Syndicated Loan Start-Up Funding: A New Way to Invest
A syndicated loan is a new form of raising investments for entrepreneurs who plan to raise capital for their enterprises. With the growing numbers of entrepreneurs in India and their requirement for raising money for their businesses, this new form comes as a boon. It’s a new and increasing investment platform trend where crowdfunding has created a unique path for learning through a system called syndicated loan funding. It has been a growing trend in a couple of foreign economies, and it allows multiple investors to participate in the same deal.
Syndicate is defined as a temporary professional investment platform which is formed to invest in a significant deal that would be difficult or impossible for entities involved to handle individually. It allows companies to pool their financial resources and share the risk together.
However, the amount of risk taken by each syndicate member can vary along with the potential earning available to them. This system allows the investors to share their risks among all investors and an opportunity to get good returns.
Syndicated Loan Investors
Syndicated loan funding is led by syndicate leaders who are experienced investors with relevant work experience and in-depth industry know-how.
Usually, such investors have these four characteristics.
- Access to syndicated loan funding: Usually such investors comprise of successful entrepreneurs or professionals that have necessary capital to invest in start-ups.
- Access to deals: Chances of scoring good deals are very high for such investors since they keep receiving multiple business proposals which are exclusive to them.
- Relevant support: Such investors bring on board mentoring and guidance to entrepreneur and help them grow sustainably.
- Experience: Syndicate investors are usually domain experts with relevant experience that might result in making the right investments.
Benefits of Syndicated Loan Funding
Syndicated loan funding makes immense sense for investors. It also attracts many backers who are not experienced in the domain of investing but follow a syndicate leader and extend their financial support. Usually, the most prominent cheque in the deal is written by the lead investor who also typically likes to take up a board seat in the company. A leading investor usually introduces many other backers for the project.
A backer usually won’t issue an entrepreneur with the majority of funds. However, they will still substantially contribute to the start-up funding round. These investors typically have less work to do than the lead investor who usually oversees the company via board responsibilities.
Syndicated loan is a win-win situation for both investors and entrepreneurs in the following ways:
1. More Depth in the Pocket:
Since each investor in the syndicate is only investing a small amount, they come with the ability to commit some more funds for future requirement. It also helps entrepreneurs to safely assume financial support in case they are unable to raise the next round and save time they would have invested to search for a new one.
2. More Minds and Sector-Specific Expertise on Board:
The more the domain expert, the better is the situation for entrepreneurs. It helps in accessing a more extensive network of the investors and multiplies business faster. However, one of the challenges is that too many cooks spoil the broth. In case of disagreements, it may take a longer time to arrive at common consensus.
3. Validating Due Diligence Finding and Thesis:
Since there are multiple experts on the investment board, it helps in verifying the idea faster, completing the process of due diligence better with various references. It can result in a faster turnaround of the investment process and focus on jointly building the business faster than the usual method.
4. Sharing the Syndicated Loan Risk:
Nothing can guarantee returns for an investor even though they may belong to the same domain. Investing in start-ups is a risky proposition, but co-investing can decrease the risk associated with it. In case of an investment not working profitably, the investors don’t land up losing a significant amount of funds.
Why Investors Prefer Syndicate Deals?
In some instances, backers have been able to introduce the entrepreneur with a lead investor they have worked with in the past and who might be willing to take the lead forward. Another benefit of getting backers is that it can create a sense of urgency that the company won’t be available for investments few months down the line.
Small investors prefer syndicated deals since it allows them to invest in multiple deals and hedge their financial risks comfortably. It also helps such small investors to learn the nuances of investing and further commit their financial support in larger deals as an angel investor.
One of the most significant concerns of syndicated loan funding is the time and complexity it involves for closing the deal round. The complete process will require a lead investor to negotiate the deal terms with the entrepreneur and then manage the syndicate of investors. Other challenges that are involved include building a fundraising plan, determining the funds to achieve planned milestones, share diligence reports with other investors and champion the deal with other potential investors.
It is suggested that an entrepreneur should try to restrict the syndicated loan deals with up to two investors. It will help the entrepreneurs to balance the coordination with investors and report the updates on time. Usually, if a company has syndication with more than seven investors, then it is termed as a party round.
However, when everyone’s invested, no one’s invested. From entrepreneur’s point of view, there are a variety of factors that need to be considered when building investors syndication.
Entrepreneurs must ensure that the founders and investors are on the same page. They should see to the fact that the lead investors can champion the deal and maintain relationships with other investors.
The investors can add multiple values to the enterprise in the form of making connections, helping find future hires and opening their personal network to help the company. With this type of start-up funding all parties involved get benefited. Syndicate Loan investment reaches more start-ups hence; investors are encouraged to co-invest accelerating the investment eco-system.
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