Building technology companies

The Role Of Shared Values In Syndication By Bob Ackerman

Successful venture funding syndication is as much an art as it is a science.  Bob Ackerman Founder/Managing Director at Allegis Capital, a BGV syndication partner shares his experience on this important topic. Syndication has long been a mainstay of venture financing, since it allows a group of investors to pool large resources of capital and “share” the inherent risk and rewards associated with the building of a successful company from an original idea.  While the process of syndication is relatively straightforward, “effective” syndication is a complex process resulting in a significant strategic asset.  Effective syndication is not only about sharing risks and rewards, but also puts in play a combination of complementary skills, experience, networks and resources that no single investor alone can provide to a company. A cohesive investment team shares a vision and set of goals that are achieved through continual collaboration with one another as well as with a company’s CEO and management team.  Effective syndication won’t eliminate risk, but it can play a huge part in mitigating it.  On the other hand, weak syndication can really ramp up risk for a start-up enterprise if syndicate members introduce external division, distraction and diversion for a CEO and the entrepreneurial team.  As a former serial CEO and as a venture capitalist for more than 15 years, I’ve seen and lived through both scenarios. Effective syndication is not solely a CEO’s responsibility.  Success becomes more likely when expertise, networks and pro-active collaboration are equally important to both management and investors.  The process begins with a financing event and will continue throughout the life of the company, including the future financings that a company will likely require to support continued growth.  Assuring that everyone is on the same page before taking the first step is simply the smart way to go. Basic Skills and Attributes – Not a Name on a Door The skills and attributes needed for effective syndication have everything to do with each individual investor and very little to do with a name on some investment firm door. I’d start any evaluation of a potential finance partner by considering five basic components:

  1. Personality
  2. Expertise
  3. Willingness to commit significant time to engaging with management
  4. Willingness to commit significant time to engaging with other board members
  5. Ability to cooperate and be “part of the solution”
Some investment firms have teams of such individuals, some don’t. Experienced investors know the difference, or at least they should.  Entrepreneurs have to know the difference and select their investors accordingly. If the management team, corporate culture and shared values provide the foundation upon which a successful start-up will build its vision of success, effective syndication is the support network that can measurably contribute to reduced risk and accelerated growth as a company traverses the minefields that mark the path of a start-up. Take Time to Find Cohesion and Balance Making the right choices for a team is never simple. Of those five basic components above, only personality might reveal itself without some pointed research on your potential investors (although reference checks with other entrepreneurs are a worth while investment of time. And remember: personality reveals itself in times of crisis ..). Getting to the bottom of the other four takes some work.
  1. Select investors with demonstrated expertise in your company’s domain who have a track record of adding material value to their past portfolio companies.  Will they make a difference?  How?  Be focused and concise.
  2. Spend the time necessary to get to know prospective investors and develop a shared vision for the company – before any investment.  Understand what each investor can bring to your efforts to build the company.  Place reference calls about the individual representing the investment firm before selecting the investors.
  3. Determine that they have the time to actively engage with you and your management team in between board meetings.  Too many board seats means to little time to support a CEO and their team.
  4. Talk with CEO’s with whom the investor has worked in the past.  Would these CEOs work with the investor again?  Why?  Understand their particular strengths and weakness.  How can you use them most effectively in building your business?
  5. Talk with your prospective investors to understand biases — both the good and the bad — among the investors working together.  Building a team of the willing is paramount. The goal is not to referee egos and personalities.
You want cohesion and balance.  Build an investor group and a board that can make a difference. How to Best Keep the Team in Synch Once a syndicate is formed, it will take a consistent and on-going effort to meld an effective team from your syndicate members:
  • Ensure open communications. Informed and engaged board members can be invaluable resources.  Co-opt the board – make them part of your team.  Not as friends, but as trusted advisors.
  • Assign each board member specific responsibilities in support of the company’s needs and goals.  Hold them accountable – to you and their fellow board members.
  • In addition to board meetings, make a point of holding board dinners on a regular schedule – use the opportunity to develop a deeper understanding amongst your syndicate members of the opportunities and challenges confronting the business.  Engage your management team in the process so that they view board members as resources to assist them in meeting their objectives.
  • At least once a quarter, spend one-on-one time with each of your board members.  Build relationships and shared responsibility for the success of the company.
  • If you have investors who are not represented on your board, find time to periodically update them on the business.  Ignorance is not bliss – it leads to a lack of support.
The process of building an effective syndicate is time consuming.  The right investors will be willing and supportive contributors to the process and provide the company with a competitive advantage and resources for risk mitigation.  If you fail to mobilize and engage your investors, what you get is detachment and a lack of ownership. This mindset is at best neutral to your goals or, potentially, negative. From personal experience, I have never seen a board “make” a company, but I have seen effective syndicates make a big difference for a company.  I’ve also seen dysfunctional syndicates get in the way of a company’s success.  Some may say that syndication is too much work – akin to “herding cats”.  But the alternative, a single investor, limits expertise, resources and bandwidth while also representing a “single point of failure” as you look to the future needs – financial and strategic – of the company.