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Creating a Proposal for Raising Venture Capital

May 6, 2005

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Venture Capital Handbook: An Entrepreneur's Guide to Raising Venture Capital, Revised and Updated Edition

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Syndications

Often, venture capitalists will tell you that their fund is interested in investing in your company, but that the fund can invest only part of the money that you need and the rest will have to be syndicated with other VC funds. This means that the VC will look for other venture capital firms to join the investment in your company. The first question you should ask in this situation is, "Will you be the lead investor?" This means that the venture capital firm will act as the leading investor and will help persuade other venture firms to invest in your firm.

Syndications are extremely common in the venture business, and many venture firms routinely syndicate all their investments with other venture firms. It is important for you to determine who will have to persuade the other companies to join the syndication. In some cases, the venture firm, as the leading investor, will go with you to other venture firms or will meet with a group of them and will help sell your idea to them.

In other cases, the venture firm will merely act as the first investor to commit funds, and all the others will have to do so on their own, in a separate action. This means you will have to be the syndicator and you will have to find the other venture firms to join the group. Of course, any firm that commits funds to you will have a list of other venture firms that they are interested in having in the investment with them.

Quite often, the leading investor is paid something for assisting in the syndication. Investment bankers, of course, are paid 5 to 10 percent for putting together a syndication of venture capital firms to invest in a small business. On the other hand, if the venture firm acts as a principal and syndicator, the fee is usually less. The typical fee to the venture firm will be 2 to 3 percent of the money it is raising through other venture firms. Sometimes, the VC will share part of those fees with the other venture firms that are investing.

As mentioned, syndications are common in the venture capital business. However, in many instances they are difficult to organize because each venture firm will have its own way of analyzing your deal, its own way of making a commitment to you, and its own lawyer to close the loan. You will have to juggle all of these people in pulling together the investment into your firm. Although a syndication can be put together (and this is done frequently), it is a complex and time-consuming endeavor.

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