Part 1: What is an SPV and how do they work?
The easiest way to explain SPVs and Syndicates is to first run through the associated terminology, and then to piece it all together.
You may have heard the terms “SPV” and “Syndicate” used interchangeably. But, I prefer to keep them separate.
Let’s begin with the term Syndicate. In this context, a Syndicate is typically comprised of a collective of angel investors, investing either independently or together. Family offices and funds can also invest through syndicates. These investors are referred to as Limited Partners, or LPs (defined in the next section). An LP can belong to multiple syndicates, and each syndicate is run/organized/managed by one or more Syndicate Leads. Typically, a Syndicate will have, and be known for, its own brand. Numerous syndicates have built their brand around expertise in a specific vertical, and there are syndicates consisting of alumni from various well-known tech companies (e.g. Door Dash Alumni Syndicate) investing together and bringing domain expertise to each deal.
An LP is a silent partner in a partnership (read more about partnerships here, and how they differ from LLCs here). In a partnership, you typically have LPs and GPs (General Partners, also known as Managing Partners). This set-up is common for traditional venture funds. However, many SPVs are actually set-up as LLCs, where you don’t have the LP/GP structure, but the terminology is still used when speaking about SPVs and Syndicates.
A Syndicate Lead, often referred to as a GP (general partner), is an individual (or group of individuals) who sources the deal and manages a syndicate. Syndicate Leads will create a new SPV for each new investment. Leads will share investment opportunities with their syndicate, i.e. their LPs.
SPV stands for Special Purpose Vehicle. The special purpose is typically to pool funds from LPs and acquire (invest in) a specific asset (e.g. a startup). Think of an SPV as a one-deal venture fund with its own balance sheet. The SPV ultimately ends up on the cap-table as a single line item.
SPVs enable multiple investors to write smaller (sometimes as small as $1K) checks into private companies. VC funds usually have high minimum commitment amounts for LPs. SPVs enable investors with less capital to deploy to get exposure to this asset class.
Note: Syndicates are almost always invite-only, however, some syndicates have thousands of LPs whereas others have only a handful. Even larger syndicates will often be able to run more discreet processes should the founder in question ask that the materials (memo, deck) be shared with as few LPs as possible. Usually, such a raise will entail a higher minimum commitment amount from LPs. This is useful when the founder is concerned about the distribution of sensitive information and/or the optics of their raise.
SPVs appear on the cap-table the same way that typical funds do. The founder of the startup does not need to interact with the SPV’s LPs the same way that a founder typically does not interact with the LPs of the funds on their cap-table. Below is a graphic demonstrating a cap-table with many smaller checks (left), and on the right is the same cap-table, but with the smaller checks pooled into an SPV. Pooling all these smaller checks into one vehicle saves the founder a lot of time that would otherwise be spent on chasing signatures and wires.
The graphic below shows multiple LPs investing various smaller sums into a single SPV, managed by the Syndicate Lead. The SPV then acquires shares in the target company.
The graphic below demonstrates the dynamics of a Syndicate. The Syndicate Lead shares multiple investment opportunities with their LPs. LPs decide which deal(s) they want to participate in and invest only into those SPVs.
To sum things up, Syndicate Leads start, grow, and manage Syndicates. A Syndicate Lead will build a brand around their syndicate, the same way that VC funds have various brands or focuses, i.e. what they are known for, what they specialize in, etc. This helps with LP recruitment and deal flow. Once a Syndicate Lead has identified a target asset, and with full support and consent of the founder, the Syndicate Lead will set-up an SPV and share the investment opportunity with their LPs. The LPs that want to participate in the specific opportunity will commit capital to the SPV. Once the capital has been pooled into the SPV, the SPV will invest in the target asset (startup). The startup now has one additional row on their cap-table, the SPV entity (see below).
Here is more detailed breakdown of how this usually works (from the perspective of the Syndicate Lead)
- Get an allocation. Once the Lead has completed their due diligence and has conviction in a deal, they will secure an allocation in a startup’s round. The Lead must be transparent with the founder about the SPV process (i.e. timeline, the need to share information among the Lead’s LPs, etc.). Due to the fact that the Lead needs to raise the capital on a deal-by-deal basis, it is not possible to guarantee the founder a final investment amount until the LPs’ money is actually in the SPV’s bank account. The Lead typically does not sign any investment documents until the capital has arrived and is ready to wire to the startup.
- Memo. Once the founder has given the Lead an allocation and both are aligned regarding the process, the Lead will prepare an investment memo to share with their LPs. The Lead is not selling an investment opportunity; it is sharing an opportunity that it is personally excited about. The founder should approve the memo before it is circulated among LPs.
- SPV formation. This step can come either before or after circulating materials with LPs depending on how confident the Lead is that they will be able to raise capital for the deal. The Lead will most likely be using a third-party service for this (more on this in a later article). The process of forming an SPV and getting a bank account set-up usually takes anywhere from a few hours to a few days. Once this is complete, LPs will have the ability to commit to the deal (e-sign documents, wire commitments).
- Share with LPs. Distribute the approved memo and deck among the LPs along with a deal-link (assuming the SPV is ready to accept commitments). LPs will review the opportunity, and those who are interested will be able to commit to the deal. All the admin work (collecting wires, generating documents, etc.) will be taken care of by the Lead’s third-party SPV platform.
- Close the deal. Execute the fundraising documents between the SPV and the startup and wire the funds. This too is often done by the Lead’s SPV admin platform.
To come: an overview of SPV economics and how they may affect incentives, SPV admin platforms (AngelList, Assure, Canopy, etc.), Growing an LP base, some tips for founders, etc.
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