Letter to LPs - Why You’re Not Getting My Venture Capital Deal Invites
Alex Pattis
GP @ Riverside Ventures (300+ portfolio) | Co-Founder @ Deal Sheet → Curated private market SPV investments for accredited investors
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Letter to LPs - Why You’re Not Getting My Venture Capital Deal Invites
It is common for Syndicate leads to selectively share deals with specific LPs rather than sending every deal to every LP.?Each deal has varying levels of sensitivity, and it is important for GPs to invite the right LPs to the right deals.
Founders are counting on the GP to run a tight and efficient SPV process.
Zach and I often discuss the large number of limited partners (LPs) in our syndicate compared to a typical venture capital fund. Traditional VC funds with over $10 million in capital can only have 100 LPs, while those with under $10 million are capped at 250 LPs (source ). With 10 to 100 times more LPs in our respective syndicates?in combination with the sensitivity of our deals, our syndicates face the unique challenge of having to limit which LPs we can send deals to.
The same goes for the deals we run. Often founders view their memo/round as highly sensitive or less sensitive based on VC interests, product roadmaps, internal strategies, etc. and what they want to get out of the syndicate and its LPs (i.e. do they view the syndicate as a mini-marketing event with preferred broad-based visibility from syndicate LPs - great for consumer play, or does the company just want to work with the Syndicate GP with no other plans to leverage the syndicate LP base).
Founder preferences and LP activity, among other factors, dictate how we roll out our deals to LPs. We can’t send out every deal to all of my ~5,000 LPs. Some of them are not active, or are just lookers (e.g. open deals, but don’t invest), while others are hyperactive and/or write large investment checks. Then there are the most recent backers who are often excited to deploy into the asset class.?
This is an extreme example, but I ran a syndicate two weeks back that was the most sensitive deal I’ve ever run. I worked closely with the company to develop an approach in which we were both happy with. Unfortunately for me, this approach required me to send out 160 individual NDA’s to interested LPs before they could review essentially any deal details. Once they signed the NDA, only then did I manually invite each individual to the deal to review materials and evaluate investing.?
This was certainly a one-off process, but it highlights how sensitive deal details can be and the importance of syndicate leads to run a good/tight process that the company’s founder is happy with. That being said, I hope I don’t need to run a process like that for a while.?
So, to my point of this post…
It’s crucial for syndicate leads to understand their LP base and take more of a data-driven approach when figuring out which LPs should get invited to which deals.?
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Here are 5 important data points I am constantly looking at when deciding which investor gets which deal:
1. # of deals invested in Riverside?
LPs/investors who have invested in at least 3-4+ deals with us have a higher level of consistency and seriousness as an LP and are likely to get invited to the majority, or more of the deals we run.?
Time plays a factor here (which I will get to), but if you have been in the syndicate for 1+ years and have not invested in 2+ deals, it is apparent that this LP will not be very active in deploying capital, which is okay, but we will not be sharing more sensitive, or competitive deals with a smaller allocation.?
So what should you an LP do to ensure deal invites based on # of deals? - invest often (at least 1/quarter).?
2. Average check size of deals invested
We typically have different investment minimums depending on the deal and allocation size, but will offer LPs minimum commitments as low as $1k. Many times I will work with the founders in deciding what they want the minimum to be. I do “coach” them a bit here. The average check size of deals is important as it helps break or group LPs by average check size. We are going to prioritize those LPs that are doing $10k+ checks, and definitely those $25k to $1m.?
Figuring out how you are going to fill SPVs is obviously important, therefore those LPs who are writing larger checks are typically going to get priority as they can put a much larger dent in the SPV allocation. For that reason, they tend to be invited to more deals we run.?
So what should you do as an LP to ensure deal invites based on ave. check - invest a minimum of $10k into the syndicate in total per year.
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3. Last Date Invested
The date of last investment is important in getting a pulse on how active this LP is currently. For example, an LP may write $50k or $100k checks but if they have not done a deal in the past 1-2 years, that signals they may no longer be active in our SPVs as we are doing ~50 investments a year. For higher sensitivity or smaller allocation deals, we want to prioritize investors that feel more active and engaged with the syndicate at present.
Our preference is to see LPs invest in a deal or multiple deals in the last 3-6 months, though we will? include LPs in deal invites whose last investment was in the past 12 months if he/she is a large check writer.
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As Zach mentioned in a post a few weeks back, some LPs burn out quickly as they overallocate too quickly (we are guilty of that too as we do higher volume deals), therefore it’s important for us to disseminate who is active and engaged, and looking for the next exciting company to allocate to. The more active an LP is in recent months/year, the more frequently they will get access to the syndicate leads deals.?
So what should you do as an LP to ensure deal invites based on last date invested - invest once per quarter at least.
4. Total $ invested in past 3-6-9-12 months
Another way to see how “relevant” or “active” an existing LP in a syndicate is, is to look at the previous 3-6-12 months and see how much capital has been deployed on that timeline. It’s a helpful way to get a pulse on who is active now.?
On the burnout topic, we have LPs in the syndicate who have allocated hundreds of thousands of dollars into our SPV’s which makes that look like a very attractive LP to a syndicate lead, however if all of that money was allocated from 2020-2022 (i.e. no capital allocated in the past year plus), then they are not actually all that active at present and are likely not receiving sensitive deal invites.?
LPs that are more active and have allocated more capital in total in the past 3-6-12 months will likely be invited to the vast majority of deals syndicate leads run.?
5. Date Since Being a Syndicate Member
Part of the beauty of syndicates is that unlike traditional funds, the door is always open for new LPs looking to deploy into startups. That means we are getting new LPs on a daily basis.?
This is important to note and understand when thinking about which LPs should get invited to which deals. We talked more so about # of deals and amounts of capital being deployed by an LP when thinking about who gets invited, however what happens if you just joined??
My personal take here is that you should get a chance as a new LP to review the best deals I am doing over the first few months before you get bucketed on investment data as a syndicate member. I also want to make a great first impression on new LPs (i.e. both the quality and volume of deals I run) as they join my syndicate.?
To summarize, new LPs have 3 months (typically) to make their first investment without being knocked as “inactive”. I will generally invite those new syndicate members to the majority of deals I run to give them a chance as an LP to better understand which investor profile they fit into. There may be specific, extremely confidential deals however, that are too sensitive to share with new LPs given the lack of data on these LPs. For example, I ran a deal like this last week that only got shared with specific, active LPs. It unfortunately was not worth sharing with a new LP even if they may have been interested in the deal.
?As mentioned, many deals are sensitive and highly confidential. Here are a few of the reasons we WOULD NOT share deals with the entire syndicate:
?We also asked 5 Syndicate GP friends for examples of:
See their answers below!
We typically only send deals to active LPs and we've actually started removing LPs from our base that have not invested over the past 12 months. This is mostly because we feel that we need to be careful with information sharing. Companies need to be sure that their deck and memo do not end up with LPs which never invest as it seems they may be on the platform for different reasons. Sometimes, we have high profile deals which are only shared with the most active LPs. This way we reward active LPs for their trust in us. If allocation is available, we invite other LPs at a later moment.
Morgan Schwanke
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If you enjoyed this article, check out our past articles discussing GP/LP relationships:
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Embracing selectivity in VC ensures each investment blossoms ??. As Seneca noted- Luck is when preparation meets opportunity. Let's prepare diligently and seize the right opportunities! #VCInsights #InvestmentStrategy
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8 个月Fascinating insight, Alex Pattis! Prioritizing investor-fit metrics is crucial for successful deal allocations in venture capital.
Principal Account Executive @ Databricks | Angel Investor & GTM Advisor @ LaunchRight | 3i
8 个月This is ??— cheers as always Alex Pattis Zachary Ginsburg
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8 个月??