unlisted space). As this is a space that is more about access and knowing the founder, the syndicate model is popular. A syndicate allows new or experienced investors with less time on their hands, to back “lead investors” on startups they invest in. The syndicate model is one of the most popular mechanisms for investing globally.
As the Lead to the startup, the lead investor typically sources a deal, works with the founder to be on the board of the company (though this is not done always due to fiduciary responsibilities), represents investors on the captable, as well as works on protecting investor rights in the next round. They also work with founders if the startup investment goes wrong.
The Lead increases the probability of an angel investor getting their money back because they have skin in the game. A study in the US has shown that companies that have a lead investor as a mentor have a 40% higher probability of becoming successful because they have someone who is actually working with them to build the company.
For this, the lead investor is given a Carry. Carry is calculated at time of exit as a percentage of profits. Globally, funds use the model of Carrry where there are fulltime fund managers who run this professionally. Standard Carry is 20%. As an LP into a fund, 20% is the standard Carry you would pay. This would be across the portfolio and across the fund returns. Funds work with founders for at least 8-10 years, till the lifetime of the fund or till an exit.
Now come to early-stage syndicates. This is different from fund investments.
How? Because an investor
- invests deal-by-deal
- The syndicate lead is ‘usually’ not fulltime
- The Lead typically will be actively engaged till the next institution comes in.
- Deal-by-deal Carry does not normalise across portfolio returns.
As we did the math, we believed we need to change some conversations. As the largest Angel AIF fund in the country, we would like to ask the right questions and challenge status quo. It is almost like a ‘Zerodha moment for private equity'.
We are reducing the Carry from 20% to 10% on the LetsVenture public platform.
You can argue on multiple fronts if this is the right number or not, but we believe this is the right percentage for Leads and for participating investors. This is so that collectively there is wealth being created at the right cost of capital.
This is a bold step for us, and one that we see a risk with. We stand to lose some Lead relationships, as they may have platforms that continue to pay them 20% Carry. However, we also know from our conversations that there are Leads who are happy to change gear with us.
Change is never comfortable. But we stay with status quo. At LetsVenture, we believe that market making comes with responsibility. With the responsibility of ensuring we also watch out for investors who are entering private market investing.
This is a topic open for debate. On both sides. We have taken our position of ensuring we implement what we believe will contribute to all. And ensure that this allows more people to have the trust in us, that while we build private markets in India, we continue to build it the right way.
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