⁉️ How do SPV leads have access to “Unlimited” Pools of Capital ⁉️
This one is really interesting in understanding the difference of how a traditional VC deploys capital versus the opportunistic, unlimited pool (yet also quite limited) of capital, syndicate lead.
Let's dive in.
With a traditional fund, a pool of capital is raised upfront from LPs (e.g. investors) to be invested into various companies/assets according to the fund's strategy.
This is typically a fixed pool of capital of $10m to $1bn in venture, but nonetheless is a set or fixed amount.
Having a limited pool of capital forces Fund GPs (General Partners i.e. Fund Managers) to optimize their capital and as by definition of being fixed, dollars invested into one company is capital that can’t now be invested in a different company.
While it varies, most Seed funds I come across usually have 20-40 initial entry investments that they plan for of which they invest into over a two to three year period.
In contrast, the syndicate process works by first selecting a target company that the syndicate lead GP believes is a good investment and then raising capital from his/her LPs for that specific investment opportunity.
There is an unlimited number of opportunities an SPV lead can run as they are not limited by a fixed pool of upfront capital like a fund is, allowing the Syndicate GPs to theoretically invest in as many “good/quality” opportunities as they can find and raise capital for.
This may sound great, and frankly, it is – but it’s also not as rosy as it appears for Syndicate GPs.
There are very real drawbacks to this syndicate capital allocation model.
For one, because LPs in SPVs are selectively choosing which companies to invest in, syndicate LPs have more control and influence in investment decision making compared to being a limited partner in a fund, where the Fund GP can have full discretion over investment decisions.
This impacts us (syndicate leads) as we pass on deals that we know our LPs won’t invest in even if we believe it’s a good deal…
By contrast to Fund GPs, Syndicate GPs are at the whims of their LPs in terms of how much capital they can invest into a company, and often times that amount is unevenly distributed into deals based on signaling like who are the round leads e.g. a16z, Founders Fund, etc. versus investing into a GPs’ “best” investment opportunities.
Believe it or not, who is leading is often not the best criteria to evaluate a deal.
But fundamentally, in a fund you are investing in a manager, while in a syndicate, you’re often investing in a mix of a manager the startup being syndicated, which makes optimizing capital difficult for Syndicate GPs.
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