The Essential Guide to Syndicates

Hey everyone, and welcome back to Seed to Harvest. Today I'm going to be doing a bit of a different episode. So I originally wrote a blog post called The Essential Guide to Syndicates in 2021 after I had completed my first syndicate, and I really wanted to expand on some of the things that I touched on there, as well as go through some of the technical aspects of raising an SPV or syndicate. So without further ado, I'm going to kick it off into a bit more about my background. So for those of you that listen to my voice every week on the pod, but maybe haven't gotten to know me personally yet, I'm Paige. I'm one of the founding partners behind Genius Ventures. I studied computer science at San Diego State, graduated in 2020. I worked at WorkOS as a developer success engineer nights and weekends. I wrote a children's book about venture called Seed to Harvest. And that book ended up leading me to doing my first syndicate deal in a really cool company called Pallet, which is community job board infrastructure. And that syndicate led me to do 3 additional syndicates before raising our debut Behind Genius Ventures fund, which is a $5 million fund. We've invested in 30 startups across the future of work and the future of play, and we're backed by great folks like Tribe Capital, Bain Capital Ventures. GPs like Jenny Lefcourt, Katie Stanton, Heather Harnett, some awesome folks that we've had on the podcast as well. So that's a bit of context for me across the syndicate deals that we've done. I've done individually, and then we've done it behind Genius Ventures. I've raised over $400K in capital, and it's been a really powerful tool for me to disrupt the traditional path into venture. I'm really passionate about syndicates because I think they empower folks with less liquidity or maybe not the access to capital that other folks have, or don't work at a firm to start building their track record in venture. And then I've also seen it on the other side as a fund manager when we don't have the capital in our fund to participate in follow-on rounds, but we have investors that are interested in doubling down in a specific company. And so that's why I'm passionate about syndicates and I've had experience with them. So wanted to dive a bit into the history of syndicate vehicles and why I think they're so important. They have quite a tumultuous past. So according to The Accounting Trick Behind 30 Years of Scandal by Christopher Matthews, the genesis of SPVs was actually as the demand for high yield debt waned in the late 1980s. Michael Milken and his firm, Drexel Burnham Lambert, packaged this debt in a special purpose entity, or SPE, that would allow the ratings agency to rank them as an investment grade rating, which would allow insurance companies and pension funds to invest in them. If this sounds familiar, you might've watched The Big Short, or also a notable company is Enron. At their peak, they had over 3,000 SPEs. So quite a storied past in terms of more private debt packaging, but SPVs have really reinvented themselves in past years in ventures, an opportunity to participate in financing deals that you might not have had an opportunity to. Either with your check size or liquidity status, or just your access in general to, to deals. Syndicates are really incredible because they allow an on-ramp for newcomers with social capital, a lot of hustle and access to great deals, the opportunity to start building a track record in venture and later on go on to build a venture firm. And I'm a bit biased about that because that was my path into venture. And there's a really great article by Katerina Fake, who's an investor at YesVC. She's the co-founder of Flickr and the previous chairman at Etsy. In April 2022, in a TechCrunch article she called Stop Trying to Raise for Your Debut Venture Fund, Raise SPVs Instead, she talked about the pros and cons of SPVs. And I think that's a really great article. I'll link it below in the show notes. Also, if you have any history with SPVs or any insights into it, I would definitely appreciate if you could tag me on Twitter with some of your learnings or comment on the YouTube video that'll be coming out. So with that, let's dig into it. So first, what is a syndicate? So a syndicate is essentially a deal-by-deal venture capital firm. So it's composed of an organizer or organizers. Who make investment decisions and backed by accredited investors or high net worth individuals who contribute capital. And these people are called limited partners or LPs. So as you might, as you hear me mention LP further on the episode, that's what I'm talking about. So an organizer may have a consistent base of investors that they work with across deals, but that base may not be the same for each deal because each LP can opt in or opt out of on a deal-by-deal basis. So each deal is either referred to as a syndicate deal or its legal construction name, which is an SPV. So let's dig a bit into syndicate dynamics. So first, a syndicate organizer has to secure allocation or a piece of the round. So in my case, how my first syndicate worked was I was working on Seed to Harvest. I had set up a community number and a founder reached out and he said, hey, I love your approach to community and content. Would you be willing to chat with us at our company about what what we're building. And I hopped on the phone and just had this spark of, wow, I think this is a company that's really gonna create generational change in the recruiting industry. And I really wanna be a part of this as an investor. It was something that I had on my mind. I had written a couple what I call cherub checks, which are smaller angel checks. And what was really funny is I kind of accidentally ended up Going into a syndicate, my friend mentioned to me, hey, you should ask if he has any allocation in the round left. And I was like, oh, I hadn't thought about doing that. And so I think this is like one of those things where sometimes you'll be speaking with someone really cool, but you might not make the ask to ask for allocation in their round. More often than not, that's a discussion that they're open to having. So I think that, you know, don't be afraid to ask someone for allocation if you feel like you have good rapport and it's a deal you're really excited about. And so I remember texting, I remember texting Kai and being like, hey, do you have $50K in allocation? He was like, oh, you know, our round is, is quite full, but we could definitely make room for you based on your experience with community content. We think you'd be a really valuable addition to the cap table. And so that was in November of 2020. And so that really kicked off my Investing careers, I know it. And Kai is a really great friend of mine. He's going to be an investor in our second fund, which I'm really excited about. But yeah, that's how my first syndicate started. And so to get into a deal, some of my friends have gotten allocation through cold outreach via Twitter DMs or email. Sometimes it's inbound. But to get into a syndicate lead, you'll often Most often need to punch above your weight in what Harry Hurst, the CEO of Pipe, coined the check size to helpfulness ratio. So as a syndicate lead, you'll engage in a due diligence process with founders going through their pitch, your questions, possibly reaching out to a few investors in your syndicate to gauge their appetite for the deal. So you'll negotiate allocation after deciding to invest in a company. And according to AngelList, syndicate allocations on average range from $200K to $300K, but I've seen a range from $50K, which is kind of like the minimum viable for the cost that it takes to set up an SPV, which I'll talk about a bit later in this episode, all the way up to $400K. So from here, each syndicate organizer runs their process differently. I'm a bit of an automation nerd at heart, and so I had a lot of automation built into our communication. I would send an update email out to the accredited investors on my syndicate list, which was literally like a Google Doc with a bunch of people's names in it. Which were tagged by areas of interest and check size, and then they'll often reply with more questions and a yes or a no. So those yeses and their associated check sizes are called commitments. They're not legally binding, but are rather held by someone's word. And Alexander had a great piece called On Social Capital or something like that. I'll also link it below in the show notes. But Silicon Valley lives and dies by social capital and your reputation is really important. And so to back out of a deal is not great. And so I would say these commitments are usually quite solid, but you do want to get that, that check size and those yeses and then keep track of them in a Google Sheet. So after receiving the commitments, I would Keep the founder that you're working with updated. So I would text Kai and be like, hey, we closed $6K. Hey, we closed $20K. Hey, we closed $30K. Keep them updated on your process. And so I ended up closing it in around 2 weeks. And I think this is one of like the really magical parts about syndicate deals is the speed. So for context, it took us 10 months to raise our first $5 million fund, and it took us about 2 months to go from starting fundraising to actually being able to write a check. And syndicates You have a much faster timeline on actually being able to send the wire, which I think is really special. So after receiving these commitments, I used a platform called Assure. Shout out Assure, they're actually sponsoring this episode. I have loved working with the team. I actually reached out to another company about running a syndicate, but they expressed a lot of hesitation because I was an unaccredited investor. Even though I had allocation and committed investors, they ultimately were not down. But shout out to Sure. Y'all have been great. To handle the fund administration side. So they create a legal entity, which will often be a series LLC, which is kind of like, you can imagine it as like a baby LLC. They provide the SPV fund documents, a bank account, taxes. So you'll send out what are called K-1s when there are material changes in how your investment has grown. One of the things to note here is that when your company raises on SAFE notes instead of price rounds, you won't see the tax implications of that until they raise a price round. So you, in my experience, we haven't had to do K-1s for SPVs that haven't raised price rounds yet. So I think that's important to keep in mind, thinking about taxes. And then a note on using that fund administration software. Using a software platform like Assure decreases the traditional fund administration process by by as much as 90%. Like, these used to be super, super expensive to spin up, and that's why a lot of companies that had in-house legal counsel were most often the folks that were spinning up SPVs. And now, because of platforms like Sure, you know, their starter package charges a one-time fee of $2,500 and then around 1.5% of the total raise plus any blue sky fees. Blue sky fees are like kind of annoying, but it's a tax that states charge funds, and this differs across every state. So keep in mind if you have investors in like New York, California, you know, Colorado, et cetera, like different states will have different blue sky fees. So that'll get tacked onto your SPV cost as well. And then there's also a distribution fee if and when there is a future distribution event. So Assure handles most of the fund administration previously handled by a combination of lawyers, banks, admin, and tax professionals. And then AngelList is a great option if you're looking for a full vertical solution, including an LP marketplace. But I've really enjoyed working with Assure. So after my commitments reach my allocation level, Assure closes the SPV and we wire the money to the company we're investing in. So depending on the size of the round, this process from securing allocation to close has taken me around 3 weeks. Most of this time is spent waiting for granular details like the bank account setup and the wire confirmations from investors. Then after that close, I used to send out intro emails with a blurb, like introducing each LP to each other and also the founders. And yeah, so that's kind of like the process of what it looks like to organize an SPV. And then I want to talk a bit about why organizing a syndicate is a good idea for an aspiring investor. So I think one of the questions that has come up a lot, I've seen it on a couple of my YouTube videos, was do you have to be an accredited investor to invest? And the answer is no. You can be a syndicate lead and you're not required legally to be an accredited investor. However, I think one of the things that is helpful in a syndicate is each LP opts into the deal by themselves. And so you present them with the opportunity, but ultimately they're the ones making the decision. You are sort of just like the conduit or node between the investors and the company. So even though you are required to be accredited to angel invest, you can start using syndicates to jumpstart your investing career and build a network and track record by Leading these syndicates. So some of the pros are you get practice reaching out to LPs and writing deal memos to get LPs excited. I crowdfunded for Seed to Harvest, so I raised around $5,000 in like 48 hours for Seed to Harvest. But before that, I hadn't raised a dollar. So it was really great to have the practice of going through the motions of raising, and it really substantially helped me when we went out to raise our first fund. Also, syndicates give you an opportunity to build a track record with top-tier VCs co-investing. That's one of the things that institutional investors often look at is who you're co-investing with. Um, you build the repetition of due diligencing. You learn what works and what doesn't in your process. You get to own your LP relationships, which is, I would say that like venture is such a web of relationships, but I think it's really cool doing a syndicate because you actually Get the one-to-one relationship with your LPs, and then you can also build out and prove your thesis so that you have immediate access to pools of capital when you find a company that you have really high conviction about. You'll also tend towards LPs that have similar investment theses as you, 'cause you'll find that they really resonate with the companies. And so I think it can be a great start of a relationship to start building a track record with those specific LPs that will probably end up coming into a fund if that's the route that you're looking to go down. It's a more formal arrangement than just intros to funding. Granted, it is more paperwork, but you, you will have your name on the cap table, which I think is really cool. And I'd say like the difference between raising money for an SPV versus for a fund is that in the SPV, the investor is underwriting the asset. So the product or company that you're about to invest in, whereas in a fund, they're underwriting you. And I think that I must have written this in like December or January of 2021 for our first fund. The questions are much more oriented around you and your decision-making skills because instead of saying, hey, we're going to invest in this asset, you're actually saying, hey, this is my decision-making process. This is what I'm excited about. You know, contribute to a blind pool of capital. Which I think is something to consider, or it's really great practice for fundraising, but it does shift significantly to you and your decision-making skills when you get to the fund level. Cons, it can be a lot of work. I was doing this on top of my day job, so it was definitely pretty chaotic. It was mostly emails and a few calls, but it was definitely a lot of work where you're doing the legwork for the founder for that section of the round with carry-only compensation. So I didn't take a management fee on the SPV. It was just admin-only funds. So why would you back a syndicate as an investor? I've been seeing this trend in VC where, you know, as the market shifts, we'll see how this plays out. But as there's been lots of capital and saturation, there's a lot more competition for deals. And it has been a founder's market in the past. I think that deals that are really great will still be super competitive, even more so than they might've been in the pass. So as a syndicate lead, you'll have access to those deals. Like you can really hustle to get allocation in them. And I think that evaluating deals through different syndicates allows you to write $1K to $5K checks, which most founders that you don't have a pre-established relationship with probably won't accept directly because it's a lot of paperwork for them. So you can get into competitive deals through a syndicate lead with a smaller minimum check size. And I would say like another common refrain that I've heard is, I have money, but I don't have the deal flow. And I think that backing syndicates as an investor also allows you to be involved in the general ecosystem and supporting the next generation of emerging managers and founders who bring a diverse perspective to startup funding. There is a caveat. This should be like only part of your income should be relegated to angel investing. So it's a very risky investment asset class, but it can have a higher upside. And then also like investing through SPVs, you'll often pay no management fee versus working with a fund, you'll pay a management fee in addition to carry. So yeah, there's a quick list of things that you should consider in terms of investing in a syndicate. Usually there's a minimum investment account amount. A common amount is $5,000, but some organizers are larger, some are smaller. It really depends on the overall size of the SPV. Risk. Every investment has risk, and investing in startup companies has a large amount of risk, and each investor should be comfortable with basically lighting the amount of money that they invested on fire. Industry and specialty. So many syndicate investors are more interested in deals that focus on industry, sector, or specialty that the investor has interest or experience in. So if you're wanting to invest in syndicates, I would definitely recommend looking at syndicates that operate within your area of interest or specialty. And time horizon. So startups take time to grow, and some startup investments that don't fail can take a decade or longer to reach an exit. The next thing I want to talk about is talking about The founder aspect. So why would you want to work with a syndicate as a founder? Leverage is really important in a fundraise. So as a founder, it can be helpful to enlist a syndicate lead to abstract some of the relationship management while you focus on larger check sizes. AngelList actually has an interesting product called the AngelList RUV, where it's a roll-up vehicle that allows founders to roll up smaller checks. I think it's like an $8,000 one-time fee. But I think that syndicates are really great when you want someone to manage those relationships for you, because as a founder, you're still going to be managing those relationships. So there's like 2 ways a syndicate can be involved, which would be like a syndicate lead. So someone else raising a check of your round or a chunk of your round for you, ability to pinpoint specific investor personas. Since the investors on every SPV are different. And it's funny, I wrote this article in before AngelList had rolled out the REV product, but I said syndicate as a service. So handling smaller check sizes for you from inbound interest you've generated, which keeps your cap table clean while still being able to accept smaller angels. So one of the things that, one of the questions I got from one of my friends, Sean, On Twitter was, as a founder, what are some of the key differences of an angel investor, a venture capital firm, or a syndicate when thinking about funding? Does that change in later rounds? So I'd say, you know, angel investors and syndicates are really great ways to build momentum when you're raising. One of the ways that we thought about structuring the fundraise for our fund was, okay, institutions probably aren't going to look at us early on because we didn't have a deep track record. And so we thought about who are the people that will, are trusted within the industry and will make an impact when we mention them in meetings or be able to make really high quality introductions. Focus on those. I think as a founder, it's very similar process in terms of pinpointing the people that are really respected within the industry and are able to give you really high quality introductions and help with your company. And then I think having more concentrated relationships over the long term. It happens. It just falls out like that. You'll find that it's rare you'll find an angel investor who will back you in every single round with, you know, increasing amounts of capital. It's difficult to find that. Definitely super exciting if you can, but I would say it's difficult. And so that's what a firm really provides, a lead firm that often will invest follow-on into your future rounds, and they're really devoted to helping you have your company succeed. So here's some other FAQs that I want to touch on. If you create a syndicate, what are your obligations after the investment is made? So your obligation is all of the post-close activities that the syndicate SPV needs to complete, like tax returns and corporate actions. So you'll need to make future investment decisions when the syndicate SPV is asked to vote as an investor on the cap table. You also have an obligation to your investors to be available And you need to assist with any future distributions in the event of an exit. So groups like Assure will prepare the syndicate taxes and assist with all your corporate actions and distributions, but ultimately you'll be the conduit between the founder company and your investors. There's no difference between syndicates and SPVs. They're the same thing. People just use them interchangeably. There is like an interesting difference in nomenclature between Some people refer to a syndicate as the loose group of investors that will invest across their SPVs, but you can also use syndicate to describe like a specific deal that you're doing. How many LPs can you have in a syndicate? So you can have 99 accredited LPs in a syndicate. If you're investing in a startup company and your syndicate raises less than $10 million, then you can have up to 249 accredited LPs. And then if your LPs are qualified purchasers, then you can have up to 1,999 investors in your syndicate. But if you want to raise capital from more than 99 or 249, then every investor must be a qualified purchaser, and that is a much higher bar than an accredited investor. And then there are options to set up SPVs outside of the USA. I personally haven't Participate in any of the financings that are outside of the US. So I definitely recommend Googling that stuff. I wanted to share like some of the reflections from our first syndicate, which I think is really cool to look back on. It's been around a year and a half since we started doing that, since I started leading syndicates, and I've learned so much. I think one of the things that I've been thinking about a lot is like, Easy come, easy go. It's something my grandma used to say, but I used to get really excited by fast yeses. But as I go through multiple cycles of SPVs and funds, I'm realizing that you want someone who's building a relationship with you for the long term that's going to be an investor in either the company or yourself. And so, you know, those are going to be the people that are going to stick by you whenever things go sideways, and they will probably. I mean, the failure rate is spectacularly high in startups. And so I would say that has been one of my biggest learnings over the past year and a half is that really focus on those long-term relationships that you're building. The next one is some investors will ask a lot of questions and some will ask very few. So that's normal due diligence. In my definition is the amount of information that you need to be able to have conviction in an investment. And some folks, when they're asking additional questions, it's more based around they might have someone that they're defending that investment decision to, whether that's a family member or whether that's external investors that they work with. So be aware of that. I would say keep a list of all these questions that they ask you. So we did this in our first fund. We had an investor FAQ and that was super helpful. We could go through and if anyone had a question that was asked before, we had an answer. Some of them take a really long time to think through that are more strategic questions about your syndicate and things like that. I would definitely recommend using a CRM. I didn't on my first and a combination of like Twitter DMs and separate email threads got really messy quite quickly. And so I ended up using, we use Close and Airtable now, but I used to use Notion when I was running the syndicate. Also, the doldrums happen. This is when you're so close and then no one writes you back for like a week. No one emails you back. Everyone's on vacation. People are out. Yeah, but like stalled conversations are tough, but I would say have patience and they'll come through. I would recommend following up and give them updates on either the company or new investors in the rounds. That's incredibly important to closing a syndicate. Speed is really the name of the game and also making sure you're communicating the necessary information to help the investor make an informed decision. Nerves mean you're doing something right. I needed to lay down and take some very deep breaths the morning after asking for allocation. So executing on small tasks over and over again make things seem less scary. I learned this from the Getting Things Done book, but some of your anxiety comes from having a project that feels insurmountable. And so if you focus on just the next step, available action step that can really tone down your anxiety. I think having done this for a year and a half and being in that mode, you sort of learn to like temper your emotions. And I meditate quite often. And having like a support network is great, especially if it's really close to your identity. It is like a very emotionally grueling process to fundraise, whether you're a founder, a fund manager, a syndicate organizer. Trying to focus on angels or investors with similar or tangential interest areas cut my reach out time like in half versus had I been not specific. Because people often pass if an investment is outside their thesis area. So for example, you might not present a developer tools play to a consumer investor, or you might not present like a creator tools investment to like a deep machine learning investor. The more closely a company aligns with your investor's thesis, the easier it is to reach conviction. They'll often have it like in their bio, or you can see from their background. And I think that I'll leave you with this. There's no better way to learn than to do and to do repeatedly. The perspective that I gained talking to investors helped me anticipate what they may ask in the future. It helped me understand fundraising dynamics better, both from a founder and funder perspective, and ultimately launch my venture career. And so I really hope that you enjoyed this. It's a bit of a different episode than I usually do, but let me know if you enjoyed this. Also let me know if you didn't enjoy it. I'm @PaigeFinn on Twitter, and again, thank you so much Assure for sponsoring this episode. I Really appreciate it, and your support has been super incredible in empowering like diverse investors to get their jumpstart into venture. So yeah, I'll link some show notes below with additional resources. But let me know if you enjoyed this. I'm happy to share more learnings on becoming a venture firm manager or syndicates in general. Feel free to comment on the YouTube video or tag me on Twitter at. Paige Finn. All right, hope everyone has an awesome day. Thanks so much for tuning in today to Seed to Harvest. If you enjoyed this episode, be sure to subscribe wherever your favorite podcast listening platform is. I'll be releasing new episodes weekly, and if you have any questions or comments, feel free to let me know on Twitter. That's Paige Finn, Paige and then Finn with 3 N's. Thanks and see you again next week.