A Guide to Co-Syndicating Venture Capital SPV’s

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A Guide to Co-Syndicating Venture Capital SPV’s → Everything You need to Know

Co-syndicating became popular only about 3-4 years ago following the popularity of SPVs as an investment avenue into startups, an alternative approach to a traditional venture fund. It’s now a common part of syndicating deals and a way to work with and meet many other syndicate leads in the ecosystem.?

More than half of the deals I now syndicate are being co-syndicated. In this week's post, we’ll break down the ins-and-outs of co-syndicating, the value prop for each party involved, why it’s grown in popularity, how it differs from traditional venture capital and more!

What is Co-syndicating?

Co-syndicating is when 2 (or more) syndicates team up to run an SPV together, essentially becoming Co-GP’s on a given deal. Zach and I have done this many times together (pretty much how we built a relationship) but also with other syndicate leads.

History of Co-syndication

Co-syndicating has really only been a thing for maybe the past 3-4 years, so it is relatively new i.e. not commonly understood. It has added quite a bit of collaboration amongst syndicate GPs to now partner up on different deals and essentially team up on a deal with the common goal of filling quality allocations with speed, more value add and access to different LPs bases.

What I believe originally started as a way to combine forces instead of competing when multiple syndicate leads were putting together an SPV for the same company, quickly morphed into a collaborative way for syndicate leads to work together. GPs quickly realised that they could bring in other GPs to co-syndicate with them, which would give them more exposure to LPs, value add and capital for a specific deal. It also provides a way to get more deal exposure to provide to LPs without necessarily leading the deal which takes on more admin tasks etc.?

Fast-forward 3-4 years later, this is now:

1. Very common amongst GPs
2. Tons of co-syndication strategy that has been implemented for both new and existing GPs (which we will get into).

Why it’s helpful in getting started as a Syndicate Lead

In my opinion there are multiple reasons a new syndicate GP would focus on co-syndicating early on. It offers multiple growth hacks including:

• Access a larger capital pool (via your co-syndicate partner who should ideally be more established than you). By bringing a partner into your deal, when they share details on the SPV you are running, in turn you are accessing their LPs, value add, etc. i.e. a larger pool of capital for the given SPV and those relationships.
• Get exposure to new and potential LPs to back you (it’s similar to getting retweeted so all these new followers can get exposure to you). That same email/post/message referenced above is going to provide exposure to new LPs who you can win for your syndicate. If they like the deal you are running point on, it would be smart of them to get involved in your syndicate to see more deals that resonate with them.
• Grow your LP base faster. Generally, the more you co-syndicate in order to grow your LP-base, the quicker you will be in a position to operate independently. In this scenario, you are leveraging your co-syndicate partner(s) access to LPs and value add, but our point here is that it's a hack to more quickly grow your LP base via exposure from your partner's existing LPs.
• GPs also provide other value add in the process. This can take form in many different ways from: - Diligencing a deal - Thinking through positioning of the company - Knowledge of competitive comps in the market - Access to LPs who can add value? - Access to co-investors who might be a great fit - Access to customers for the company - Industry relevant experience/knowledge - And more

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Value prop for those with larger, well-established syndicates

An important question to ask is why would a larger, existing syndicate be willing to provide you (a new syndicate lead) exposure to their LPs who might invest and deploy capital into your deal??

The reality is, not every syndicate lead is open to this, however many (I’d go as far as saying most) are open to this. For someone with a new syndicate looking to lean into this strategy, it would be good to know which syndicates are open and interested, as those will be your future partners.?

Below are the main ways in which larger syndicate leads extract value from working with smaller, less established syndicates:

• Access to more deal flow → one main value to larger syndicates who co-syndicate other syndicates deals is that it provides more access to deals to evaluate which is worth sharing with your LP-based and joining the syndicate. In my opinion, everyone in venture has some level of “good” deal flow. But good is not good enough to make you a great VC/investor. Larger syndicates have a unique/strong-alignment value prop versus traditional venture allowing them to see more high-quality deals where allocations have already been secured by smaller, up-and-coming syndicates. Well, this is true for the good ones that have great access. When economics (carry) are aligned between 2 syndicates, it enables a relationship one would not typically see across 2 different funds. For this reason, many larger syndicates leverage their LP distribution to access more deal flow.??
• Scout-Type Model → Similar to the point above, the co-syndicate model acts somewhat similar to a VC scout model. It’s not apples–to-apples as the up-and-coming syndicate is the one actually investing and running point on the deal (unlike a VC scout, however it depends on the scout model as they differ, more explained on the models here). In the co-syndicate model, you’ve got the up and coming syndicate lead who brings the deal, the founder relationship, and the allocation to the table, and then you’ve got the larger syndicate lead who is likely (not always true) carrying more of the weight on value add help and LP capital distribution. Both parties bring key elements to the table in order to team up and get the SPV done, and ideally done well.
• Helps Build Longer-Term Partners → once you build a working relationship of having done multiple deals together successfully, certain syndicate leads really like working together. This was kind of the case with Zach and I, but I also have like 4-5 syndicates that I’ve built this relationship with over time, and you see certain “clicks” across syndicate leads, which I think is good. Having partners in this business will only help! Though there are syndicate leads who operate more in silo and do extremely well.?

Why collaboration here works better than traditional VC

My opinion is that collaboration across Syndicates is much stronger than collaboration across Venture Funds. Here’s why:

First, lack of Collaboration across Venture Funds: there is collaboration across venture funds, however many times funds are not sharing their best deals with other funds until they’ve got a term sheet signed (or at all). Many funds have sharper elbows due to ownership requirements, etc., that make it difficult to collaborate with other funds. If “company A” is selling 15% of his company in a financing and two lead VC funds each have 10% ownership requirements, that is not a formula for collaboration between the VCs. Syndicate leads do not have these requirements and can be nimble with check size. . There are co-lead scenarios, but these venture funds need to make sure they get their ownerships targets. Once they have a term sheet signed they are more likely to share with other friendly VC’s, but likely with those that are okay not leading rounds, so it limits who they can “collaborate” with. Many times angels fit in well here if it’s still an earlier stage deal.

Part of the reason we are truly excited about our Deal Sheet product is because we believe it has the strongest alignment across any deal sharing platform that exists. What I mean by this is that VCs would never share their best deals in emails/newsletter/etc; as a syndicate we can. I don’t want to sell Deal Sheet too hard here (okay, I kinda do), but by being in a hyper collaborative VC syndicate ecosystem in which many years of trust has already been built, we can offer the best VC deals out there and still play nice with traditional funds.?

Second, Increased Collaboration across Syndicate Leads: Unlike institutional venture funds, for the most part, syndicate leads are not leading rounds and do not have ownership targets, making investing much more flexible. For this reason, elbows are not as sharp as we are typically taking a smaller portion of the round and have explained to the founder the target investment amount, but also highlighted that it could flex up or flex down depending on LP interest here. Good syndicate leads will be transparent and get a little flexibility if they can from the founder, which is really an art to syndicating deals.?

When you’ve got a little flexibility built in here, it becomes easier to collaborate if 1) you want to bring another valuable syndicate into the fold or 2) another syndicate reaches out to you because they want to get involved in the given investment. This is not always the case as there might be really small allocations where it makes less sense to bring or allow a partner to come in, but that is definitely the minority of deals.?

When a syndicate lead is longer-term focused on growth and success versus optimizing for the one deal in front of you, you’ll see great collaboration and teamwork of syndicating deals. Speaking for myself, I am happy to work with good syndicate leads who can be long-term partners meaning they can 1) consistently bring high-quality deals my way and 2) they can consistently join/support the syndicates I run and contribute to capital/value-add. As explained above, building these longer-term go-to partners can be super beneficial for syndicate leads out there.

Who is responsible for what in a co-syndication

When co-syndicating a deal, you have 2 main roles here:

1. The Co-syndicate Lead: this is the person who has direct access to the company and has secured the allocation and running the vehicle to invest. They will be the ones communicating with the founder and taking capital into their setup vehicle to invest directly into the company.
2. The Co-syndicate Partner: this role will be working alongside the lead to play a support role. They may have direct access to the company, but this will be dependent upon or flow through the co-syndicate lead (who has the allocation). Their primary role here is to offer value-add help (via their network, own experiences, etc.) as well as share the SPV investment opportunity with their LP-base to get those interested to invest in the company to invest via the co-syndicate leads’ SPV.?

The beauty here is it builds a mini-team for a given deal where both partners are incentivized to team up and put a solid SPV together.?

Bonus → Hear from a few GPs on their thoughts on the co-syndication model:

• Jeroen Bertrams : “Co-syndicating can be a great way to receive additional inflow into an SPV and to acquire new leads. For new syndicates, finding a co-syndicate partner is the best (and often only) way to grow their number of LPs. Co-syndicating works best when the overlap between backers is not too big. That said: even when overlap is significant, it can help to create additional appetite for an SPV. Not every syndicate still does co-syndications. In our case, we need to believe that a deal will bring a great outcome for LPs before we consider co-syndicating.”
• Austin Walker : "Invaluable way to get established as a syndicate lead"
• Drew Austin : “As I started Red Beard Ventures Angellist syndicate, I asked a lot of questions to syndicate leads about how to grow your LP base. There were two common responses, and looking back they were spot on, first - get high quality deals, sounds obvious but that’s what attracts people and creates virality, and second - partner with other syndicates and get your deals in front of their audiences. As a new investor, I’d heard of the competitive nature of venture capital, in the syndicate game it’s the opposite. It’s often a rising tide, lifts all boats. We root for the success of other syndicates to hopefully bring more angel investors in our ecosystem, and often collaborate on deals to drive the most capital to the company.“

If you enjoy this article, feel free to view our prior articles on SPV dynamics:?

• ???? v2 Playbook to Launching a Syndicate
• ??From LP to GP → 10 Valuable Learnings for Success as an LP in VC Syndicates

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?? Written by Zachary and Alex