the essential guide to syndicates: SPVs 101 by paigefinnn

Hey everyone, what's up? I'm Paige. I'm an emerging fund manager. I'm a developer success engineer at Workwest, and I run an early-stage syndicate focused on product-led growth companies. Today I wanted to dive into my Essential Guide to Syndicates, fill out some of the information I provided there so that you can have a more full understanding of what syndicates are and how they can be beneficial to you both as an organizer, a founder, and an investor. So Let's get started. I'm going to go ahead and share my screen. All right, so you'll see this is my Essential Guide to Syndicates. Here I have a graphic. You know, graphic design is my passion. Um, and let's get started off with doo doo doo. What is a syndicate? So a syndicate is essentially a deal-by-deal venture capital firm. It's going composed of organizers like myself who make investment decisions and backed by— this is the important part— accredited angel investors and high-net-worth individuals who contribute capital. So these folks are referred to as limited partners. I think a common misconception about a syndicate is that you have to set up a legal form or thing for it. You don't actually have to do this. A syndicate is basically like a loose organization of these LPs. And these LPs can choose which SPVs they want to invest in. So an SPV is the legal format of a specific investment that you'll be making. You can see here, I made a graphic to illustrate this dynamic. So how do these work exactly? So first, a syndicate organizer has to secure allocation. The process of it— this usually looks like getting deal flow. So that's either going to be inbound or outbound. And for example, like the first, the source of my first syndicate deal came from a number that I had set up to share updates for my book, Seed to Harvest. And then some of my friends have also gotten allocation through cold outreach via Twitter DMs or email. Intros are often a really great way to get deal flow as well. So how do you win allocation? I think that there's a lot of value that you can provide as a syndicate lead because you can kind of matchmake the different investors in your LP community that would be a good fit for that specific deal, either based on the vertical or where the company is in their journey. Syndicate allocations on average range from $20K to $300K. That's according to AngelList. They usually run like a larger check size, I would say. I've seen a range from $50K in pre-seed deals to $400K. Every syndicate organizer runs their process differently. So I usually send out an update email to the investors on my syndicate list. So they'll often reply with more questions about the deal. If they reply yes, those are called commitments. They're not legally binding, but I do take people's words pretty seriously. So I keep track of those in a Google Sheet when I have an active syndicate deal. So after receiving those commitments, I use a platform called assure.com to handle the fund administration side. So this consists of creating a legal entity, providing the SPV fund documents, a bank account, taxes, distributions, and all of the other things associated with the special purpose vehicle, or SPV. So this is really great because it used to be super expensive to spin these up using traditional lawyers and kind of cobbling that together. And so it's a really great solution. They also allow you as an unaccredited investor to organize the syndicate, which AngelList doesn't. So I've been really happy in my time working with Assure. So after commitments reach that 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 and the number of investors, this process from securing allocation to close has taken around 3 weeks. It can take longer if you're working with services like Alto IRA, which basically increase the number of middlemen and organizations that you have to pass money between. So let's dive into why organizing a syndicate is a good idea for an aspiring investor. One, you're not required to be an accredited investor to be a syndicate lead. So this can be a really great way to start off your investing career if you don't come from generational wealth and begin to build a network of limited partners and, and a track record of investing by leading these deals. So here's some of the pros. It's practice on reaching out to limited partners and writing deal memos to get limited partners excited. It's an opportunity to build a track record with top-tier VCs co-investing. So I've gotten to invest alongside firms like the Kleiner Perkins Scout Fund twice now, the Accel Scout Fund, and Bessemer Partners. You build a repetition of hyper-speed due diligencing with all of the different LPs within your community. You get to own these LP relationships, which I think think is really beneficial going forward. You also get to build out and prove your thesis. So mine is centered around product-led growth. And you get to look at a ton of deals. So I was getting a ton of inbound. I am still getting a ton of inbound deal flow on investing. And this is really great because having this scale of inbound deal flow really allows me to build out the process automation for deal flow later on as that scales up. You get to offer founder-friendly terms because you're most often not leading rounds. It also allows you to get in on competitive rounds more easily. It's a more formal arrangement than just intros to funding, so I help founders raise hundreds of thousands of dollars prior to this. I'd say like one tip is try to focus on angels with a similar or tangential interest area. Really cuts your reach-outs versus not being as specific. So the more closely a company aligns with an LP's personal thesis, the easier it is for them to reach conviction because they require less education about the space and the market. There's a couple different ways that you can run SPVs. So one is one-off special purpose vehicles via Assure, which are great if you're looking for high-touch support and have an existing network of investors you like to work with. AngelList is another platform This is great if you're looking for a complete vertical software solution, plus additional investors than your existing network. For me, this wasn't something that I had as top of mind since I had already filled my commitments with investors through email and DM. Allocations is another additional option for fund administration. So the difference between raising money for an SPV and for a fund, something that I'm intimately learning about now, is that in an SPV, the investors underwriting asset, so the company, the thing that you're about to invest in, whereas in a fund, they're underwriting you, the investor, and your decision-making. It's more of a blind pool situation. Cons are, it's a lot of work. You're basically doing all the legwork for the founder for that section of the round with carry-only compensation. For early-stage deals, it can take as long as like 7 to 10 years to see compensation for this. So yeah, that's a summary of a syndicate from an organizing perspective. Let's dive into why you would back a syndicate as an investor. So there's a growing trend in venture capital around lots of capital, which means that capital is getting less expensive. So this means that it's really an entrepreneur's market and there's more competition for deals. So as a syndicate backer, you'll have access to competitive deals you wouldn't have seen otherwise. Especially if you're looking to write lower check sizes. So most founders that you don't have a pre-established relationship with won't accept direct checks for small amounts of money because it costs money for them to do that from a legal perspective. And then also another common refrain that I hear a lot is that you have the money or you don't have the deal flow in that specific sector. So for example, some of the LPs I work with are really well-versed in the later-stage private market markets, but don't have the deal flow in the early-stage startups. It also provides you an opportunity to be involved in the ecosystem and supporting the next generation of emerging managers and founders who bring a diverse perspective to startup funding, which has been shown to generate higher returns. Caveat, angel investing should only be part of your overall investment, but it is like a higher upside, even though you know, 90 to 95% of startups fail, the ones that go on to make it often have much larger upside than less risky investments. And you also don't have to pay management fees on an SPV, which is really nice if you're looking to invest in one-off deals and not pay a management fee. And alongside this, you have the ability to opt into deals that you're excited about and pass on those that you're not. And one thing, so a couple things to consider around being an investor in a syndicate. So each syndicate organizer will set a minimum investment amount. This is usually like a fraction of the total allocation that they have. A common amount is $5,000, but some organizers are larger and some are smaller depending on the size of the deal. And a lot of folks will also let you invest smaller amounts of money. If you're a strategic investor and can provide value in a way different than capital. Risk. So every investment has risk, and investing in startup companies has a large amount of risk. So every investor should be comfortable with and able to lose that invested amount. Um, also industry and specialty. So many syndicate investors are more interested in deals that focus on an industry sector or specialty that the investor has interest or expertise. So it's really great if you can find syndicate leads that focus on the specific vertical or industry that you're really excited about. Um, time horizon. So startups take time to grow, and some startup investments can take a decade or longer to reach an exit. So this is something that you want to go into knowing that you're not going to see liquidity for a while, especially if you're investing at the pre-seed and seed stage. So you should definitely gather information on the companies that you're investing in. So reviewing the materials and attend meetings that are provided to you, and then also prepare to move quickly. A lot of deals move super quickly. So that's just like an important thing to consider. Some of them go as fast as like, I've seen a couple hours on AngelList. I would say a couple weeks is pretty common for pretty quick early-stage deals. Um, so this is the next part, is the Essential Guide to Syndicates for Founders. This is a question that I get asked really often by other founders, is, you know, like, how do I work with a syndicate? What are the benefits for me? Um, and I would say there's like 2 separate ways that you can work with a syndicate. So one is you might have a bunch of friends that want to write smaller checks This is what I call a syndicate as a service. So a syndicate lead would handle all of your small check sizes for you, and this would mean that you keep your cap table clean while still being able to accept smaller angels. And then the other is a syndicate lead. So that's basically someone else raising a chunk of your round for you. You can see here in this diagram that an SPV will constitute one line on your cap table, but you'll have a range of LPs that are able to be included there. Um, so you'd say like, what are some of the key differences and pros and cons of working with an angel investor, a venture capital firm, or a syndicate when thinking about funding? And does that change in later rounds? So I'd say angel investors and syndicates are great ways to build momentum when you're raising and looking for a lead investor for your round. However, I will say that a lot of syndicates kind of operate like micro VC funds in that they most often like to see a lead in your round. Some are much earlier and are comfortable investing without a lead setting the terms. But for context, they won't have the bandwidth to do deeper due diligence dives, and they often will delegate to a lead to set terms. So it's much easier to raise from syndicates if you already have a lead involved. It also makes it easier for them to basically sell the investment to their limited partners. And then angel investors can commit the fastest of all groups since they aren't managing other people's money. So some frequently asked questions. What's the best way to set one up? I use assure.com or assure.co. I would definitely recommend reaching out to Landon. He is an incredible help. He's the managing director of Assure Syndicates. If you create a syndicate, what are your obligations after the investment is made? So you have all of these post-close activities that the syndicate needs to complete, like tax returns and corporate actions. You'll need to make future investment decisions when the syndicate SBB SPV is asked to vote as an investor on the cap table. You also have an obligation to your limited partners to be available and assist with any future distributions. And then what's the difference between syndicates and SPVs? There isn't anything different between a syndicate and an SPV. They're exactly the same thing, but people often refer to a syndicate as the community of limited partners. And especially like on AngelList, you can subscribe to a syndicate. And so people often reference like that community as a syndicate. How many LPs can you have in a syndicate? You can have 99 accredited investors in a syndicate deal or SPV. 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. This is the same as raising a venture fund. So in a venture fund, you can have 99 accredited LPs, and then up to 249 if it's less than $10 million. So there's some great notes here on investing in SPVs outside of the US, so either in the UK or India. Also some reflections from my first syndicate. So some investors will ask lots of questions, some will ask very few. That's normal. People have different levels of information they need to be able to have conviction in an investment. 2, keep a list of all the questions potential investors ask you and the answers you have for them in a central spot to make things more efficient. This is also a really great resource for founders when they go to fundraise in later rounds, because they'll have a collection of the questions that you were asked. Lesson 3, use a CRM. I didn't. It was really hectic in my first syndicate deal. I am using Close now. I mentioned that I was going to be using Notion, but Close is awesome because you can keep track of basically everything that you're working on in one central place. Lesson 4, celebrate quick nos and long yeses. I really loved when angels were able to tell me a quick no based on their thesis. And on the flip side, it was incredible to hear yes after playing email tag for weeks. And answering deep diligence questions. Long nos were my least favorite. I'll just leave it at that. Definitely my least favorite. Lesson 5 was the doldrums happen when you're so close you can taste it. About like 1 or 2 investments from finishing, I was waiting on a handful of stalled conversations. So my advice here would just be to have patience. These conversations will fall out, but it can feel like you're under a lot of pressure, just continue to communicate with both the founder and the other investors in the syndicate. Lesson 6 is follow up, follow up, follow up. Make sure you're communicating the necessary information to the folks that you've initiated conversations with. The one caveat I will say to this is if someone doesn't respond to your initial message about investing, don't worry about following up. They'll follow up with you if It's of interest to them. But definitely follow up with the people that have replied back to your email about a deal. So 7, nerves mean you're doing something right. I definitely needed to lay down and take some very deep breaths the morning after I asked for allocation. So executing on small tasks over and over again make things seem less scary. It's just like continuing to build that momentum. Lesson 8, so try to focus on angels with a similar or tangential interest area. It really cuts your reach-outs a lot, and it's easier for them to reach conviction, and it's also just more considerate of your investors' times. So lesson 9, there's no better way to learn than to do and to do repeatedly. So the perspective that I gained talking to angels helps me anticipate what they may ask for in the future, which contributes to the advice I can provide other founders and my general knowledge of investing. Lesson 10 is that the only thing that feels better than doing my own syndicate is doing it with an incredible team backing me. I've really enjoyed my time, and it's been an incredible journey doing syndicates. So I hope this helped you understand a bit more about syndicates, both from an organizer, founder, and investor standpoint. Definitely let me know if you have any questions. Happy to answer them. I would— my 10-year goal is to help 1,000 folks make their first angel investments, 500 people lead their first syndicates, and seed 100 emerging fund managers. So let me know if you end up leading a syndicate. I would love to know, and I am here to help. So follow me on Twitter @PaigeFinn, um, or you can check out my website. I'll link this blog post below so that you can go into deeper information there. I hope you have a wonderful day and take care.