5 Diligence Criteria for Web3 Angel Investing in a syndicate
5 Diligence Criteria for Web3 Angel Investing in a syndicate
AngelList co-founder - Naval Ravikant, talks about how a good deal is difficult to define — you know it when you see it.
About Web3 Angel Investing: the syndicates
Wikipedia describes a syndicate as;
"a self-organizing group of individuals, companies, corporations or entities formed to transact some specific business, to pursue or promote a shared interest."
Simply put, they're combined to promote a common interest. In this case, pull funds together and invest in a startup or company with a great chance of succeeding.
A 2019 research paper by the AngelList data science - Abe Othman, shows that VC returns are strongly correlated to the number of startup investments an angel makes. The more investments he can make, the better his chances of early-stage returns.
That paper was written with web2 in mind.
The rise of Web3 has given birth to a new set of angel investors who are backing founders in the space with not only capital but also mentorship and community building.
More than capital, Web3 startup founders are looking for value addition, expertise and mentoring from investors. Also, there's a shift in fundraising, startups are tilting more towards issuing token assets instead of equity stakes.
Angel investing is one of the most important aspects of the Web3 community-building process. Angel investing is a fun, challenging and rewarding experience. Cues from U.S. and other international markets have led to several thriving angel investor networks for Web3 entrepreneurs – most notably Boost VC (which incubates companies) and Web3 Labs (which invests in startups). With its list of companies like Coinbase, Aragon, and Etherscan among many.
What Web3 Angel Investors Do.
Web3 Angels invest in very early-stage blockchain companies. They expect and provide significant guidance to the companies they invest in (not just capital)— but they want that guidance to be exclusive to Web3 Angels because of the high risk associated with this investment type.
A bit of insight into the angel investment landscape.
It's been interesting to watch the capital markets change as access has become easier and the barriers of entry have come down. This has had a big impact on “growth companies” that are just startups trying to solve real-world problems.
When investors invest alongside other experienced investors, it is more valuable than investing as a lone investor. This is particularly true in web3 where the community takes centre stage. The teams who are building for the web3 stack are more likely to succeed if they have great investors by their side. As such, this allows the investments to be effective as possible, both financially and from an ecosystem perspective.
How to join an AngelList syndicate to source investment opportunities.
Let's look at how AngelList Syndicates work.
"Focus on your deals, not managing multiple service providers. AngelList handles legal formation, capital calls, tax documents, and everything else you need." - AngelList
According to information available on the AngelList Venture website; "A syndicate allows investors to participate in a lead investor's deals. In exchange, investors pay the lead carry."
Investing in web3 means these capitals are focused on Crypto and Web3 opportunities (including Crypto, Defi, NFTs, Protocols, DAOs, Exchanges, Tokens, Metaverse, Digital Assets, Decentralized Applications, Play to Earn Gaming, Infrastructure, Tooling) especially companies that are driven by top talent, large markets, significant growth trajectories and disruptive opportunities.
To be an AngelList Web3 Syndicate; follow these steps:
Create your syndicate profile
Submit a deal
Invite LPs
Deploy capital
Why you should join a web3 syndicate.
Gain Access to High-Quality Deals
Following reports, the quality of the deals on AngelList stands out.
One of the reasons is the number of experienced GPs on the platform who offer deals they’ve done diligence on, he said.
Close Deals Fast
AngelList makes it easy to deploy capital quickly. AngelList makes that happen and takes the headache out of the entire process. We can quickly pool and deploy capital.
Honing His Investment Judgement
AngelList co-founder - Naval Ravikant, talks about how a good deal is difficult to define — you know it when you see it.
What are the top 5 criteria you would use to diligence a Web3 angel investment?
- The technical expertise of the team (understanding of the problem space and ability to deliver)
- The size of the problem they are solving. What is the size of the market? How urgent the problem is? And how much value the solution will add?
- The quality of the product or demo/prototype. Is it clear what they are building, how it will work, whether it can be feasibly built and what kind of traction they have already?
- The quality of business plan and financials. Are they being realistic about how much money they will need and what milestones they need to hit to go from zero to profitable?
- What is the competitive landscape? How many other players are in this space and how quickly does the market need to be scaled up before it becomes saturated?
The top 3 questions you should ask for each of those 5 criteria?
- For technical expertise: who is on the team? Any prior experience with starting successful businesses? How does their protocol design fit into their business model and token model? How does the token model incentivize their community to grow and increase adoption of their platform/protocol/application?
- Size of the problem. What would the Product/Market Fit look like? Is this product needed? What pain point does it address? What are the existing alternatives and how prominent are they in the market? Is there a clear path to monetization? How will the company make money over time? Will it be through fees, transaction revenue, ads...etc.?
- The competitive landscape. The incumbent competition, market entry barriers and defensibility. Who else is in the space and how well established are they? How much traction do they have? What is their % of market share? Are there other barriers to entry into this space (e.g. regulatory)?
In2021, A16Z invested in a Syndicate DAO, a web3 startup building the protocols and tools that will enable DAOs to reach their full potential.
If you're looking for a Web3 syndicate, start here 👇🏽:
I'm much involved with Odyssey DAO as a project manager for its BootCamp, onboarding one million people into web3 and also work with the product team.
Image: Unsplash