The best seed funds generate fantastic returns for their investors.
But they require investors and managers to make a long-term commitment to investing large amounts of capital.
Syndicates are a new complement to seed funds.
They allow managers to quickly raise capital from the accredited public, one investment at a time.
This difference leads to important economic consequences.
Higher returns by eliminating management fees
Syndicates can have higher returns for investors because they eliminate management fees, leaving more capital for investment. On average, syndicates invest 97% of the capital they raise, while seed funds invest 75-85% after fees.
Most leads don't need a management fee because investing is not their full-time job.
So syndicates only charge the cost of making an investment, leaving 97% of their capital for investments on average.
Seed funds charge a management fee of 2-3% per year over 10 years, as well as other expenses,
leaving 75-85% of their capital for investments.
With more invested capital, investors in a syndicate can make a 19% higher multiple than a seed fund,
assuming 20% deal carry, 20% fund carry, 2% management fees and a 4x portfolio with a typical distribution.
View the model »
Management fees vary over time but typically average 2-3% per year. For example, a seed fund may charge a 3-4%
fee for the first 4-5 years and reduce the fee to 1-1.5% in subsequent years. Some funds also charged a fixed dollar amount instead of a percentage, or only charge a fee for the first few years. In any case, allocating 15-25% of capital to management fees and other expenses covers most situations.
Other expenses typically account for 3% of a seed fund’s capital, including expenses for fund formation, audit, accounting and deal-specific legal expenses that are absorbed by the fund.
This model assumes that funds pay back their management fees before taking carry. Fee recycling can also be modeled by increasing the size of the fund (and syndicate) by the amount recycled
and not charging fees on that amount. For example, a $100M fund with a 2% fee for 10 years is equivalent
to a $120M fund with a 1.7% fee.
Equivalent carry to a fund without the commitment
so investors can opt out of any investment or stop investing anytime.
On average, syndicates charge 19.5% deal carry, which is equivalent to a 25% fund carry.
Investors in a seed fund are committed for the full 10 years of the fund—they can’t opt out or stop investing.
Syndicates charge 19.5% deal carry on average, including AngelList’s carry.
This is equivalent to a 25% fund carry in a 4x portfolio with a typical distribution.
View the model »
Deal carry is not common in seed investing, but is used in certain venture capital investments.
For example, venture partners often receive deal carry for their investments.
And special purpose vehicles for secondaries and pro ratas use deal carry.
Deal carry and fund carry diverge as returns decrease and writeoffs increase.
For example, a 20% deal carry is equivalent to 33% fund carry in a 2x portfolio with 66% of investments written off.
Skin in the game aligns incentives
Syndicate leads put ‘skin in the game’ with each investment, so their incentives are aligned with their investors. Leads personally provide 16% of their syndicates’ capital on average. Seed funds provide 1-5% in personal capital, but also take out 10-20% in management fees.
All venture capital investments are very risky but, in theory, deal carry can incent leads to make even riskier investments.
If one investment succeeds, the lead gets carry on the deal, while investors bear the losses of the failures.
In reality, leads have little incentive to make riskier investments.
They only have 73% leverage on average, so they don't have a large incentive to increase the risk on their personal capital.
Unhappy investors can also stop investing in a syndicate at any time or invest in managed AngelList Funds if they do not want to monitor leads.
Some leads provide their ‘personal capital’ from a venture fund or have low skin in the game.
They may have excellent investment opportunities but investors should do their diligence.
It's a good sign if other notable investors are making a significant investment in the round.
A lead's leverage on an investment is: carry * $ from investors / $ from lead.
Pro ratas can give leads significant leverage (several 100%) but investors must opt in to pro ratas.
Only returns matter
Measure investments by their returns, not by their fees, carry or skin in the game. The best seed funds make fantastic returns for their investors, despite their management fees. It’s too early to measure the returns of any syndicate. The product is only two years old and it takes 7-10 years to measure returns in seed investing. As always, expect to lose your money when seed investing.