Syndicate investing has quickly risen in popularity over the past several years. In venture capital, syndication refers to the process of pooling together capital from a number of individual angel investors or VCs to invest in a company via a single check. Syndicate members often collaborate around deal sourcing, diligence, and portfolio management as well. 

Syndicates are in many ways the lifeblood of early-stage VC, but they have developed a complex reputation in recent years. On the one hand, syndicates increase access to venture investing for both investors and deal managers. In the same vein, they increase access to capital for early-stage founders. On the other hand, the boom of syndicate deals in 2020 and 2021 revealed bad, scammy behavior from syndicate managers who wanted a shot at the uncapped upside of startup investing with little to no skin in the game themselves. 

Unsurprisingly, the down market hasn’t been great for syndicates. Syndicate activity has dropped significantly over the past year, with syndicate platform AngelList reporting that Q2 2023 was their lowest quarter in history for closed investments. And yet, some predict a renaissance of deal-by-deal investing over the quarters and years ahead. These optimists understand that deal-by-deal investing is more than just a way for influencers to monetize their audience or for retail investors to get $1k checks into hot deals. A deal-by-deal investing strategy, on its own or alongside a committed capital fund, can make a manager more attractive to LPs, more valuable to founders, and more flexible in how they can deploy capital.

Managing a syndicate was once seen as just a stepping stone, a way to build a track record with the hopes of one day being taken seriously as an investor. Today, there’s an opportunity for savvy capital allocators to employ a deal-by-deal strategy and create disproportionate value for their founders, their LPs, and themselves. 

Alex Pattis and Zach Ginsburg have navigated the landscape of deal-by-deal investing through several markets. In the years since launching Riverside Ventures (Alex) and Calm Ventures (Zach), the two of them have collectively deployed over $200M into almost 600 startups, largely through SPVs. Together, they author Last Money In, the most actionable newsletter in venture capital. We sat down with Alex and Zach to better understand the role that deal-by-deal investing plays in the venture capital ecosystem, especially through a down market. 

Key Takeaways:

• Your Syndicate is Your Deal Flow: Simply launching a syndicate isn’t enough to build a compelling track record. Consider how you can use your syndicate as a source of deal flow to share with established managers as you build your network. If you want to eventually graduate to managing a fund, the relationship you built while syndicating deals could be invaluable. 

• Be a Super-Connector: Bringing established managers into deals can help you earn or increase your allocation to an exciting company. Being a super-connector also increases your value to founders, allowing you to contribute to their hiring, sales, and business development efforts. 

• Build Trust Through Communication: When raising a fund, you are selling yourself and your strategy to LPs. When raising for SPVs, you are constantly selling an opportunity, traction, and story behind a company. Understand what resonates with your LPs and communicate with them transparently. 

• Operationalize Your Workflows: Deal-by-deal investing offers more flexibility. More flexibility gives you more options, as you are free to invest across any sector, stage, or geography. With more opportunities for distraction, streamlining your workflows and building repeatable processes are key to running a successful syndicate.

Selling Yourself vs. Selling the Opportunity 

Raising capital for an SPV requires selling investors on the founder, their company, its traction, and its growth story. An investor’s attention is focused on the opportunity itself, rather than these deal managers. What does the company do? What type of traction does it have? Who are the other investors involved? These are all questions potential LPs can ask and get answers to before they make their own decision about investing.

Traditional funds are all about the manager, their network, and their strategy. What is the manager’s background? What investments have they made in the past? What is their overarching thesis? These are good questions for a potential LP to ask a fundraising manager, but they may be hard to answer if you’re just getting started. SPVs allow an investor early in their career to focus LP attention on the opportunity itself rather than exposing any vulnerabilities in their own track record (or lack thereof).

“In a traditional fund, you have folks that are backing you and your ability to choose the right deals based on a specific thesis. With an SPV, each deal is an opportunity for you to highlight your ability to get into good deals.  If you want to graduate into managing a traditional fund, this is the right place to start – and it’s a great avenue to build trust and get some markups and/or returns for your LPs.”

- Alex Pattis

Your Value is Your Deal Flow

The best way to get started with SPVs is by being a great source of deal flow for other established investors. By helping other investors in the ecosystem, you’re able to build out your own deal flow and get access to better deals.

LPs are often hesitant to get involved in a syndicated deal until there is a strong lead investor. But, it’s hard to get allocation once there’s a strong lead investor in a deal. The best way to stay ahead of this curve is to become the person that brings a strong lead into a round. This builds your credibility with established funds, cements your reputation as a strong source of deal flow, and demonstrates your value to other founders. 

Becoming a deal-flow superconnector is no easy task. While deal-by-deal investing does allow you to build a track record quickly, there’s no shortcut to the hard work of finding exciting founders to invest in before everybody else. However, this type of work compounds. Once your network is established, you’ll find that deals come to you with little effort.

One thing that never changes though is the role of syndicate leads as super-connectors. Whether you’re connecting a founder to a VC, an LP to another syndicate, or two LPs to each other - the role of syndicate leads as facilitators in the ecosystem is a big part of their value.

“When we started the syndicate, I would leverage my relationships to source deals and build credibility. I’d get a referral to a founder from someone I already knew, and it kind of created a flywheel effect. People started sending us deals because they knew we could move quickly and also be helpful to founders. 

Today, I spend very little to no time on sourcing. I spend a lot of time connecting with other VCs and syndicate managers. Then, as companies are looking to fill out their rounds, we’ll bring in other syndicates or funds to help these companies move quicker and also raise follow-on capital down the line.”

-Zach Ginsburg 

Leveling Up: The Path of a Successful Syndicate Manager

It’s well understood that deal-by-deal investing can be an efficient way for an aspiring VC to build a track record. But not much airtime is given to the topic of what happens once you’ve demonstrated success as a syndicate manager (in the form of distributions or significant markups). At this point, many syndicate leads find themselves pulled towards raising a committed capital fund so that they can spend less time fundraising, move more quickly on hot deals, and consider their portfolio construction strategy. 

Alex Pattis and Zach Ginsburg have both “graduated” to managing their own funds, but that doesn’t mean that they’ve left deal-by-deal investing aside. Instead, they’ve layered on committed capital in a hybrid approach to venture investing.  A hybrid model refers to a structure where a manager operates both a committed capital fund and a syndicate. In this model, the fund is able to lead the process, commit capital to a founder, and then open up additional allocation to LPs. This is also referred to as opening up “co-invest” opportunities to LPs.

Learn more about how to use Co-Investing as a Competitive Advantage.

“About a year ago, I raised a micro fund of a couple million dollars. Once the market started to turn, it made more sense to have a fund to be able to write slightly bigger, consistent checks, especially since the market for deal-by-deal is a little less reliable. 

But syndication is always going to be meaningful for us. It allows liquidity opportunities earlier than a traditional fund. The hybrid model gives us the best of both worlds without really changing our strategy” 

- Alex Pattis

Graduating from running a syndicate to managing a fund, or undertaking a hybrid model, isn’t as simple as just standing up a new investment vehicle. Scaling can reveal vulnerabilities in your operational processes that are easy to ignore when your deals are infrequent or your investor base is smaller. Hybrid managers like Alex and Zach have found that proactive and clear communication with all stakeholders is a key part of a smooth process.

“We try to run the process within a two-week timeline, which gives LPs time to sit on the deal memo, do some diligence offline, and come back with any questions that they may have. 
I have to understand what type of deals make sense for my LPs, and sometimes that means telling an LP that a deal probably isn’t the right fit for them. While that might hurt in the short term, it’s an investment in the long-term relationship. There's very little to gain by selling the deal and getting that first LP check without kind of building that trust and that transparency that's needed for a fruitful, long-term relationship.”

- Alex Pattis

Establishing clear and reliable channels of communication with LPs is key to building trust. In practice, this means putting in the time to draft comprehensive deal memos and then making yourself available to answer ad hoc questions relatively quickly. Rather than hard selling the deal, focus on what you know about your LPs. Not every deal will be the right fit for every LP and it’s important to present the opportunity as it is rather than embellishing. Any exaggerations are short-sighted in what should be a long-term relationship with LPs.

These relationships take a long time to build, so deal-by-deal investing is a really good way to build trust with LPs.  Some of our LPs have been with us for a couple years and have seen a couple hundred deal memos. Not only do they get to evaluate the deal, but they get to evaluate our analysis on top of the deal. ‘What does this GP think? Does it align with the way we go about deals?’ Showing investors how you think with each deal memo is a really unique way to build that relationship over time.

"After doing this over the course of a year or two, you actually have good relationships with some of these LPs. And they've also built a track record with you. And so they've built trust through actually working with you on the SPV side and investing in some of your deals."

- Zach Ginsburg

Enjoyed the recap? Check out the full conversation here. 

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Sydecar's Fund+ allows managers to employ a hybrid fund-syndicate model using a single vehicle.  An end-to-end fund formation and administration solution, Fund+ combines the stability of a committed capital fund with the flexibility of deal by deal investing. Built on Sydecar’s proprietary infrastructure, the Fund benefits from automated banking, compliance, contracts, tax, and reporting, making it the best option for the next generation of venture investors.

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