With Q3 officially in the books, Sydecar is proud to announce significant enhancements across our platform, from refining compliance processes to launching our innovative Syndicate platform. These updates reflect our ongoing commitment to innovation and our dedication to meeting the evolving needs of fund managers, syndicate leads, and investors. Read on to discover how these new features can transform your investment management experience with Sydecar.

Compliance

Improving UBO Workflows

What It Is: We've made it easier to manage information about Ultimate Beneficial Owners (UBOs) during the setup of entity profiles on Sydecar. Key updates include:

• Allowing a designated person to input UBO details without replacing existing UBO profiles, even when using the same email address, provided they have permission from the UBOs.

• Providing the ability for designated individuals to update or delete UBO information directly within the entity profile, with the necessary approvals from the UBOs involved.

Why It's Important: These improvements streamline the setup process for entity profiles with UBOs, reducing the time and effort required to comply with legal requirements. With these changes, managing and updating UBO information is more straightforward for entities with complex ownership structures.

Corporate Transparency Act Update

What It Is: Sydecar has enhanced its SPV and Fund+ products in response to the Corporate Transparency Act (CTA). This update allows organizers to opt in or out of partnering with Sydecar for CTA compliance and includes provisions for collecting information from individual users for Beneficial Owner Information (BOI) reporting. 

Why It's Important: This update streamlines the collection of ownership information, enabling fund managers and investors to meet reporting requirements quickly and with less administrative effort.

Syndicate

Syndicate Platform Launch

What It Is: Sydecar's new Syndicate platform offers robust tools to enhance the operations and effectiveness of syndicate leads:

• Centralized Communication: Enables direct communication with all members through the platform, allowing updates on syndicate activities, deal flow, and successes to be shared efficiently to keep everyone informed and engaged.

• Member Portal: Provides investors with a dedicated portal where they can view deal flow and communicate directly with the syndicate lead, ensuring their information remains confidential and under the control of the syndicate lead.

• Deal Tracking: Leverages analytics to monitor member participation and engagement, allowing syndicate leads to focus on investors who are most active and likely to participate in future opportunities.

Why It's Important: Sydecar’s new syndicate platform addresses the specific needs of syndicate leads who have historically had to manage their activities across multiple, disjointed tools. By centralizing these functions, the platform not only saves time but also reduces the likelihood of errors, enhances communication, and improves decision-making processes. This new product simplifies complexities, ensuring that they can focus more on strategy and less on administrative tasks.

As we continue to enhance our platform, we remain focused on providing the most robust and compliant solutions in the market. These latest updates are designed to meet the specific needs of our clients, ensuring they can manage their syndicates, SPVs, and funds with greater ease and security. We thank our dedicated community of venture managers for their feedback, which has directly informed these updates. Stay tuned for further developments as we continue advancing our platform to support your venture operations effectively.

MA7, the new syndicate co-led by Murat Abdrakhmanov and Yelzhan Kushekbayev, is making waves in Kazakhstan’s venture capital ecosystem. While Murat is recognized as the country's most prominent angel investor, Yelzhan brings extensive experience, having personally invested in 90 SPVs since 2020. Together, they’ve launched the MA7 Angels Club, a syndicate leveraging Murat’s deal flow to give individual investors exposure to high-growth opportunities. 

The Birth of MA7 

Yelzhan and Murat met through Astana Hub, a government institute that supports the growth of Kazakhstan’s tech and IT ecosystem. Murat, a mentor in the Hub’s first angel investor cohort, saw potential in Yelzhan and invited him to partner in creating MA7. With Murat’s track record of a combined portfolio that includes over 50 companies and 12 exits, the duo set out to develop a syndicate in Kazakhstan that emphasizes meaningful, transparent interactions with investors. 

Investment Strategy and Notable Deals 

MA7 focuses on sectors they understand and have deep expertise in—primarily B2B SaaS, fintech, edtech, hrtech, deeptech, and AI. Avoiding industries like biotech or agriculture tech, they instead invest in promising startups like Hero’s Journey, a Kazakhstan-originated, US-based fitness company. Hero’s Journey has created a revolutionary gamified gym experience that uses (automation and IoT) to optimize customer engagement and revenue per square meter. MA7 raised $1mil in a $6 million seed round to support Hero’s Journey’s expansion into New York.

Another recent investment is Zibra AI, a platform that transforms text into 3D objects for game development. Murat had already invested personally in the company before Andreessen Horowitz backed it. When the next round came up, Murat and Yelzhan brought in their MA7 syndicate members, giving them a chance to back a leader in AI-driven game design. The syndicate members quickly jumped at the opportunity to participate in the round.

One unique aspect of MA7’s strategy is the commitment Murat and Yelzhan have made to each deal. While many syndicate organizers often contribute as little as 10% or less of the allocation, MA7 aims to put 30-50% of their own capital into each investment. This higher level of personal investment ensures alignment with their investors and strengthens the trust within their community.

Why Sydecar? 

From the outset, MA7 chose Sydecar to manage their syndicate operations because of the platform’s flexibility and user-friendly interface. Yelzhan also emphasized the importance of Sydecar’s due diligence and KYC process. Kazakhstan’s geographical proximity to Russia adds complexity for investors, and Sydecar’s team has been diligent in ensuring compliance while also accommodating the specific needs of MA7’s investor base.

Building a Community 

One of the standout features of MA7’s syndicate is its tight-knit investor base. With 80+ investors, all of whom are friends or direct referrals, MA7 is committed to building meaningful relationships. Deal presentations take place where founders pitch directly to the syndicate’s investors, followed by detailed analysis sessions with the investors where Yelzhan and Murat break down the investment thesis, risks, and benefits. This approach fosters transparency and trust, ensuring their investors understand the full scope of each opportunity and feel confident in their investments.

MA7 also occasionally hosts offline gatherings, including venture-focused regattas and apres ski events across the globe. These events combine networking with educational sessions on venture capital, further strengthening the community.

The Road Ahead 

In the coming year, MA7 aims to invest $10 million across 15 deals and grow their investor base to 300. While they’ve grown their syndicate through word-of-mouth, they’re now planning to launch a public website and engage in more formal marketing activities.

With the support of Sydecar’s platform, Murat and Yelzhan are well-positioned to scale their operations, expand their investor base, and continue sourcing top-tier deals from Kazakhstan, central Eurasia, and beyond. Sydecar streamlines everything from investor management to deal tracking and communications, helping syndicates like MA7 operate with precision and efficiency. Learn more about how Sydecar’s Syndicate platform can enhance your syndicate operations by visiting our Syndicate page.

Today, we’re thrilled to introduce a new tool that will transform the way syndicate leads manage deals and engage investors. Sydecar’s Syndicate platform is designed to empower syndicate leads and their investors by combining all essential tools into a single, intuitive platform. This platform simplifies member communications, tracks deal participation, and supports syndicate growth—all in one place.

Managing a syndicate has historically been cumbersome and time-consuming. Syndicate leads have had to rely on a patchwork of tools to manage their operations. This fragmented approach not only wastes time but also increases the risk of miscommunication and missed opportunities.

Sydecar’s Syndicate platform offers a unified solution: a platform where all syndicate activities are centralized, making it easier than ever to keep your members informed, engaged, and ready to act. Our platform ensures that you can focus on what matters most—sourcing deals and building relationships—while we handle the rest.

Key Features 

Centralized Communication: Say goodbye to juggling multiple communication channels. With Sydecar, you can streamline all member communications directly within the platform. Effortlessly share updates on syndicate activities, deal flow, and past successes, ensuring everyone stays informed and engaged.

Member Portal: Maintain full ownership and control of your contacts. Investors have a dedicated portal where they can view deal flow and communicate directly with you. Best of all, their information remains between them and you, private from other syndicate leads.

Deal Tracking: Get insights into member participation. With our analytics tools, you can easily identify and target engaged LPs for future opportunities, optimizing your syndicate’s success.

We developed the Syndicate platform with the unique needs of syndicate leads in mind. Our goal is to eliminate the inefficiencies that have long plagued syndicate operations and to provide a seamless experience that scales with your growth.

We’re excited to continue supporting the next generation of syndicate leads and venture investors who are looking for more efficient, transparent, and scalable solutions. With the launch of our Syndicate platform, we’re taking another step toward transforming the way private markets operate, and we’re excited to have you with us on this journey.

Experience the impact of our Syndicate platform firsthand. Visit our website to explore an interactive demo that will show you firsthand how our platform can streamline your syndicate operations and help you achieve more with less effort.

Gabriel Jarrosson, a seasoned venture capitalist and founder of one of the largest French angel syndicates, has been navigating the complexities of syndicate management since 2017. With over 750 active angel investors and a community of over forty thousand on social media, Gabriel has built a significant presence in both France and Silicon Valley. His syndicate, Leonis.vc, invests primarily in YC companies. He is also the Managing Partner of a fund, Lobster Capital.

In the early days of his syndicate, Gabriel struggled with the inefficiencies of managing French SPVs, describing the experience as nothing short of “horrible.” Seeking a better solution, he transitioned to using Assure’s Glassboard product for his syndicates. However, when Assure shut down, Gabriel needed a reliable alternative. Two years ago, he discovered Sydecar.

Unified Communication and Operations

Running a large syndicate requires efficient communication and operational tools. Sydecar’s Syndicate platform provides Gabriel with the capability to manage all investor communications, from creating posts and sending updates to handling investment memos—all directly within the platform. The platform’s design offers the control and customization needed to engage investors more effectively.

Keeping LP Information Private

Gabriel’s primary motivation for choosing Sydecar as his syndicate platform was the platform's commitment to privacy and control. Unlike other platforms, where LPs might receive deal offers from multiple syndicate leads, Sydecar ensures that Gabriel's investors see only his deals.

Moving Forward

Looking to the future, Gabriel sees Sydecar as more than just a tool—it’s a platform that evolves with his needs. As he prepares for his next fund, Sydecar’s continued innovation ensures that Gabriel can stay ahead of the curve and keep his investors engaged.

Gabriel’s success with Sydecar showcases the power of an all-in-one platform to transform syndicate management. If you’re interested in seeing how Sydecar can streamline your syndicate operations, check out our interactive demo. The demo offers a step-by-step guide on how easy it is to set up a syndicate on our platform. 

Michele Schueli, GP at ARMYN Capital, stands out in the venture capital space for his strategic focus on secondary transactions. With a keen eye for identifying market dislocations, Michele has successfully navigated the turbulence of recent years, turning undervalued assets into profitable opportunities. His approach to secondary investments reflects a blend of opportunism, market insight, and a deep understanding of the evolving needs of LPs.

Opportunity in Market Dislocations

Michele's interest in secondary transactions began in 2019 and persisted even through the market turbulence of 2022 and 2023. In fact, as valuations of high-quality companies fluctuated dramatically, Michele identified opportunities where solid companies were trading at significant discounts. 

Michele's strategy at ARMYN Capital also includes facilitating liquidity for LPs through carefully timed transactions. By helping LPs find buyers when the right opportunity arises, Michele ensures that his LPs can capitalize on market conditions without being locked into long-term positions. Michele highlighted that some of the most coveted names in the market are only accessible through secondary transactions.

Evaluating Secondary Deals

When assessing secondary deals, Michele breaks them down into two categories: highly sought-after tender offers in companies such as Stripe, and companies that are temporarily mispriced due to market conditions due to individual sellers seeking liquidity. For the high-demand names, the focus is on securing access. However, for mispriced opportunities, ARMYN relies heavily on financial data and their knowledge of the company. 

Michele also emphasizes the importance of understanding the preference stack when dealing with secondary transactions; it's crucial to know where that stock sits in the stack. This can significantly impact the investment's risk and return profile.

Sydecar’s Role in Secondary Transactions

Sydecar’s platform has been a game-changer for ARMYN Capital when it comes to handling secondary transactions. One feature that stands out is Sydecar’s easy-to-use pooling system, which makes gathering and managing funds from multiple investors a breeze. This has saved Michele a lot of time and allowed him to focus on finding the right deals instead of worrying about the logistics.

With Sydecar, Michele has been able to scale ARMYN Capital’s secondary strategy, making the process faster and more reliable. The platform’s efficiency has become a key part of ARMYN’s success, helping Michele stay competitive in a fast-moving market.

Looking Ahead

As the venture capital market continues to evolve, Michele believes that secondary transactions will remain a vital part of ARMYN’s investment strategy, particularly in the absence of a robust IPO market. 

Michele anticipates that the trend of secondary transactions will persist, driven by the need for liquidity and the maturation of private companies that might have otherwise gone public in different market conditions. He believes that the role of secondaries is only going to grow, especially as more companies embrace tender offers as a viable alternative to IPOs. 

If you're inspired by Michele’s approach, check out how you can streamline your own secondary transactions with our interactive product demo. With our interactive demo, you’ll get a step-by-step walkthrough of how to create a deal on our platform. Whether you're a seasoned manager or new to secondary deals, this demo will show you how easy Sydecar makes the process.

We're excited to share that Sydecar has surpassed $1 billion in assets under administration (AUA). Here's a snapshot of how we’re doing currently:

As we celebrate surpassing this mark, we're not just signaling a financial milestone; we're showcasing a shift towards a more standardized, transparent, and efficient approach to private investing. This achievement underscores our platform's credibility and the trust the market places in our mission to streamline venture fund and SPV management.

Reaching $1 billion in administering assets reflects the growing confidence that fund managers and investors place in Sydecar. It's a testament to our platform's ability to manage deal execution seamlessly. Our journey from reaching $350 million in AUA just two years ago to now administering over $1 billion illustrates our capability to scale and adapt to the evolving needs of the venture capital ecosystem.

Embracing Standardization in Private Investing

This milestone is significant not just for Sydecar but for the entire venture ecosystem. It signals a shift towards embracing a standardized approach to structuring and managing investment vehicles. Standardization brings numerous benefits, including reduced complexities, lower costs, and improved accessibility for new entrants in the venture capital space. By pioneering a product-driven approach, Sydecar has established an industry standard to simplify the investment process, making it more transparent and accessible.

Advancing Our Mission for a More Transparent and Efficient Market

Achieving $1 billion in assets under administration brings us closer to realizing our mission of enhancing transparency, efficiency, and liquidity in private markets. This milestone demonstrates our capability to provide clear and accessible processes, streamline complex operations, and facilitate quicker transactions, increasing market liquidity.

A Look Back: The Road to $1 Billion

Sydecar was born out of a necessity to solve the inefficiencies and high barriers to entry in private investing. Our founders experienced first-hand the challenges of setting up and managing investment vehicles. This understanding drove our commitment to creating a platform that not only meets the compliance and operational needs of today's investors but also anticipates the demands of tomorrow's market dynamics.

Our SPV product was just the beginning. Today, Sydecar supports a wide array of investment activities with tools that ensure compliance, streamline operations, and enhance investor communication. These tools have been crucial in achieving the milestone we celebrate today.

Looking Forward

As we continue to grow, our focus remains on expanding our platform to support the next wave of innovations in venture investing. The introduction of new products designed to remove regulatory barriers and enhance capital formation is on the horizon. We are excited about the future and committed to supporting our clients in unlocking more opportunities in private markets.

We are incredibly grateful to our clients, partners, and the entire Sydecar team for being part of this journey. Here's to continuing our mission of transforming private market investing together.

Interested in joining the growing number of fund managers and investors who trust Sydecar to support their success? Book a demo with us today and explore how our platform can streamline your venture fund and SPV management:

Venture capital is an illiquid asset class. Investments in private companies, whether directly or indirectly (through funds), are locked up to some extent until the company goes public or gets acquired. Secondaries have always been and remain a strong mechanism for investors to achieve some level of liquidity before a traditional exit opportunity arises. However, as the exit market (and therefore liquidity) has dried up over the last few years, the volume of secondary transactions has grown dramatically. The robustness and types of secondary opportunities for investors have similarly expanded, yielding new and exciting opportunities for buyers and sellers. 

What is a Secondary Transaction?

In the private markets, a secondary sale is any sale of ownership in a startup (typically common or preferred stock) where the seller is anyone other than the company itself. For instance, an investor may purchase Series Seed stock and then resell it to another investor several years down the line prior to the company going public or getting acquired (known as “exiting”).

A Brief History

Around the turn of the century, private markets grew exponentially with new capital and investors flooding in. Allocators started investing more, and as the market ebbed and flowed, investors needed liquidity. They turned to secondary sales for this. However, secondary sales had a stigma, leading to a scarcity of buyers, hesitancy from sellers, and tight regulations.

The 2008 financial crisis significantly impacted secondary markets. As liquidity dried up, LPs were forced to hold positions longer than expected, spurring a rise in secondary buyers and transactions. After a period of stability, the market saw a resurgence in 2020-2022, driven by high valuations and substantial committed capital, which led to large, late-stage investments in overvalued companies. Rising interest rates and declining market sentiment caused valuations to drop, closing the IPO market and hindering M&A activity. Consequently, a new wave of secondary vehicles, funds, and marketplaces has emerged to address these liquidity challenges.

Types of Secondary Transactions

Direct Secondaries

The most common form of secondaries occurs via "direct" sales, where the underlying asset is equity in a company. Given the restrictions on shareholders and transaction volume that large private companies are subject to, secondary transactions can be difficult for these companies to accommodate. To bypass these hurdles, investors can use SPVs to buy company equity and then trade shares of those SPVs. While this strategy can unlock liquidity opportunities, such transactions can also be complex and difficult to manage.

Fund Secondaries

Sometimes, shares of private companies are sold as part of a larger fund. When these fund positions are traded, they are called fund secondaries. Fund secondaries make up an entire ecosystem on their own. The exact nature and structure of a fund secondary can take on many forms. Three main mechanisms are the most popular: 

LP-Led Secondaries

If an investor becomes a Limited Partner in a fund, they can also access the secondary market. As private funds often extend beyond their planned divestment date, investors might face liquidity issues. LPs looking for full or partial exits can sell their positions to other fund investors, outside investors, fund-of-funds, or specialized secondary funds. These dedicated secondary funds are becoming increasingly common, providing more options for LPs to achieve liquidity.

GP-Led Secondaries

When a fund is nearing the end of its intended lifecycle, GPs can introduce liquidity by selling the fund’s ownership of select companies in a secondary transaction. This strategy is similar to that of a direct secondary. Often, these positions are bought by private equity firms or secondary funds. This group also encompasses strip sales. 

Continuation Vehicles

If a fund has reached the end of its intended lifecycle, but the portfolio is still not ready for liquidation, GPs can turn to continuation vehicles. These involve effectively rolling the current portfolio into a new fund or vehicle, which can include adding new LPs. Oftentimes, LPs of the original fund can use this to sell their stakes for liquidity, and secondary funds can utilize this technique to gain exposure to late-stage portfolios. Such vehicles have become very popular over the past year, and are expected to be a core focus of the secondary market’s trajectory in the near future.

Benefits of Secondaries 

The primary function of a secondary transaction is to create liquidity for the initial purchaser. This is especially relevant in VC, where investments are typically “illiquid,” meaning that investors won’t receive a return for five, ten, or more years. Secondaries allow VCs to return funds to their LPs without having to wait for a portfolio company to exit.

Secondary sales can also allow VCs to recycle capital back into a fund. Instead of returning funds to LPs immediately, proceeds from exits or secondary sales are reinvested into additional companies. For LPs not needing early liquidity, this recycling can enhance long-term returns by deploying more capital into investments. It also improves fund metrics like IRR and total value paid in (TVPI), aiding in future fundraising efforts. This post by Sapphire Ventures provides an in-depth example of how recycling can impact fund return multiples.

If the VCs don’t have immediate plans for near-term liquidity, LPs can use secondaries for their portfolio positions. Much like a private ETF, secondary investors can buy later-lifecycle portfolios with more mature positions. Conversely, sellers can generate cash flow opportunities outside of the fund. 

On the buyer side, secondary transactions rely on deal access. Secondaries provide a viable opportunity for newer investors, including angels and micro-fund managers, to buy ownership in companies they would not have been able to invest in directly. These are almost always later-stage companies, where there’s more demand for equity given that the companies are more established and have demonstrated success. Newer investors may see this as an appealing way to diversify their portfolio and participate in the value creation of a company soon before an IPO.

Because of these benefits and the increased interest in private markets as a whole, there has been a demonstrated increase in secondary activity over the past several years. Secondaries are particularly appealing to stakeholders such as family offices, high-net-worth individuals, and fund-of-funds that are newer to venture investing and therefore may not have access to primary investment opportunities.

If you're interested in tapping into these benefits and want a hassle-free way to invest, Sydecar can help. We make it easy to navigate secondary investments and boost your returns. Sydecar handles everything from automated banking and compliance to contracts and reporting for secondary transactions, so you can focus on deal-making. Visit our Secondary SPVs page to learn more and get started today.

Max Harris is the co-founder and CEO of Ticker Markets, a platform for private fund LP secondaries. Working primarily as a brokerage, Ticker aims to support liquidity solutions through the fund life cycle, connecting the secondary market to allow for lower mid-market individuals and family offices to access the growing pool of committed secondary capital. Before starting Ticker, Max worked in the aerospace and defence industry at Northrop Grumman, building out next generation space-based solar power technologies. 

Emerging VCs are facing rising pressure to generate returns for their investors after several years of sub-par performance. As a result, demand has concentrated around certain deal types, specifically AI and pre-IPO companies. However, fundraising challenges have made it difficult for emerging managers to gather the substantial capital required for these opportunities.

Late-stage companies, particularly AI startups like OpenAI and Anthropic, have attracted significant investment, but gaining direct cap table access to these companies is very difficult due to their high valuations and popularity. To overcome this, investors are turning to “pass-through” SPVs. 

What is a Pass-Through SPV?

The term “pass-through SPV” typically refers to an SPV that is used by VCs to pool funds and invest in another pass-through entity (i.e. SPV), which has a direct allocation in a target company. These structures involve multiple pass-through entities that form the layers. Each SPV contributes funds up the chain until reaching the final investment.

Since these SPVs allow multiple investors to pool their resources, this approach makes it possible for investors to join high-value deals that would otherwise be out of reach.

Pass-through SPVs offer access to valuable investments and help emerging managers build stronger relationships with their investors by providing stakes in top companies. However, while this strategy opens up new opportunities, it also brings significant operational challenges, especially around transparency and tax reporting. 

Why this is Happening

Access

Emerging managers struggle to meet the high minimum check sizes required for these coveted deals. By sourcing allocations through larger firms' SPVs, which might have $10-50M already secured, they can participate without needing to secure massive capital commitments or get a direct cap table allocation.

Investor Demand for Later Stage/More Liquid Deals

Investors are pushing for later-stage investments with higher liquidity potential due to recent record-low returns in venture capital.

Fund Size & Portfolio Construction

Pass-through SPVs allow emerging managers to participate in larger funding rounds without coming up against certain portfolio construction limitations. Standard operating agreements often limit the amount of capital from a fund that can be invested in a single portfolio company. However, SPVs allow managers to raise substantial capital through a sidecar vehicle, avoiding limitations that exist for their flagship fund. 

Prominent Pass-Through SPV Deals

Recently, investors have used pass-through SPVs to secure stakes in high-demand AI startups like OpenAI and Anthropic. These structures pool funds from multiple parties, allowing smaller investors to participate in substantial deals they would otherwise miss. This trend has gained momentum as demand for AI startup shares has surged.

Thrive Capital's OpenAI SPV

Earlier this year, Thrive Capital led a significant purchase of existing OpenAI shares, estimated to be worth hundreds of millions of dollars. Thrive also created a smaller SPV, under $10 million, to give its investors additional exposure to the ChatGPT developer. Similarly, Soul Ventures and SparkLabs Global Ventures used SPVs to buy shares in OpenAI during a sale that valued the company at $86 billion. These SPVs provide a flexible way to increase holdings in coveted AI startups.

Menlo Ventures' Anthropic SPV

Menlo Ventures employed a pass-through SPV to take a prominent position in Anthropic. Menlo raised $750 million through an SPV, allowing it to invest heavily in the AI startup, which saw its valuation soar to $18.4 billion. This strategic move enabled Menlo to increase its stake without overextending its main venture fund. The SPV also included contributions from insiders and other key partners, maximizing the investment's impact.

Emerging Manager Perspective

Sydecar spoke directly with several emerging managers who identified the potential benefits and challenges when considering pass-through SPVs. 

One major concern is the “look-through” rules. If an SPV invests in another SPV that qualifies for an exemption pursuant to Section 3(c)(1) of the Investment Company Act of 1940, the manager of the underlying SPV might have to count all the SPV’s investors towards the 100/250 investor limit. 

For example, taking a $100K check that counts as 20 investors is less attractive than a $100K check that counts as one. This issue can manifest in two main ways:

1. Statutory Issues: According to 15 U.S. Code § 80a–3(c)(1)(A), when counting the beneficial owners of a 3(c)(1) fund, if the SPV owns 10% or more of the underlying fund, all entity investors in the SPV will count towards the 3(c)(1) limit. This is a clear rule but can be avoided by ensuring no entity investor in a 3(c)(1) fund owns more than 10% of the underlying fund.

2. Regulatory Issues: The SEC has stated through a series of no-action letters that if an SPV invests more than 40% of its assets into another 3(c)(1) or 3(c)(7) fund, there is a presumption that the SPV was formed for the purpose of investing in the underlying fund, and all the SPV investors would count towards the underlying fund's investor limit. This gray area requires careful consideration, although some precedents, like the Cornish & Carey letter, suggest that intent plays a role in the SEC’s determination. Specifically, funds should not be structured to circumvent regulatory provisions. 

Additionally, an SPV that invests in another pass-through entity, rather than directly into a target company, is generally required to have a higher investor accreditation status than the standard accredited investor (i.e. qualified client or qualified purchaser). 

Fiduciary duties also pose a challenge: 

From a practical standpoint, managers must also consider the logistical complexities. Different SPVs might have varying advisors, structures, and requirements, complicating integration and management.

In an interview, one manager explained their cautious approach to pass-through SPVs: 

Another manager noted that while they have not yet organized an SPV that accepted investment from another SPV, they have had discussions about potential structures. These include co-GP relationships where two GPs manage an SPV together, optimizing logistics and sharing economics. 

Overall, while pass-through SPVs offer access to high-demand deals, emerging managers must navigate regulatory, fiduciary, and logistical challenges. Sydecar's platform helps mitigate some of these issues by providing compliance and administrative support, making the process more efficient and transparent. 

Investor Perspective

Investors have mixed views on pass-through SPVs due to the potential for stacked fees. When fees from multiple layers of SPVs are combined, the overall cost eats into the investment amount, reducing the investor's exposure to the company and making these deals less attractive. Some managers address this by reducing fees or waiving them altogether, focusing instead on the value of access to high-demand opportunities. This strategy helps strengthen relationships with LPs, who may be more willing to invest in other vehicles where fees are charged.

SPVs often include preferential terms for a VC’s own backers. For instance, in the recent Anthropic round, fund LPs were expected to benefit from reduced or waived fees, making the investment more appealing to existing LPs. 

Overall, while the prospect of stacked fees in pass-through SPVs can be a deterrent, transparent communication and strategic fee structures can enhance the attractiveness of these deals for LPs. By focusing on the value of access and maintaining strong LP relationships, managers can alleviate investor concerns and encourage them to continue investing.

Complexity of these Deals

Operational Complexities

Investing in pass-through SPVs can introduce operational challenges. Managers must ensure they raise enough money to cover fees for both the investing SPV and the underlying entity, which might require holding back some funds if not all fees are paid upfront. Transparency is crucial; managers must inform investors that their SPV is investing in another SPV, not directly in the target company. If the underlying SPV doesn't secure an investment in the company, the investors' funds might not be used as intended. This could result in returning the capital to investors, potentially reduced by fees, even though the deal didn't go through. Additionally, even if the investment doesn’t proceed, investors will receive a distribution, which may have tax consequences, and they will be issued a Schedule K-1 for their tax reporting.

Tax Complexities

Tax reporting for pass-through SPVs can be intricate, requiring waiting for underlying K-1s which can trigger filing extensions. As mentioned earlier, SPVs are typically formed as pass-through entities. This means that all income and deduction items pass through to each investor, retaining their tax characteristics. This information is communicated to each investor through a Schedule K-1. Each entity must first receive a K-1 from the underlying ‘layer’ (SPV) before it can file its tax return. The more layers there are, the longer the chain of K-1s. Depending on an SPV’s position within the chain, investors may need to wait significantly longer for their K-1s, requiring investors to extend the filing date of their own tax returns.

Importance of a Reliable Admin Partner

Given the complexities of managing pass-through SPVs, having a dependable admin partner like Sydecar is paramount. Sydecar ensures transparency, accurate tax reporting, and compliance, enabling emerging managers to navigate these pass-through investments effectively. Check out our Pass-Through SPVs page for more information about how we support these investments:

Sources:

1. VCs are selling shares of hot AI companies like Anthropic and xAI to small investors in a wild SPV market

2. Inside AI Unicorn Anthropic’s Unusual $750 Million Fundraise

3. How Investors are Using SPVs to Buy Stakes in OpenAI and Anthropic

4. LinkedIn – Chris Harvey

5. Private Fund Adviser Rules

A Vision for a New Investment Landscape

PariPassu, a members-only co-investment network launched by Pari Passu Venture Partners (PPVP), brings together a curated community of founders, operators, and tech enthusiasts to invest in leading Seed/Series A stage startups spanning eCommerce tech, SaaS, and consumer tech. Led by Insight-alum Julia Gudish Krieger, PPVP was built with founding partners and fellow operator-investors Kyle Widrick (founder of Win Brands Group) and Dylan Whitman (founder of Inveterate). PPVP aims to give industry insiders access to high-impact investments alongside top global venture capital firms and to be an engine for value-add that helps startups succeed. The early-stage venture firm has backed 22 companies to date, including Siena AI, Daasity, Function Health, and Mantle. PPVP’s co-investors include Sequoia, Upfront, 8VC, and Sierra Ventures.

The recent launch of their private investor app, PariPassu, amplifies PPVP’s mission, granting approved, accredited investors access to highly competitive investment opportunities on a deal-by-deal basis. The new app is designed intentionally to give members the ability to discover new opportunities, seamlessly track their investments, and support their portfolios all from the palm of their hand.

Breaking Barriers in VC

For many startups, the journey to success is marked with challenges that require more than just financial backing. Access to a powerful network of value-add operators—individuals who have hands-on experience in building and navigating companies—is imperative. However, such networks are not accessible to all.

Similarly, for operators and tech enthusiasts who wish to invest in startups, the barriers to entry in traditional venture capital are high. Typically, venture capital investments require a substantial financial commitment (often a $50K+ minimum), and gaining access to top-tier deal flow in competitive venture rounds requires deep-rooted relationships in the venture ecosystem. Many angel investors who prefer the flexibility of deal-by-deal investing find it difficult to identify high-quality, curated opportunities amidst a sea of mass-market crowdfunding sites and marketplaces.

A New Co-Investment Platform

Enter PariPassu, a private investor network and mobile app designed to democratize venture capital investment. PariPassu provides its members—accredited and approved industry operator-angels—with the opportunity to co-invest in category-defining startups alongside experienced venture capitalists, starting with as little as a $10K check.

Leveraging PPVP's extensive network and expertise in commerce enablement, SaaS, and consumer tech, PariPassu sources highly curated, often oversubscribed investment opportunities. The platform’s intuitive interface allows members to access deals in real time, invest with a lower entry point, engage with founders to provide support, and receive portfolio updates—all from the convenience of a mobile app. This approach enables individual founders and tech enthusiasts, who have traditionally been left out of venture capital investing, to join a supportive community. This community aids the next generation of startups, providing the support these companies often need to succeed.

Key Success Factors

• Founder-Led Approach: The founder-led, founder-backed ethos of PPVP underpins the entire PariPassu platform, creating a sense of community and trust among members.

• Curated Value-Add Network: PariPassu's community consists of some of the most high-profile leaders in commerce and tech, supercharging the value-add on cap tables. Many of the founders backed by PariPassu invest alongside the community in future rounds. 

• Investment Expertise: With a track record of creating over $200M of enterprise value and allocating hundreds of millions in capital, PPVP's team brings members access to highly competitive deals while still empowering angels with the flexibility to make their own investment decisions.

• Accessibility: By lowering the barrier to entry to venture capital investment and using SPVs, PariPassu makes it possible for founders, operators, and other angels to participate in backing the leading technology companies of the future. 

Streamlining the Investment Process

While SPVs offer significant flexibility to PariPassu’s network of investors, they can also be administratively burdensome. This is where Sydecar steps in. Sydecar handles the bulk of SPV back-end processes, from creating the investment entities and associated bank accounts, to handling K-1s for investors in the case of taxable events. This allows PariPassu to focus on meeting with founders and building their community of value-add investors. Since switching to Sydecar, PariPassu has closed 13 SPVs, benefitting from Sydecar’s streamlined product and quick, responsive customer support.

The Next Era of Venture Investing

PariPassu is on a mission to build the most powerful ecosystem of operator-investors and collectively back best-in-class companies. Their platform represents a paradigm shift in venture investing, democratizing access to the highest-caliber dealflow and empowering accredited investors to participate in the growth of innovative startups by co-investing with leading VCs. With its founder-led approach, curated network, and top-tier investment opportunities, PariPassu bolsters value-add on cap tables and supports the next generation of disruptive entrepreneurs.

If you're an accredited investor, download the ‘PariPassu’ app to receive access to PariPassu’s dealflow here.

We’ve been hard at work in Q1, launching several new features focused on improving the investment process for deal leads, fund managers, and investors. These updates address key areas of our business, including fund management, compliance, syndicate management, and financial operations. Our aim is to make your experience smoother, from easing ownership changes and automating tax document delivery to ensuring compliance and enhancing syndicate operations.

These product updates are in direct response to customer feedback, and they’re designed to streamline your workflow and support your investment goals. 

Syndicate Contacts List

What it is:
The Syndicate Contacts List is designed to empower syndicate leads and angel groups by providing a centralized place to manage all of your investor contacts. This functionality allows syndicate leads to easily manage members, export contacts to a CSV, track investment activity, and streamline communications.

Why it's important:
These updates transform our platform into a powerful tool for syndicate management and communication, giving syndicate leads the ability to more effectively target, communicate, and close investors. Furthermore, the export functionality ensures syndicate leads can leverage their investor data flexibly, extending the utility of our platform beyond its native environment. This update signifies our commitment to evolving our platform to meet the sophisticated needs of our clients, enabling them to manage, analyze, and grow their investor networks more efficiently.

K-1 Delivery Update

What it is:
Sydecar delivered 100% of K-1s to SPV investors for the 2023 year (with the exception of vehicles that invested into a pass-through entity) ahead of the tax deadline for the second consecutive year. This success is largely due to our standardized approach to creating SPV and fund structures and their integration with our tax software. 

Why it's important: 
Our approach to delivering K-1 tax documents brings efficiency and accuracy to the forefront for both fund managers and investors. By automating the preparation process and directly integrating our systems with tax software, we've significantly cut down on manual work that fund managers need to complete and reduced the possibility of errors. This means we deliver K-1 documents well before the tax deadline, making tax season less stressful for fund managers and investors and eliminating the hassle of filing for extensions.

CTA Compliance 

What it is:
In response to the Corporate Transparency Act (CTA) requirements, Sydecar has updated its SPV and Fund+ products to include a comprehensive compliance workflow. This involves collecting essential identification documents, such as driver’s licenses or passports, from investors. This move ensures a unified approach to document collection and compliance, streamlining the process for both new and existing investors.

Why it's important:
The CTA aims to combat financial crimes by enhancing transparency around company ownership, requiring detailed reporting of beneficial owners to the Financial Crimes Enforcement Network (FinCEN). By integrating CTA compliance with our KYC/EDD processes, Sydecar ensures that our clients are ahead of regulatory requirements without added hassle. This approach not only prepares our platform and its users for current compliance demands but also anticipates future regulations (including those that are state-specific), ensuring that your investment processes remain uninterrupted and secure. Our commitment to embedding these requirements into our platform reflects our dedication to your peace of mind and focus on building relationships and securing deals while we handle the complexities of compliance and data security.

For more information on the CTA, check out our blog post here. 

Enhanced Due Diligence

What it is:
Enhanced Due Diligence (EDD) is a critical update to Sydecar’s compliance processes, focusing on in-depth verification and information gathering for investors with complex investment profiles. This update includes a comprehensive approach to collecting EDD information for deal leads and investors of SPVs. By integrating EDD requirements into the investor profile creation and updating processes, including a detailed EDD form for approval, Sydecar ensures rigorous adherence to regulatory requirements and enhances the security and integrity of investments.

Why it's important:
EDD is vital for maintaining compliance with global anti-money laundering (AML) regulations and safeguarding against financial crimes. By verifying the identities of investors with intricate investment portfolios, especially those from or banking in restricted countries, Sydecar provides a secure and compliant platform for venture investments. This process not only mitigates potential legal and financial risks but also reinforces trust among deal leads and their investors by demonstrating a commitment to thorough due diligence. Automating the collection and verification of EDD information streamlines compliance, reduces the administrative burden for deal leads, and ensures that all investments on the Sydecar platform meet the highest standards of regulatory compliance and financial security.

Now that these features are available, we're eager to see their impact on your operations. We believe that they will make a significant difference in your investment activities. Thank you to our customers for your continued support and trust in us.

“Should I charge management fees on my SPVs?” It’s a question we’ve heard time and again from syndicate leads in our community. As one can imagine, there’s not a one-size-fits-all answer. The fee structure you choose for your SPVs should be informed by your strategy and your LP base, among other factors. Read on to discover the pros, cons, and considerations of different fee structures.

Management Fees: A Foundation for Operational Stability

Management fees, typically ranging from 1.5% to 2.5%, are calculated on committed capital and collected annually or as a one-time, up-front fee upon closing. These fees cover operational costs such as salaries, office expenses, and professional services. Management fees provide a predictable revenue stream, which allows syndicate leads to cover the costs of handling essential tasks like deal sourcing and due diligence. 

However, management fees can raise concerns if not aligned properly with investor interests. Overcharging on management fees could shift attention away from investment performance, causing a disconnect with your investors.

Table: Pros & Cons of Management Fees

Carried Interest: Aligning Interests Through Success 

Carried interest (“carry”) represents a share of the profits from the SPV’s investments and is typically 20% (though it can range from 15% to 25%). Carry serves to align the syndicate lead’s interests with those of the investors by rewarding good performance. Since the majority of a syndicate lead’s compensation typically comes in the form of carry, it keeps them highly focused on generating returns for investors. This structure promotes a shared focus on maximizing returns, but, carry is contingent on the SPV's success, making it an unpredictable revenue stream–it may take years to see them, if they occur at all. We’ll discuss SPV profitability more in-depth shortly.

Other Fees

Beyond management and carry fees, syndicate leads might impose other charges for specific services, ranging from 0% to 5%, enhancing income while promoting strategic differentiation. These fees cover a variety of activities, such as deal sourcing, portfolio monitoring, or other professional services (e.g., tax, accounting, audit). When charging additional fees, a syndicate lead must be transparent with investors and justify these fees clearly. This avoids potential misalignments or conflicts of interest that could undermine trust or affect SPV performance.

Crafting Your Fee Model: A Strategic Approach

Choosing the appropriate fee model is more an art than a science, requiring a thoughtful analysis of several factors, including SPV size, investment strategy, and market positioning. Managers should aim to strike a balance that ensures operational viability while aligning closely with investor expectations and SPV performance goals.

Here are key considerations for setting your SPV's fee structure:

• Operational Needs vs. Incentive Alignment: Assess the balance between covering essential operational costs and incentivizing performance.

• Market Positioning: Understand your competitive edge and how it justifies your fee structure.

• Investor Expectations: Engage with your investors to gauge their preferences and requirements for fee alignment.

• Transparency and Flexibility: Ensure your fee model is clear, fair, and adaptable to changes in investment strategy or market conditions.

After determining what the best fee structure is for your situation, you may be thinking, “Okay…now when am I going to start making money?” Turning a profit from SPVs often involves a long-term commitment, requiring significant patience and planning. Syndicate leads must understand the timeline for returns and what supplementary income streams exist in order to manage their financial stability effectively.

A Decade to Profitability

It typically takes seven to ten years for a company to reach IPO stage from its founding. Considerable carry returns from seed-stage SPV investments can similarly take a decade to realize. GPs who run a fund can hedge their bets against this delay by charging management fees, providing them with a reliable source of income as they wait for potentially significant carry returns in the long term. Here’s a rough estimate of what GPs can expect to earn on a 2% management fee after other necessary expenses, organized by funding round & fund size: 

However, for SPVs, not all GPs charge a management fee, as Cindy Bi highlighted in our recent Sydecar Session. Likewise, many syndicate leads choose to forego management fees due to investor pushback, relying instead on carried interest. This approach can lead to financial uncertainty due to the lack of a steady income stream. To boost their financial stability, syndicate leads look to other sources of income. Some of the top ways syndicate leads generate additional income include: 

• Consulting fees: Offering advisory services for a fee.

• Early exits: Gaining interim income from early-stage company exits.

• Secondary investments: Selling stakes in companies that have increased in value, before a liquidity event.

• Non-venture investments: Earnings from public stocks or cryptocurrencies.

• Part-time roles or other ventures: Many syndicate leads take on additional, part-time roles to supplement income. Some even pivot to working full-time for a VC fund for the guaranteed salary.

• Newsletter: Operating a newsletter with a large audience to attract advertisers and generate ad revenue. 

• Membership programs: Launching a membership program, similar to Alex Pattis and Zach Ginsburg's "Deal Sheet" from Last Money In, offers a powerful way to generate revenue. Deal Sheet is a paid weekly newsletter that delivers top, actively investable startup investment opportunities directly to subscribers.

Running a syndicate involves balancing immediate financial needs with long-term gains. The typical syndicate lead experiences periods of low income, with occasional high returns. This leads to high turnover among syndicate leads, who may opt for more stable income sources.

With this in mind, deal leads must carefully plan their fee structures and consider their income strategies. In developing a fee model and profitability timelines, it is necessary to balance operational costs with the delayed returns common in venture capital. Syndicate leads should aim for a fee structure that supports operations, aligns with investor success, and remains adaptable to growth and market shifts. 

As you get closer to realizing returns from seed-stage investments, your approach to fees may evolve, reflecting both your strategic vision and market realities. While the path to profitability is lengthy, the potential rewards can justify the investment for those prepared for the challenges.

Sydecar makes it easy for syndicate leads to adjust management and carry fees and provides LPs with complete visibility into deal fee structures. Request a demo below to learn more about how we streamline fee setup. 

How can influencers raise capital for companies or funds, without running afoul of restrictions on “general solicitation”?

The 2012 bipartisan JOBS Act was supposed to empower funds and individuals to raise capital more openly: to publicly advertise their track record and what they’re selling, just like almost every other industry. However, as far as I know, the great majority of private capital raises for funds and companies are still not using general solicitation. Winter Mead, Founder & CEO of Coolwater, an accelerator for emerging fund managers, said: “Fewer than 5 of the 180 emerging managers we’ve worked with are raising via 506c, in order to get in front of more retail LPs, who are generally already following the GP, e.g., through the GP’s newsletter or community. At this point, all of them are currently planning to do 506c again for their next fund.” 

Why has general solicitation not become more widely used among investors in alternative assets? There are four disadvantages to general solicitation. 

• General solicitation creates an obligation to verify that investors are accredited. William Stringer, Founder, Chisos, said, “The benefits of 506(c) were clear when we were raising smaller checks into a small fund from individual accredited investors. However, because of the additional information burden we almost lost a few larger, more sophisticated investors that did not want to be bothered for a relatively small investment.” You can typically outsource this for as little as $60 to companies such as VerifyInvestor.com or EarlyIQ. Or, Yoni Tuchman, Fund Formation Partner at DLA Piper, said, “Include a form letter in your sub docs that the LP can have their lawyer or accountant sign.”

• Time efficiency. General solicitation requires engaging with many potential investors, most of whom are just tire-kickers, not check-writers. Founder Pete Cashmore observed, “Smaller (or non-professional) investors may have unreasonable expectations of returns, which could result in conflict in the case of failure.”

• Signaling. When you’re raising capital for a fund (or private company) you’re fundamentally selling a luxury good, which is seen as more valuable because it’s scarce. General solicitation damages that perception. 

• Inherent conservatism of LPs. Brian Laung Aoaeh, Founder & Managing General Partner, REFASHIOND Ventures, said, “We chose not to do general solicitation for our institutional fund after doing a 506(c) rolling fund because we got the sense that most institutional LPs are not yet very comfortable with the rules. Explaining that a certification from an attorney or accountant would be sufficient did not appear to be sufficiently persuasive.”

With that said, what is the best way to market your capital-raise to potential investors, while staying compliant? This is particularly relevant for influencers who have an audience, as many emerging fund managers do.

David Teten, Venture Partner at Coolwater, interviewed Sydecar’s CEO, Nik Talreja, to provide some guidance based on his deep expertise in this area.

David Teten: Hi Nik. Can you introduce yourself and Sydecar?

Nik Talreja: I’m the Co-Founder and CEO of Sydecar, a fintech company on a mission to bring more transparency, efficiency, and liquidity to private markets. The idea for Sydecar unfolded in my mind during my decade-long career as an attorney working in capital markets and then working directly with startups and VCs on financing events. 

I practiced securities and transactional law at Weil, Gotshal & Manges and Cooley before branching out and starting my own law firm, where I supported early stage startups and investors. The experience of working with stakeholders on all sides of these transactions – companies, VCs, and their LPs – made me realize how fractured the ecosystem is. Every person is kind of speaking their own language and it makes it difficult to communicate and ultimately to transact. Every VC has their own fund model which has to be supported by a service-driven fund administrator. To add to that, there are many gatekeepers – law firms, accountants, tax advisors – who are basically charging rent for customization and tradition.

It occurred to me that there could be a better way of approaching fund administration, where product mediates the back and forth between stakeholders, and where basic structures are standardized. It was also important to me that the fund administration model isn’t connected to any marketplace that dictates how you should operate. While pursuing my legal career, I began investing behind some of my clients and worked hard to build a small LP base. I didn’t want to bring hard-earned relationships to a marketplace where they’d be exposed to other fund managers – and I figured other new managers would feel the same. Sydecar was born as a result.

David Teten: Does Sydecar currently support fundraising via general solicitation?

Nik Talreja: Sydecar's standard SPVs and Funds are governed by 506(b) meaning that general solicitation isn’t permitted; managers can only raise from people they have an existing relationship with. We can support select 506(c) deals and are happy to discuss with customers on a case-by-case basis.

We’ve thought about more widely supporting 506(c) funds in the future, especially if it’s something that our customers want. But to start with, we saw the most demand for raising under 506(b) and so chose to focus on that. It’s been interesting to see how some of our customers leverage communities they have built to help them fundraise even without the ability to generally solicit. We’ve seen a lot of creativity.

David Teten: Can you share more about that? How can someone who has built a following online successfully raise from their community under 506(b) without general solicitation? 

Nik Talreja: Sure thing. To start with, it’s important to really understand where the line is drawn between 506(b) and 506(c). Under 506(b), you can raise capital from any accredited investor so long as you are not using general solicitation. Practically speaking, this means that one cannot raise money for an investment vehicle (SPV or fund) from individuals that they don’t have a “substantial preexisting relationship” with. This includes marketing the investment opportunity on social media, websites, television, radio, or any other public channel. As a result, individuals who want to avoid 506(c) general solicitation and have a large Twitter following or newsletter can’t directly ask their audience to invest into a specific deal or fund that they are raising for. 

Rather than marketing a specific deal or fund, people with online audiences can market themselves and their expertise to stay compliant under 506(b). Using marketing and PR channels to highlight your general success as an investor and then giving people a way to get in touch can be an effective mechanism to convert an audience to an investor base. The big takeaway here is that you have to establish a “substantial preexisting relationship” with an investor before inviting them to participate in a specific deal.

In 2015, the SEC issued a “No Action” letter to Citizen VC relating to the topic of general solicitation and the definition of a “substantial existing relationship”: “ a "substantive" relationship is one in which the issuer (or a person acting on its behalf) has sufficient information to evaluate, and does, in fact, evaluate, a prospective offeree's financial circumstances and sophistication, in determining his or her status as an accredited or sophisticated investor.”  Read the full letter here. 

The bottom line is that you cannot market the opportunity directly to people you don’t know without triggering 506(c). In the eyes of the SEC, you do not know your audience. However, if a member of your online audience fills out a form sharing information about their background and you subsequently schedule a 1:1 phone call with the investor, that generally meets the standard for a substantial existing relationship. 

So the key points are:

• Do not market specific opportunities broadly.

• Do not market an opportunity directly until you’ve established a “substantial preexisting relationship” with the investor.

• Filling out a form and jumping on a call constitutes a “substantial preexisting relationship” in the eyes of the SEC.

While it may take more time, it’s not impossible to establish a relationship with someone you met through social media or a newsletter sign-up before sharing deal flow with them. Of course, when raising from a large audience, managers should expect a low conversion as compared to raising from a traditional warm introduction. Having a smooth process in place to establish relationships and share information is key. 

A final note on all of this is that whether it’s 506(b) or 506(c), the investors involved need to be accredited. For 506(b), the investor can check a box to confirm they’re accredited once a “substantial relationship” has been established. For 506(c), the investor will need to provide proof of accreditation through sharing account statements or providing a signed letter from an accountant or lawyer.

David Teten: If the potential investor participates in a webinar or an in-person gated event, does that suffice?

Nik Talreja: A "pre-existing substantive relationship" exists when there has been some interaction between the two parties, whereby the investor communicates sufficient information to the issuer (in this case, the fund manager) for the issuer to determine their financial circumstances and sophistication. If the investor is just an attendee of a webinar hosted by the manager, and the two parties don’t directly interact, then they have not established a pre-existing relationship.

If participation in the webinar (or any other virtual or in-person event) involves the investor disclosing their financial status and investment experience to the manager, and if it is reasonable for the manager to believe the investor, then yes, this would be permitted. 

David Teten: Do you have any examples of folks who have done this successfully?

Nik Talreja: A good example is Nik Milanovic, founder and GP of The Fintech Fund. Nik launched his newsletter, This Week in Fintech, in 2019 as a way to share his thoughts about the evolving fintech landscape with friends, family, and select coworkers. The newsletter grew and people started asking Nik how they could invest into the companies he wrote about. Before too long, Nik had a full-blown syndicate. Because his newsletter subscribers were initially all people he knew personally, they were fair game to raise money from under 506(b). As the newsletter and syndicate grew, Nik built out a process for converting a subset of newsletter subscribers (those who were accredited and had a genuine interest in his deal flow) into syndicate investors. 

Once an investor is accepted into his syndicate, Nik adds them to a private Slack channel where they can see new deals, discuss diligence, and ultimately decide if they want to invest. The investor relationships and track record of success that Nik built through his syndicate investing ultimately allowed him to raise a $10M Fund 1 in 2022 (also under 506(b)).

David Teten: Can you expand on the process that Nik built out for converting a subset of newsletter subscribers into syndicate investors? 

Nik Talreja: The benefit of Nik having run a newsletter in which he shared his perspective on emerging companies with his reader base was that they started to get comfortable with – and then interested in – how he thought about these companies. He started to receive inbound demand from readers asking how they could invest in early-stage fintech companies and grow their dealflow. That made it pretty easy to consolidate them into a group and build the syndicate off an active, dedicated early group.

David Teten: What are examples of compliant language fund managers have used to alert investors to the investment opportunity in funds?

Nik Talreja: Keeping your language general is key to staying compliant under 506(b). You can talk about investing. You can even talk about the opportunity for people to invest alongside you. You cannot invite people to invest in a specific opportunity.

Here are some examples of language that can be used to alert investors of the opportunity without triggering 506(c):

“We’re always looking for new investors to collaborate with! If interested in participating as an LP or co-investor, please fill out this form or reach out directly.”

“Thinking about your first investment? We’d love to learn more about your interests and see if there’s room to work together.”

“We’re holding a webinar for accredited investors only to learn more about our fund and the companies we think are highest potential. RSVP here.” [RSVP form includes a self-attestation of accredited investor status.]

Here are some public examples: The Council Angels, @TheRideShareGuy, @JeanineSuah

David Teten: What are the ‘red lines’ that people with online audiences should avoid hitting which would trigger 506(c)? 

Nik Talreja: Here are some examples of language that would trigger 506(c):

“I’m raising a $10M fund! Reach out if you want to invest.”

“We are running an SPV for SpaceX. If you want to invest please reach out.”

You’ll notice that the language for 506(b) from earlier is general and pushes towards gathering more information from the investor, while the language that triggers 506(c) is specific.

Being general with your language and driving potential inventors to provide more information is key in order to satisfy the “substantial preexisting relationship” rule that sits between 506(b) and 506(c).

If you do have a “substantial preexisting relationship” with an investor, it’s 506(b).

If you do not have a “substantial preexisting relationship” with an investor, it’s 506(c).

David Teten: Given the current market sentiment of institutional LPs being more cautious about deploying into VC, do you expect to see an uptick in 506c offerings in the coming months?

Nik Talreja: No, I expect the contrary. I think we’ll see a decrease in the number of deal and fund managers overall, and the people who continue deploying capital will be those who have quality relationships with LPs and access to quality investment opportunities. These repeat managers tend to rely on 506(b) given their strong relationships with LPs and meaningful track records.  The quality of your relationships has become increasingly important through the down market – and I expect this will continue to be the case. 

For an aspiring manager to be successful in this environment, they have to spend more time deepening trust with LPs, sharing their decision-making process, and explaining the quality of their deal flow. 506(c) type offerings assume that low-touch LP relationships are sufficient, which is at odds with what I expect in the current environment.

David Teten: Are there any differences in the types of investors that invest into 506b offerings, versus 506c?

Nik Talreja: 506(c) offerings typically involve more participation from "retail" investors, or people who invest non-professionally. The term has been used to describe investors who aren’t well versed on an asset class, don’t have institutional relationships, and don’t have access to invite-only deals.

In this sense, 506(c) offerings cast a wide net -- there is no need for a deal sponsor to have a relationship with an LP, or vice versa -- and so a sponsor can post an offering on social media where anyone can view details and get involved, including retail investors.

David Teten: What are the consequences of unintentionally using general solicitation and failing to switch to a 506c offering?

Nik Talreja: It's always best to consult your attorney to ensure you get a full download on your particular situation, so consider the following with a grain of salt. If you generally solicit an offering that is registered under 506(b), you may lose your securities exemption under 506(b) and the result could be that:

1. Your securities are considered "unregistered" and investors may have a right to cancel or recall their investment.

2. You could be penalized and have to pay fees to regulatory authorities.

How large is this risk? Tough to say, but there are many cautionary enforcement actions. Bottom line: it's always best to consult counsel if you are thinking about raising for an SPV or fund and have questions about how you are or are not allowed to source investors.

David Teten: Is it worth avoiding 506(c)?

Nik Talreja: Ultimately, this is a matter of personal preference. 506(c) is doable if you’re willing to jump through the hoops of verifying each investor’s accreditation. It’s another step in the process, but it shouldn’t make or break an investor’s decision.

That being said, taking on LPs that you don’t personally know creates new risk – just like doing business with strangers. Whether you run a 506(b) or 506(c) process, it’s important to understand who you’re working with and connect with their LP base as much as possible in order to build a long term relationship.

Any manager who is considering raising under 506(c) should consult their legal counsel and / or fund administrator. While Sydecar doesn’t generally offer a 506(c) fund structure, it’s something that we’re actively exploring via a pilot program. To learn more, request a demo with a member of the Sydecar team today. 

The information provided in this article is for informational purposes only and should not be construed as legal advice. The content is intended to offer general guidance and insights on the topic discussed. It is not a substitute for professional legal advice tailored to your specific situation. Always consult with a qualified attorney or legal expert for advice pertaining to your individual circumstances

Further reading: 

• The JOBS Act: Did It Accomplish Its Goals?

• Fundraising hacks for VC and private equity funds (includes lists of LPs interested in emerging managers)

• 15 Steps to Fundraising for Your New Venture Capital or Private Equity Fund

• 5 Innovative Fundraising Methods for Emerging Venture Capital and Private Equity Funds

• 11 Ideas to Organize an Event Family Offices Want to Attend

• Should you give an anchor investor a stake in your fund’s management company?

• Should Small Emerging Managers Use Placement Agents?

• Limited partner checklist for evaluating funds

Navigating the complexities of tax season is a constant challenge for venture capitalists. In this comprehensive guide, we dive into important tax considerations for VCs and share how Sydecar can help you have a stress-free tax season.

VC Tax 101
The majority of VC investment vehicles (i.e. venture funds and SPVs) are pass-through vehicles, meaning that the responsibility to report gains and losses for tax purposes is passed through to the underlying investors. This setup avoids the double taxation typically seen in corporations, where income is taxed at both the corporate and the shareholder levels. The most common forms of pass-through entities used in venture capital include Limited Partnerships (LPs) and Limited Liability Companies (LLCs). All SPVs and funds formed on Sydecar are formed as LLCs.

Key Tax Components for Venture Funds
Carried interest, often a significant portion of your earnings as a fund manager, is taxed as a capital gain. A fund’s governing agreement (LPA or LLCA) outlines how carried interest is allocated to GPs and other investment team members, who are then liable for taxes on this income.

Management Fees are taxed as net income, which is the gross income from the fee minus operational expenses. These are subject to ordinary income tax rates.

Realized Gains: Both GPs and LPs pay taxes on their share of the fund's income, primarily coming from profits earned through liquidity events. The tax rate on capital gains for each partner, as reported on their Schedule K-1, varies based on how long the fund has held the investments. A common consideration here involves the three-year holding requirement for GPs to claim the more favorable long-term capital gains (LTCG) treatment. It’s best practice to consult your tax advisor if this affects you as LTCG rates can vary widely from ordinary income rates. 

Reporting Requirements: Schedule K-1
GPs and LPs use the Schedule K-1 form to report their share of the fund's profits and losses for taxation purposes. This form helps partnerships in the U.S., like venture funds, to share their taxable income with partners. The deadline for filing K-1s is March, but investors can request an extension until October 15. 

K-1s are issued by the fund administrator, often in partnership with a specialized tax firm. Sydecar handles tax filing and preparation internally, using our standardized infrastructure to automate K-1 preparation to ensure accuracy and timeliness of delivery. Check out our 2023 blog post about how we delivered K-1s to thousands of investors prior to the due date. 

"Throughout my 10 years in venture capital, I can attest to the importance of getting K-1s done right and on time.” - Gale Wilkinson, VITALIZE Venture Capital

Additional Tax Considerations for Private Investors
Private investors need to be mindful of several tax components beyond factors like carried interest and Schedule K-1 Forms. Here are some key considerations:

• Investment Clawbacks: In some cases, carried interest may be subject to clawbacks, where a fund manager must return profits if certain conditions aren't met. This can affect how carried interest is taxed, so make sure you know any clawback clauses in your fund agreement.

• Cost Basis Tracking for IPO Shares: Venture capital funds often choose to distribute portfolio companies' shares following an IPO. Investors must accurately track the cost basis of these shares, which can be complex due to the length of holding or multiple investment rounds in the company. Correct cost basis calculation is essential for accurate capital gains tax reporting, especially given the fluctuating values in venture capital.

• Qualified Small Business Stock (QSBS): Investing in certain small businesses can offer unique tax benefits. To qualify for QSBS benefits, the business must be a C corporation with assets under $50 million at stock issuance. Holding the stock for over five years can lead to excluding up to 100% of capital gains from federal taxes, subject to certain limitations.

Understanding the nuances of fund taxation is key for emerging managers because it directly impacts the financial performance and legal standing of their funds. Sydecar’s standardized approach simplifies all of this by automating back-office tasks like tax filings, cutting down the need for costly external services, and ensuring the timely preparation and delivery of Schedule K-1s. Book a demo with us to see how Sydecar can transform your fund’s back-office operations.

“VCs shine the brightest when they're investing in and supporting the best founders of tomorrow, not handling backend paperwork. That’s why I’m a huge fan of Sydecar: their platform streamlines tax prep, giving fund managers more time to focus on identifying and supporting the next generation of world-changing entrepreneurs." - David Zhou, Alchemist Accelerator

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Disclaimer: This content is made available for general information purposes only, and your access or use of the content does not create an attorney-client relationship between you or your organization and Sydecar, Inc. (“Company”). By accessing this content, you agree that the information provided does not constitute legal or other professional advice, including but not limited to: investment advice, tax advice, accounting advice, legal advice or legal services of any kind. This content is not a substitute for obtaining legal advice from a qualified attorney licensed in your jurisdiction and you should not act or refrain from acting based on this content. This content may be changed without notice. It is not guaranteed to be complete, correct or up to date, and it may not reflect the most current legal developments. Prior results do not guarantee a similar outcome. Please see here for our full Terms of Service.

What is the CTA?

The Corporate Transparency Act (CTA), which was originally passed in 2021 as part of the National Defense Authorization Act, went into effect on January 1, 2024. The goal of the CTA is to combat illegal activities (e.g., tax fraud, money laundering, etc.) by creating more transparency around company ownership. The CTA requires certain U.S. businesses, including limited liability companies and other similar entities, to report identifying information about their beneficial owners to the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). By requiring the disclosure of beneficial ownership information (BOI), the act intends to peel back the layers of anonymity that have allowed such activities to flourish.

A beneficial owner refers to the person(s) who ultimately own, control, or have significant influence over a company, typically through substantial equity interests or decision-making authority. The CTA mandates that covered entities disclose information about their beneficial owners, including names, birthdates, addresses, and identification numbers (such as a driver’s license or passport number).

What does this mean for VCs?

Unless an entity is exempt, under the CTA, all private companies such as LLCs, corporations, partnerships, and similar entities that do business in the US are mandated to submit BOI for certain beneficial owners. This includes LLCs formed for the purpose of making an investment, such as Sydecar SPVs and funds.

Entities must disclose the name, birthdate, and address, and provide an ID (e.g., a passport or driver’s license) for all beneficial owners. For the purposes of CTA, a beneficial owner is anyone who owns at least 25% of the fund. The fund/SPV manager is also considered a beneficial owner because they possess “significant influence and control” over the entity.

For entities established after December 31, 2023, the initial CTA filings must be submitted within 90 days of their formation date. Entities formed before January 1, 2024, have until January 1, 2025, to submit their initial filings. Starting on January 1, 2025, any new entities created have to submit their filings within 30 days of formation.

How is Sydecar ensuring compliance with CTA requirements?

As always, our goal at Sydecar is to give you peace of mind with your investments so that you can focus on what matters most: finding great deals and building relationships. In response to the CTA reporting requirements, we have built a workflow to collect the required information from all new SPV and Fund+ investors and submit initial and amendment BOI forms to FinCEN on behalf of our customers. We will be collecting identifying information from all investors (not those considered beneficial owners at the time of their subscription), in order to frontload the process. By doing so, we aim to ensure that you remain compliant with the CTA without creating unnecessary friction during the investing process.

Data collection required by CTA will also be integrated into our KYC/EDD process. This means that Sydecar customers likely will not have to take any additional actions outside of the platform to ensure they are in compliance with CTA reporting requirements*.

Request a demo here to learn more about how we help you maintain compliance while streamlining your investment operations.

CTA FAQs

1. What is the Corporate Transparency Act (CTA)?
The CTA, effective January 1, 2024, requires certain U.S. businesses (including corporations, LLCs, and similar entities) to report their beneficial owners to FinCEN to increase corporate ownership transparency and combat illicit financial activities.

2. Who needs to report under the CTA?
U.S.-created or registered corporations, LLCs, or similar entities must report beneficial ownership information to FinCEN. Certain entities, such as publicly traded companies, nonprofits, and certain large operating companies, are exempt from these reporting requirements.

3. When does BOI have to be reported?
Entities formed prior to January 1, 2024, have until January 1, 2025, to report. New entities created in 2024 have 90 days from either the actual notice of formation or public announcement (whichever comes first), and those established from 2025 onwards will have 30 days from notification or public announcement of their formation.

4. What information must be reported to FinCEN?
Entities must report identifying information of their beneficial owners, including names, birthdates, addresses, and ID numbers.

5. What constitutes a beneficial owner under the CTA?
A beneficial owner is someone who ultimately owns, controls, or significantly influences a company, usually through substantial equity interests or decision-making authority. The threshold for beneficial ownership may vary between jurisdictions but for SPVs formed in the state of Delaware (such as Sydecar SPVs), an ultimate beneficial owner is anyone who owns at least 25% of the SPV.

6. How does the CTA affect venture capital investors and fund managers?
VCs, including those managing LLCs, SPVs, or funds, must report BOI by the specified deadlines described above, unless an exemption applies.

7. How is Sydecar facilitating compliance with the CTA for its users?
Sydecar has developed a workflow to collect the required information from beneficial owners of an SPV and submit BOI forms to FinCEN on behalf of its customers, ensuring compliance. The data collection will be integrated into our KYC/EDD process, limiting any unnecessary friction for our customers.

8. Do I need to take any additional actions on Sydecar to comply with CTA?
Sydecar will give all customers the ability to opt-in to our CTA services. For those who opt-in, Sydecar will handle all BOI collection and submit initial and amendment filings to FinCEN on behalf of our customers, meaning that no additional steps outside the platform should be required for compliance. For questions regarding requirements specific to you or any other entities that you manage or in which you are invested, please consult your legal counsel.

*This content is made available for general information purposes only, and your access or use of the content does not create an attorney-client relationship between you or your organization and Sydecar, Inc. (“Company”). By accessing this content, you agree that the information provided does not constitute legal or other professional advice. This content is not a substitute for obtaining legal advice from a qualified attorney licensed in your jurisdiction and you should not act or refrain from acting based on this content. This content may be changed without notice. It is not guaranteed to be complete, correct, or up-to-date, and it may not reflect the most current legal developments. Prior results do not guarantee a similar outcome. Please see here for our full Terms of Service.

Successful venture capitalists don’t always begin in the industry. Earnest Sweat, self-made venture capitalist and co-host of the podcast "Swimming with Allocators," is a prime example of this. His journey from investment banking to entrepreneurship and finally to venture capital shows how different experiences can shape a unique approach to investing.

Earnest's career began in the 2007 financial crisis, a period that grounded his investment approach. As an equity research analyst at BMO Capital Markets specializing in Real Estate Investment Trusts (REITs), he mastered data analysis, clear communication with asset manager customers and Fortune 500 CEOs, and learned how to defend an investment thesis.

"As an equity research analyst, writing was a big part of my job. I had to confidently share my investment thesis with the world, fully aware it could be proven wrong in the short term. That experience taught me resilience, a quality I still rely on today."

Earnest’s shift to entrepreneurship was both challenging and enlightening. He was drawn to the way people build networks and set out to create MERIT, Inc., a marketplace for connecting individuals with their ideal mentors. Despite facing the common hurdles of a first-time founder and navigating the lengthy sales cycles of working with municipalities and universities, his passion for entrepreneurship remained.

This drive led Earnest to business school, where he discovered his true calling in venture capital. During an MBA internship in India for a VC, he assessed and invested in tech companies, transitioning from analysis to hands-on action.

“Venture capital is the better version of equity research because I'm getting to make bets–it's not just a recommendation. I'm actually putting skin in the game.”

Once an investor, Earnest’s diverse background laid the foundation for his unique investing thesis. Initially focusing on real estate technology (“prop tech”) through his job with Prologis Ventures, he expanded his outlook to Vertical SaaS which included industries such as commercial real estate, construction, supply chain, logistics, commerce, and retail. This flexible perspective helped him identify key challenges across industries, such as outdated technology, the need for transparency, and labor market complexities. Recognizing these universal challenges, Earnest developed a strong thesis around how product types such as applied AI, marketplaces, middleware, and vertical software can enhance value chains in all industries.

To add structure to this thesis, Earnest has defined three archetypes for what makes a successful founder:

The Humble Outsider: Picture the classic tech expert from Silicon Valley. They spot a problem in a specific industry and dive deep to understand every part of it, surrounding themselves with knowledgeable industry insiders to get the full picture.

The Innovative Insider: This is someone who's been in the industry for years and knows it like the back of their hand. They recognize the need for technology and can clearly define their ultimate goal, drawing in tech talent to create innovative solutions. They balance their deep industry knowledge with a vision for the future.

The Bridge: These are individuals with personal ties to an industry, maybe through family or their upbringing. They blend this insider perspective with a strong technical background from studying engineering. (Earnest is noticing more people like this looking to become entrepreneurs.)

Earnest's background and commitment to consistently learning isn't just the foundation of his investment thesis; it's also what makes him a standout venture capitalist. He's known for providing real value to founders, often connecting them with potential customers or other valuable contacts before making any investment. When considering an investment, Earnest goes deep, understanding the startup's target customers and then introducing the founders to two or three potential leads within his network. Thanks to his extensive connections, he can open doors to new opportunities.

“It's a win, win, win. I get unfiltered feedback, the founder has an opportunity to present their product, and my contact might become a future customer. I’ve seen this as a differentiator for me.”

Everyone’s path to venture capital is shaped by their individual experiences and perspectives. Earnest's journey demonstrates that embracing your unique journey can be your greatest asset in venture capital. He emphasizes the importance of authenticity and self-belief.

"A lot of times you have to trust your own narrative and be the best version of yourself.”

Sydecar has supported Earnest by streamlining his investment process with our SPV product, and we're ready to do the same for you. If, like Earnest, you're breaking into venture capital from a non-traditional starting point, schedule a demo with Sydecar today and let us help you start your VC journey.

As we move into 2024, the venture capital landscape continues to evolve, influenced by a range of factors from an abundance of unallocated capital in firms to a hot secondaries market. This year promises to bring changes, opportunities, and challenges for investors and startups alike. Here's an in-depth look at the key trends and predictions shaping the venture climate in 2024.

1. A Surge in Dry Powder
Dry powder, which refers to capital that has not been allocated or deployed by firms, has increased 385% since 2015 and created a situation where firms are now competing to deploy this capital. With more capital vying for the same number of quality investment opportunities, the pressure on investment returns has intensified. The abundance of capital means that firms may have to pay more for the same ownership, potentially leading to lower returns. Given the competitive landscape and pressure on returns, firms will need to deploy more strategically in 2024.

2. Rise in IPO Activity
There is growing optimism around IPOs for 2024. This optimism is buoyed by a more favorable economic outlook, including expected interest rate cuts and cooling inflation. The anticipated resurgence of IPOs is partly attributed to the bleak outlook for M&A, after regulators have slowed or blocked several significant deals. As a result, IPOs are a more attractive exit strategy for late-stage startups in 2024 as compared to the past decade. 

3. Governance Structures Under Scrutiny
The importance of corporate governance is taking center stage. Several high-profile venture capital-backed companies have faced public scrutiny due to unconventional governance structures, such as founder board control and super-voting rights. This heightened attention is prompting discussions among VCs and their LPs about the importance of robust governance. It's clear that founders and investors will continue to prioritize corporate governance issues as they evaluate traditional venture capital growth models in light of other factors, such as "public benefit" considerations.

4. Down-Rounds and Funding Challenges Ahead
In an attempt to avoid down-rounds and recapitalizations, many companies had to cut expenses and raise bridge convertible notes, hoping for a more favorable funding landscape by the end of 2023. Unfortunately, it seems that such a shift is not coming anytime soon. As of late 2023, venture debt lenders were less willing to refinance existing venture debt facilities without an infusion of additional equity from existing or new investors, so investors may have to make tough decisions about which companies to fund and which ones to write off, shut down, or sell at a loss. Consequently, investors are more likely to support their existing portfolio companies through bridge rounds and similar mechanisms. Often, these are executed using Special Purpose Vehicles (SPVs) because the firm may not have reserves in its main fund to invest further into existing portfolio companies. Investors are likely to scrutinize companies carefully to determine their real viability and differentiate them from those that may only continue to operate for a while without gaining significant traction. While down-rounds and recapitalizations will likely continue throughout 2024, even for viable companies, the bright side is that this can lead to more deals and transactions taking place.

5. Emerging Markets Gaining Momentum
2024 is witnessing a significant shift towards emerging markets. There's a growing recognition of the untapped potential in these regions, leading to the establishment of regionally-focused funds. Markets like Latin America, Southeast Asia, and Sub-Saharan Africa are attracting attention for their maturing entrepreneurial ecosystems and high-quality growth-stage startups. This shift represents a global diversification of venture capital investments, highlighting the potential for high returns in these previously underrepresented markets​​.

6. Venture Capital Secondaries Market
The secondary market in venture capital is poised for a robust 2024, building on the momentum from an active 2023. Despite some challenges, the market has seen a recovery with deal volumes remaining higher than pre-2021 levels and the gap between what buyers want to pay and what sellers want to receive in the secondary market is shrinking. This, along with a continued demand for liquidity, will drive activity. Looking ahead, aggressive fundraising for secondaries-focused funds, including Blackstone's record $22.2 billion Strategic Partners IX fund, indicates a strong pipeline of secondary deals in 2024. SPV platforms like Sydecar offer an efficient and flexible way for managers to participate in secondary transactions and create much-needed liquidity for their investors.

As we can see, the venture capital environment is changing. From the increase in dry powder to the shift towards secondary markets and everything in between, the venture capital world is poised for an exciting year filled with many changes. For venture investors, navigating these changes requires a platform that simplifies and improves the deal execution process.

Sydecar offers a solution tailored to these needs. Our platform is designed to help emerging fund managers manage venture funds and SPVs efficiently. To see how Sydecar can assist you, book a demo today.

Meet Jesse Bloom, Partner at SaaS Ventures. After beginning his career as a financial advisor, Jesse got his start in VC through a series of internships while getting his MBA from NYU. In August of 2022, Jesse joined SaaS Ventures as a Partner, leading their growth investing practice. Read on to learn about the complexities of investing in growth-stage companies and how SaaS Ventures uses SPVs to gain access to desirable rounds. Jesse also shares the secret behind building NewbieVCs, an online and IRL community that fosters connections and supports emerging talent in the venture capital space.

Sydecar (SC): What do you do at SaaS Ventures?
Jesse Bloom (JB): I lead the growth investing practice at SaaS Ventures. We have two teams: an early-stage team that invests in pre-seed through seed and a growth team that invests in Series B through Series D. SaaS Growth invests particularly in oversubscribed rounds, where access is typically limited to only the lead investor and existing investors with legal pro-rata rights. We partner with these existing investors, providing them with the capital they need to fill their pro-rata allocations. 

 
SC: What was your path into venture and how did you end up at SaaS Ventures?
JB: I started as a financial advisor at Morgan Stanley after college. Three years later, I pursued my MBA at NYU and interned at a venture fund called Alpha Partners, where I gained experience sourcing investments and performing due diligence on later-stage companies. After two years, I joined SaaS Ventures as a Partner to lead a new growth fund. Within 15 months at SaaS, we have successfully raised the fund and made two investments of which I am incredibly proud. 

SC: What challenges have you noticed in investing across both early and late-stage companies?
JB: In my experience, the most difficult part of early-stage investing is having to be selective about which founders to invest in, because you want to support them all, but that’s just not feasible. On the growth side, it can be complicated to gain access to the types of deals that I want to invest in, which are oversubscribed Series B through Series D rounds, led by one of about 25 funds that we consider to be top-tier. Speed is of utmost importance here; there were only 6 of these rounds reported in all of Q4 2023, and once they have been reported, it’s already too late to participate.

Sydecar was key in overcoming these growth-stage challenges in our most recent investment. We set up an SPV, signed a carry-share agreement, funded it, and wired to the company all within 72 hours. This speed was crucial because top-tier pro-rata decisions often need to be made in hours, not days, and we can’t afford to spend a week setting up an SPV. We need to have the capital and infrastructure ready to seize that fleeting opportunity. Without Sydecar, making this investment might not have been possible.

SC: What is your approach to network building?
JB: The bulk of a typical VC's job is to know every founder in their domain. However, my full-time job is getting to know every investor. My networking involves recurring meetings with investors and attending as many VC events as my schedule allows. I also started a group called NewbieVCs which brings newly minted investors together to collaborate, network, and navigate the world of venture capital together. 25 of us are attending the 3rd Annual NewbieVC Ski Trip in January! Throughout all of this, I emphasize being friendly and not overly transactional, hoping my business will grow proportionate to the number of investors who like me and know what I do. I’m also very clear on the type of deals I’m looking to participate in. Picking a niche is essential to stand out, and hopefully, my network knows exactly what I'm seeking.

SC: What role do SPVs play in your investing strategy? 
JB: Our firm invests almost exclusively through SPVs because we theoretically exercise pro-rata rights on behalf of other funds. For the legal pro-rata owner to be represented on the cap table, we have to set up the SPV as an affiliate of the fund with the pro-rata right. This ensures genuine pro-rata execution and avoids adding complexity to the cap table. Our goal is to gain access to otherwise closed opportunities by supporting insiders who have earned valuable pro-rata rights but can’t fill them. The only method I know to achieve this swiftly and effectively is through SPVs. 

SC: Do you ever use the SPV to bring in co-investors to the round? 
JB: Absolutely. If our pro-rata source has more allocation than we can fill and they are okay with bringing in co-investors, we offer up additional allocation to our LP base. We often extend these opportunities to a small group of prospective LPs as well to demonstrate the quality of our deal flow.  

SC: What does your LP base look like? What is unique about them? 
JB: Our LP base is made up primarily of family offices and high-net-worth individuals. They understand that the dynamics of venture are such that only the top firms typically get access to the best deals at the most favorable prices, especially at Series B, C, and D. The leading companies at these stages have the strongest traction, metrics, and teams, and therefore only want top-tier investors. Our LPs know that if they cannot invest directly in the top-tier funds, their next best move is to invest in the rounds these funds are leading to get a sample of their outperformance.

SC: It sounds like understanding LP preferences is important. Do you have any tools or processes besides Sydecar that are essential to your process?
JB: My CRM, Affinity, helps me manage relationships with LPs who provide insights into ongoing deals. It's indispensable in understanding the dynamics of my network. PitchBook is another essential tool because it gives me access to cap table details, enabling me to identify potential fund partners. Affinity then comes back into play, helping me discern which of these cap table contacts our team knows best, giving us a strategic advantage. If we secure the deal, Sydecar becomes the go-to for subsequent closing.

SC: Tell us more about NewbieVCs and the inspiration behind it. 
JB: NewbieVCs is primarily a Slack group where we exchange information, plan events, and talk about investments. I created it back in 2021 because venture newcomers expect training and guidance that partners and more experienced VCs rarely provide. So, I built a small community of ‘Newbies’ as a type of support group for VCs who have just joined the industry to make friends and learn the job. We're a tight group of 200 active members, and it's played a big role in my career. I found my job at SaaS Ventures through a Newbie, and some Newbies have been funded by others to start their own companies! It's a unique community with a ton of up-and-coming all-stars.

Jesse’s quick rise to Partner at SaaS Ventures shows how ambition can meet opportunity in the venture world. Launching SPVs with Sydecar's help, he quickly capitalized on important investment opportunities, while at the same time starting NewbieVCs, promoting knowledge sharing and networking in the venture community. His experience is a lesson for new investors: success comes from using efficient tools, building strong networks, and constantly learning.

To learn more about how Sydecar supports venture capitalists like Jesse, you can find additional information about SPVs on our website, here.

In a venture capital landscape teeming with new players from various backgrounds, emerging VCs face a challenge in distinguishing themselves. Lacking the resources of established funds, they can't always compete with large investments or extensive networks. Recognizing this, savvy new investors are turning to brand building as a crucial strategy.

A strong brand helps in various ways: it provides social proof, establishes credibility as an expert, and keeps a VC's name at the forefront for founders and fellow investors. As capital is increasingly commoditized, building a brand alongside a portfolio is more important than ever.

Raising Capital 

Brand building extends beyond traditional methods. Engaging on Twitter, publishing newsletters, and contributing thought leadership in media are effective ways to stand out. These efforts not only distinguish an investor but also attract capital, especially with the popularity of 506(c) funds which allow public marketing of fundraising. 

As you start to build your LP network, you’re competing for investor attention as well as dollars. Building trust and owning the relationship with your LPs can be a huge competitive advantage. This is why Sydecar has chosen to make our customers’ deals and syndicates private, rather than creating a marketplace that draws your investors away to other opportunities. 

Winning Deals 

Building a brand around your investment thesis and sharing details of that thesis through public channels will increase your inbound deal flow. You’ll become the first investor others think of when meeting a company that matches your thesis. This increases both the quantity and quality of your deal flow. A strong brand will also help to secure allocation in the most competitive deals as founders will have an understanding of the value you bring. 

Supporting Founders 

Your brand immediately demonstrates how you support your portfolio founders. In positioning yourself as an expert in an area, such as growth, product, or fundraising, your founders know they can turn to you for resources and connections on that topic. They can also ask you to utilize your reach for further advice. Lolita Taub, a VC who recently launched her own fund, frequently tweets questions on behalf of founders to crowdsource advice, creating a concise resource for founders to turn to. 

Build your brand 

How can emerging VCs start building their brand? The lowest barrier to entry is social media. Experiment with LinkedIn, Twitter, or even TikTok content to find where you can shine. As you engage with others, you may find podcasts, newsletters, events, or blogs are valuable for building your brand. Here are some low-cost, high-value brand-building activities that new investors can focus on: 

• Identify your voice and who you want to connect with

• Use your areas of expertise to create educational content

• Launch a newsletter for LPs to demonstrate your investment thesis and portfolio wins

• Ask questions or run polls on Twitter to get a better understanding of your audience

• Personify your brand by including pictures of yourself or telling stories in investor updates

• “Build in public” by using social media to share updates on your fundraising journey

• Host networking events in collaboration with other emerging VCs 

• Record conversations you have with founders, LPs, or investors and turn them into a podcast 

• Develop an engaging, informative YouTube channel to visually showcase your insights and investment philosophy

• Offer mentorship or advisory sessions to early-stage startups, building relationships and demonstrating expertise

The surge of new entrants into venture capital has intensified the race for top deals and LPs, challenging newcomers to carve out their niche. By harnessing the power of social media, thought leadership, and targeted content, savvy managers are establishing themselves as experts and reliable partners in the eyes of founders and fellow VCs.  This brand-building journey is not just about visibility; it's an essential strategy for success in today's VC world.

What is co-syndication?

Co-syndicating is when two or more syndicates team up to run an SPV together, leveraging capital sourced from both of their networks. Typically, one of the managers will identify the deal, secure an allocation, and then invite another lead to share the deal with the network. The two managers will collaborate on management responsibilities, including filling the allocation and communicating with the company, and then will share economics (carry and management fees) from the deal.

Why should managers co-syndicate?

Co-syndication is especially valuable for emerging syndicate managers who are looking to grow, operationalize, and level up their business. The benefits of co-syndicating for emerging managers include the opportunity to:

1. Expand your network and collaborate with other emerging managers. Unlike traditional venture capital managers, who tend to be highly competitive with one another when it comes to winning deals, syndicate leads are often collaborative with one another. Syndicates are typically more flexible when it comes to portfolio construction and deal size, as they aren’t optimizing for ownership percentage in a company.

2. Meet new LPs from your co-syndicator’s network who may be interested in your deal flow.

3. Access a larger pool of capital, which can make it easier to win allocation into competitive financing rounds and gives you a larger upside potential.

4. Increase your deal flow and opportunity to see deals with mitigated risk, because they have already been sourced and diligence and an allocation has been secured.

5. Get upside via shared economics without having the sole responsibility of organizing a deal and filling an allocation. For a newer manager with a limited investor network, co-syndication can often be the difference between closing a deal or not.

6. Do more with less. Leverage the power of a shared network to efficiently identify deals, and diligence companies, fill allocations, and support founders.

7. Diversify your portfolio by gaining access to deals that you might not otherwise see.

8. Provide better support and more value-add to startups through the power of an extended network.

“Co-syndicating creates so much alignment of incentives and leverages the collaborative nature of early-stage, emerging syndicate managers that does not exist within traditional VC. It has also become my strongest deal flow channel, allowing me to do hundreds of deals per year through my syndicate.” - Alex Pattis, Riverside Ventures

What are some key considerations when co-syndicating a deal?

While co-syndication can be a powerful tool for emerging managers, it also requires thoughtfulness, communication, and coordination. Here are a few things to keep in mind if you’re considering co-syndicating a deal with another manager:

1. Deal Leadership: While there are benefits in managers co-owning deal responsibilities, it’s often more efficient to have one true deal manager. It can be helpful to divide up areas of responsibility; for example, choosing one manager as the main point of contact for the company to avoid any confusion.

2. Shared Economics: Typically, when a deal is co-syndicated, carried interest is share between the two managers. Make sure to align on the economic split prior to launching the deal. It may be 50/50 or the deal originator may take slightly more carry if they are more involved in sourcing and managing the deal.

3. Communication and Expectation-Setting: Maintain open and regular communication among syndicate members throughout the investment process. This includes making sure investors from each syndicate know who their main point of contact is for deal information.

4. Investor Exposure: Keep in mind that, when you invite your investor network to participate in a co-syndicated deal, you are exposing them to a new manager with unique deal flow. Make sure to communicate clearly with the deal originator about expectations for communicating with investors once the deal has closed.

5. Pro-Rata and Follow-Ons: Discuss and agree on the pro-rata rights for future investment rounds. This includes decisions on whether syndicate members will invest together in subsequent rounds and how to handle situations when one or more syndicate members choose not to follow on.

6. Distribution Preferences: Co-syndicate partners should have a mutual understanding of the exit strategy and distribution expectations, including timelines and a process for distributing cash, selling shares, or managing an IPO.

Like any collaborative undertaking, proactive communication and thoughtfulness is key to a successful co-syndication. With these best practices in mind, you’ll be able to develop ongoing relationships with other managers who become regular co-syndication partners.

In the investing world, the last decade has been characterized by a notable shift from an individualistic, self-interested approach to investing to a more communal one. New generations of investors have embraced the impact of investing alongside a community, driven by a shared purpose, camaraderie, sustainability, and trust – all of which have a demonstrated positive impact on financial returns. Since 2020, the term  “investing community” has become part of the shared lexicon as investors realize that they thrive within social ecosystems. Financial decision-making and investing rhetoric are more commonly occurring in open, inclusive spaces rather than behind closed doors. 

Several key dynamics have contributed to this shift: 

1. Digital Transformation of Investment Committees: The adoption of digital communication for investment decision-making, especially at the highest levels, has become more widespread since the onset of COVID, allowing for remote collaboration.

2. Increased competition in venture capital: The VC asset class has surged in popularity, prompting firms and individuals to look for new ways to create value and competitive advantages. 

3. Investment tooling has improved:  It used to cost $20,000 in legal fees to get a deal done. Today, both the cost and complexity of investing legal processes have significantly decreased, with new software emerging that has made it much easier to share financial upside and ultimately encourage collaboration.

   
   

What does community actually look like in an investing context?

An investing community can broadly be defined as an interconnected network of stakeholders who share a vested interest in the success of an investment or fund or the group itself. Community members can include founders, investors, employees, advisors, and even customers.  Communities focus less on ad hoc transactions and more on creating collective value. A community is meant to win and grow together. 

As communities grow, they generate a power that becomes more than the sum of its parts. Alex Pattis, GP of Riverside Ventures, believes:

“Communities create the best flywheels which can create access to the right people or companies for all sorts of business opportunities.”

In the VC ecosystem, community takes on many forms: 

Syndicates: A syndicate is a formal or informal group of investors who pool capital, resources, and insight to invest in a startup together. While some operate collectively, most are led by one or a few individuals who act as primary decision-makers. Digital platforms (like Sydecar) have also made it easier to form and manage syndicates with multiple stakeholders and shared incentives.

Zachary Ginsburg, GP of Calm Ventures, says:

“Community can take a long time to build – but, once you have it, you can move a lot quicker. At Calm, we’ve seen this momentum within our syndicate. From the outside, it may seem like it’s just me running everything – but, in reality, our community of syndicate members, including angels, VCs, operators, founders, and scouts, is the engine that allows us to invest in over 100 startups annually.” 

Founder Networks: Founder networks offer platforms for knowledge exchange, resource sharing, and potential customer leads amongst startup founders. These groups are typically formed and supported by VC firms and have become a powerful source of deal flow. They also provide an opportunity for founders to invest together in other startups. Notably, alumni networks from major tech companies like Airbnb, Google, and Coinbase have transformed into active founder networks, investing in startups launched by former employees.

Alex Pattis loves these communities:

“I’ve seen the Airbnb, Uber, Lyft, and Google alumni syndicates deploy meaningful capital into their ex-employees’ new companies. Startups love having these communities on their cap table given the relevant operating backgrounds and unique access of the members. It’s a true win-win.”

Online Forums & Social Media: Increasingly, investors and founders are taking conversations to Twitter, LinkedIn, and specialized forums to source deals, discuss strategies, and gain insights. Some of these groups are rallied together by a syndicate lead or fund, but others form more naturally to later join forces as a syndicate or fund. 

Hustle Fund’s Angel Squad is a great example. Zachary Ginburg notes:

“Angel Squad has done a great job of establishing a large group of accredited investors with shared goals. I’ve seen others try to build national angel groups in the past, but Hustle Fund seems to have succeeded by putting the community first and continually engaging them via education, networking, and deal flow access.”

Brian Nichols, Co-Founder of Angel Squad, notes:

“The best part of our approach is that the community extends outside of just the angel members to our portfolio companies as well. Angels have an opportunity to get in the weeds with portfolio companies in meaningful ways. As an example, one of our angels who works at Nike connected a portfolio company that they invested into the right team at Nike, which became that startup's biggest contract in company history.”

Incubators/Accelerators: These groups serve as vibrant mini-ecosystems, offering startups not only capital but also a supportive community of fellow entrepreneurs, mentors, and alumni. Y Combinator stands out as a prime example, fostering an active and interconnected network of founders. 

Community is a Competitive Advantage 

The value of community in VC cannot be overstated. In a competitive and rapidly evolving landscape, an authentic community can differentiate and strengthen an investment strategy and provide a network ripe for support and collaboration.

However, establishing a community isn’t as simple as bringing together a group of individuals with shared interests or goals. The term community is often used to describe a large social following or group of newsletter subscribers. In reality, these groups are more likely audiences. Importantly, a community involves two-way interactions and mutual engagement, whereas an audience typically engages in a one-directional manner with the leader. For example, a newsletter would be considered an audience because the subscribers cannot communicate with each other. A founder network hosted in Slack would be considered a community because the members are able to (and encouraged) to communicate with each other.

Zach Ginsburg has experience with both. In reflecting on the process of building up the following for his newsletter, Last Money In, Zach notes:

"Part of building an audience is delivering consistent value and transparency. The shift from audience to community comes from engagement, which could come from real-life events or Slack groups. Creating opportunities for two-way interactions is key in transforming an audience into a community.”

The line between audience and community is often blurred, with many groups embodying elements of both. Newsletters often extend their reach by creating Slack groups for subscribers to connect. Similarly, venture capital firms may lead founder networks, periodically engaging members through updates and newsletters. The key distinction lies in the nature of interaction: communities foster mutual engagement among all members, while audiences primarily interact with the leader.

An audience, if well taken care of, can become a community. And a community, if neglected, may slip back into an audience.

Brad Jenkins, Co-Founder and CEO of Seed Round Capital agrees:

“The difference between a community and an email list is consistent two-way engagement. If community members don’t have a way to interact with you or their fellow members, it’s not going to be as rewarding.”

Communities, inherently more complex and powerful, have the potential to become self-sustaining, growing organically through member interaction. Conversely, the vibrancy of an audience depends solely on the leader's activities. However, an audience, particularly in the form of an extensive email list or social media following, can still offer substantial benefits, especially to investors.

Julie Weber, GP of The Helm, notes:

“Investing alongside a community can also feel more impactful; where one small check may not feel like it moves the needle when capital is pooled, a little can turn into a lot very quickly. It’s exciting to feel part of something bigger and to know that you’re investing alongside others whose values are aligned with your own. Additionally, depending on the round dynamics, many founders won’t take small angel checks, so investing as part of a community provides access to sought-after investment opportunities that wouldn’t otherwise exist for angels.”

How do investors effectively foster community?

For investors aiming to cultivate a sense of community, the journey begins with fostering interconnectedness and encouraging active participation. A syndicate, initially a list of individual investors receiving deal memos, can evolve into a community through events, forums, and facilitated connections. No single step can make an audience a community, but a consistent effort to encourage interconnectedness will push things in the right direction.

As Jason Burke, Co-Founder of All Stage, explains:

“Successful communities are about give and take. Like any relationship, the communities are ones in which the value exchange is bi-directional. Encourage everyone in the community to contribute and engage.”

After decades of investing in startups almost exclusively through fund managers, more family offices are choosing to go direct with their investments, drawn by the control and outsized returns and empowered by a new generation taking the reigns.

A family office is an organization that manages financial assets for a wealthy family (or multiple families, in the case of a multi-family office). Its role is to ensure that the family’s wealth is managed, preserved, and grown for future generations. Given their goal of increasing wealth for future generations, family offices tend to be more comfortable with high-risk and long-term investment horizons. According to a study by Goldman Sachs, family offices allocate approximately 45% of their portfolio to private equity on average. A UBS survey shows 74% of families are likely to increase their allocation to private equity as they believe these investments will continue to outperform public equities.

Historically, family offices have gained access to private assets through funds, rather than direct investments. Notably, this gives them exposure to a wider variety of assets so as to hedge the risk involved and build a truly diversified portfolio. As venture capital has proven to be an increasingly lucrative asset class over the past decade, family offices have become a popular source of LP dollars for venture funds. Investing through a fund allows a family to diversify their startup exposure, access high-quality deal flow, outsource the cumbersome process of due diligence, and save time on deal execution. Outsourcing deal flow and due diligence are key, as many family offices lack the expertise needed to effectively evaluate an early-stage company. Instead, they look to emerging fund managers, who spend their time deep in the weeds of company picking, to provide access to a high-quality basket of startup assets. Family offices and emerging fund managers are a match made in heaven, as newer managers appreciate the lower diligence threshold that family offices have as compared to institutional LPs. 

“Syndicates play a critical role in showcasing how certain managers communicate about deals. The most savvy VC managers are showcasing deals that they are syndicating, along with whatever terms they have, to prospective LPs. It helps LPs understand how they think, which is especially helpful for family offices that are thinking about going direct. It helps them start to understand what a good deal looks like, what type of traction and growth investors are looking for at each stage.” - Dave Sachse, Sachse Family Fund

In recent years, family offices have displayed a growing appetite for more direct exposure to startups. Each year, family offices as a whole have increased direct startup investments, as evidenced in First Republic Bank’s report from 2022. Family offices will often invest alongside funds to increase exposure to a certain company and as an opportunity to build their own deal flow. This trend is fueled by the younger generation’s influence, the market downturn, and new economic advantages. 

“The vast majority (72%) of those surveyed invest in established venture funds, 84% invest in emerging venture funds (which include Fund II and Fund 3) and 81% percent invest in first-time funds — a jump from over 75% last year.” - First Republic’s Family Office Survey Report 2022

The next generation of investors brings new strategies

The first wave of family offices included the likes of JP Morgan and JD Rockefeller in the 1830s, but the family office model wasn't popularized until the late 20th century. Over the past few decades, the number of family offices has grown to track with the record number of Ultra High Net Worth Individuals (UHNWIs) in the US. Unless they were in a tech ecosystem or made their wealth from the Dot-com boom, this generation of family offices was less interested in venture investments, instead focusing on familiar investments or the industry where they made their wealth. However, as millennials become more involved with their family’s wealth management, venture capital is becoming an increasingly appealing asset class. This generation is not only more comfortable with risk, but they are also able to leverage their knowledge as digital natives when evaluating opportunities. They’re better suited to seek out deal flow, perform diligence on early-stage startups, and get in the weeds with portfolio companies. Their lived experience generally allows them to make direct investments with more confidence. 

“A lot of gen ones want to hold on to how they made their original wealth — maybe it’s real estate or manufacturing or retail. That’s all they know. But eventually, the generational wealth transfer is going to happen. I see venture becoming more and more prevalent because our generation grew up with technology. We’re going to gravitate towards it more and we’re going to see more and more family offices getting into the game in the next decade.” - Dave Sachse, Sachse Family Fund

The rise of value-driven investing is also incentivizing more family office involvement in VC. Across the board, investors want to be more connected to the startups they are investing in. Family offices are more interested in funds that invest in diverse founders or impactful causes, but an even better way for family offices to control investing in their values is through direct investment.

Downturn makes startup investing more palatable

Family offices have a reputation for being bureaucratic, slow, and approaching venture investing with the same heavy-diligence lens as they do with other investments, causing them to miss out on the fast-moving, high-valuation rounds from the past few years.  They tend to have smaller teams that approach early-stage investing through a broader private equity lens, meaning they take more time to do the calculations on a company’s cash flow, growth, and exit potential and will care more about a reasonable valuation deal. 

With the economic downturn, the venture ecosystem has adjusted to slower fundraising timelines, more reasonable valuations, and alternative sources of capital outside of traditional VCs. These factors have made venture investing more palatable for family offices.

On the startup side, founders are looking toward sources of funding other than institutional VC funds as fundraising is now harder. They are more inclined to seek out family offices, syndicates, and other funding options to participate in their rounds.

Economic Advantages

Family offices were never uninterested in direct investing. In fact, several believe that direct opportunities are where they can find truly outsized returns. However, they haven’t focused on direct investing because of the back-office operations required. They were willing to rely on VC firms to handle the legal and accounting work for each investment because of the time and cost involved.

“Family offices can benefit from partnering with emerging managers who bring a fresh perspective, specialized expertise, and access to unique investment opportunities. By partnering with emerging managers, family offices can diversify their portfolios and achieve higher returns while also supporting the growth of emerging businesses.” - Leesa Soulodre, R3I CAPITAL

Today, as back-office technology improves, deals can be done quicker and cheaper. What used to take months of legal fees and a team of accountants on retainer can now be spun up in a few hours for a fraction of the cost. Direct investing also allows family offices to put more of their capital to work without sacrificing carry and management fees. Platforms like Sydecar are powering family offices by managing back-office functions like legal, banking, and accounting using standards-driven software. With the lowered transaction costs and admin time required, family offices can spend more of their time focusing on deal sourcing and diligence, and get greater exposure to the opportunities that excite them.

As the next generation steps up to managing the investments, the downturn allows family offices to get involved, and the burden of executing investments is lowered, family offices are increasingly able to act as their own VC fund and invest directly into startups.

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Learn more about how family offices partner with Sydecar to run SPVs.

In the dynamic world of startups, securing the right type of funding at the right time can often be a make-or-break moment. For Unplex, the decision to opt for an angel round was a strategic choice. In this article, we delve into Unplex's journey and explore its decision to use a founder-led SPV to leverage its network and efficiently raise capital from over 20 angel investors. 

First, some background on the company: Unplex is pioneering a financial revolution that envisions a planet where money knows no borders. With a mission to simplify and democratize global transactions, Unplex is redefining the way we send money, making international money transfers as effortless as sending a text message. Say goodbye to cumbersome bank account numbers and the hassle of navigating multiple apps. 

Why Choose an Angel Round?

In February 2023, six months after launching their company, the Unplex team set out to raise an angel round to extend their runway. It became clear that an angel round was the right fit for the company when they considered the community they were building their solution for. During their research phase, they noticed a significant level of interest among potential investors. What's more, they recognized the added value that angel investors could bring, particularly those with relevant contacts or experience, who could also serve as advisors with a vested interest in the company's success. With this information in their back pocket, the founders of Unplex kicked off their own fundraise using a founder-led SPV on Sydecar. 

Kick off the Fundraise

The Unplex team kicked off their angel round by gauging interest and determining an appropriate valuation for the company. To gauge interest, they reached out to their network of friends and acquaintances. The response was overwhelmingly positive, further fueling their confidence in pursuing angel funding.

Valuation, a crucial aspect of any funding round, was established through meticulous research. The team studied similar companies and funding rounds on platforms like Crunchbase and engaged in discussions with a select group of advisors. This comprehensive approach helped them arrive at a valuation that was both fair and competitive.

Leveraging the Power of Network

For Unplex, the network the founders had built played a pivotal role in the success of their angel round. The three co-founders harnessed the power of their individual networks, reaching out to friends and connections. They organized a single product demo and angel investment day, where they presented their pitch, provided a product demonstration, and fielded questions from potential investors. This strategic move not only streamlined the investor outreach process but also generated a sense of FOMO that allowed them to close the round within an impressive three-week timeframe.

Demo days were instrumental in Unplex's fundraising strategy to share information with potential investors. By presenting their pitch and product in a structured format, which included a presentation, demo, and detailed Q&A session, they were able to address questions and reservations on a broader scale. To ensure that investors came prepared, Unplex shared a pre-read memo in advance. This approach boosted investor confidence significantly.

Efficiency through Processes

Closing an angel round is not just about generating interest; it's also about efficient execution. Unplex adopted several practices and processes to expedite the deal closure. Demo days were a cornerstone in creating FOMO, but they didn't stop there. The team maintained diligent follow-ups at each stage of the process. They used Sydecar's founder-SPV product to onboard investors seamlessly, track incoming wires in real time, and follow up with lagging investors. The real-time visibility into each investor's status allowed them to follow up appropriately and keep the fundraising momentum going.

The success of Unplex's fundraise can be attributed to their proactive approach to investor engagement and the FOMO generated through their demo days. Prior to the demo day, they kept potential angels informed about their startup through phone calls and regular social media updates, ensuring that there was already a foundation of interest. Additionally, they recognized the importance of a credible lead investor, which further instilled confidence in the deal and minimized drop-offs.

Unplex's journey to secure angel investment offers valuable insights for startups looking to navigate the complexities of fundraising. Through strategic decision-making, leveraging their network, and adopting efficient processes, they successfully closed their angel round and took a significant step towards realizing their vision of a world where money truly knows no borders.

Hearing about Paige Finn Doherty’s path into VC is like getting a masterclass on building a track record. What is perhaps most inspiring about Paige’s story is that she never once waited for permission; time after time, she took initiative based on the path she envisioned for herself. 

We recently sat down with Paige to learn more about what was going on behind the scenes as she grew her Twitter following from 300 to 30k, published a children’s book, and raised over $10M to invest into startups. Aspiring angel investors, syndicate leads, and fund managers can learn from Paige’s story what it really takes to build trust, credibility, and a personal brand online.

Building community through writing

If there is one throughline to Paige’s journey as an investor, it’s community. As a 2020 college graduate, Paige was forced to navigate a tricky post-grad landscape and fell back on the community she built at San Diego State University to help guide her. In her first post-grad job at an early-stage startup, she missed the sense of community that she’d enjoyed so much in the SDSU entrepreneurship program. Since it was the peak of the pandemic, Paige, like so many others, turned to the internet. She reignited her personal blog and started publishing pieces like “How to Land Your Dream Job” as well as a virtual workshop on cold outreach. Through this work, she began connecting with like-minded individuals from across the world. 

“Writing online is like a tuning fork. You put an idea out and see who it resonates with.” 

Entrance into VC

As Paige continued sharing her work with peers and through Twitter, she started to feel tuned in a specific direction. Having studied entrepreneurship at SDSU and subsequently gone through On Deck’s Angel Investing program, she was pulled towards working with startups. After binge-watching Silicon Valley, Paige knew she had to find a way to experience the world of venture capital for herself. Frustrated by the lack of simple explanations of VC, she started writing Seed to Harvest, a children's book about venture capital. Coming to the industry as a beginner herself, Paige felt like she was well-equipped to educate her community about this complex, opaque topic.

The conversations she had while writing the book, along with her education, gave Paige a wealth of knowledge about the VC industry. And then, the magic moment: Paige discovered that she could start investing herself despite being an unaccredited investor. While you have to be accredited in order to invest in venture funds, you don’t meet any income, wealth, or certification thresholds in order to organize a venture fund or SPV. In fact, by organizing an investment vehicle, you actually become accredited for the purposes of investing in that vehicle.

Paige navigated countless hurdles when setting up her first few SPVs. The further she dug into the legal framework of SPVs, the more questions she had – questions that she couldn’t find answers to while working with legacy SPV administrators. Should I charge a management fee? How much? Am I even legally allowed to charge a management fee? 

Are you a syndicate lead who has asked yourself these questions? Sydecar is here to help – check out our article on Management Fees and peruse the rest of our Learning Center.

Sourcing your first deal and getting allocation

Paige’s first syndicate investment was into a company called Pallet which builds infrastructure to manage job boards. At the time, she was writing Seed to Harvest and using Twitter as a way to meet people to interview for the book. The founder of Pallet reached out to learn more about Paige’s approach to content and community, but Paige had something else in mind:

“I remember hearing Kai outline his vision for Pallet and having this overwhelming sense of conviction. As soon as we got off the call, I was like: “Hey, I'd love to have like a $50K allocation in your pre-seed round.” He told me he’d have to check with his other investors because the round was oversubscribed, but they ended up letting me in. And then, I realized that I had $50K in allocation and probably like a grand in my bank account.” 

Filling your first allocation

At that point, Paige had built up a small following on Twitter and decided to get scrappy. She understood that she couldn’t post about the allocation publicly, so targeted people who were “mutuals” and drafted short, personalized blurbs telling about the opportunity to invest in Pallet.

“I've always valued the art of very personalized cold outreach at scale in tandem with building an online audience. And it's a skill that I used to raise $60K from 17 investors in two weeks. Ultimately, that skill translated into a lot of the tactics that I used to raise our first fund, which was five million dollars. Of our 120 fund investors, a lot of those relationships originated from Twitter, including folks like Andy Weissman from USV, Heather Hartnett from Human Ventures, and Jenny Lefcourt from Freestyle.”

Building trust in public 

There was no playbook for Paige to follow as she set out to build an audience online and translate that audience into an investor community. Rather than navigate the challenges she faced alone, she chose to share her journey at each step of the way. By doing so, she was able to crowdsource crucial information about setting up her first few SPVs – but later on, she realized that sharing her journey publicly had a larger impact as well. As she shared her challenges and successes publicly, her followers started to learn how she thinks and makes crucial decisions. They started to trust her, without even knowing her personally. She started to build trust at scale.

“I was pretty shameless when I started. I found people who followed me on Twitter, which constitutes an existing relationship, so I could legally reach out to them. I’d tell them about the opportunity, what I liked about it, and maybe some of the co-investors. The conversion rates were pretty high because I had spent time building trust with people in public. Even if they didn’t know me personally, they had built trust by following me online.”

Building a track record: from SPVs to a fund 

When Paige set out to raise her first SPV, $50K felt like an infinite amount of money. Just one year later, she found herself closing a $5M fund, more money than she had ever conceived of. And yet, she still had people telling her that she should raise more. Telling her that $5M wasn’t enough capital to implement a successful investing strategy. 

As she reflects on what allowed her to build a track record (while she was a new college grad in a moderately paid startup job), Paige is grateful for her conviction and passion. Without that, she might not have chosen to muscle her way through the fundraising process for what feels like a relatively small amount of money today. 

“Knowing what I know now, raising a $60K syndicate from 17 investors is an insane amount of overhead.”

Many managers would argue that syndicating a deal with this investor-to-capital ratio is more trouble than it’s worth. Considering how much harder capital is to come by today compared to 2021 (when Paige was raising her first SPV), it’s easy to feel cynical about the opportunity for those without traditional experience, network, or access to capital to build a track record. Paige herself admits that she no longer syndicates many deals, preferring to deploy the readily available capital out of her fund. 

However, all hope is not lost for aspiring syndicate or fund managers. Young startup operators can be some of the most valuable capital allocators. Having your boots on the ground in the startup ecosystem creates a valuable network from which to source deals, diligence companies collectively, raise capital, and, perhaps most importantly, provide hands-on support to founding teams. You just need to have the right combination of resourcefulness, shamelessness, and conviction.

“I think there's still an opportunity there for people who are willing to go against what I know now, which is that syndicating deals requires a lot of work. But it got my foot in the door. And, if I could go back and do it again, I’d do it every time.”

The good news: the tools available to syndicate smaller deals have evolved significantly over the past few years. Sydecar was built to provide a flexible on-ramp to capital allocators who, like Paige, have incredible value to provide to founders and to the startup ecosystem as a whole. If you’re thinking about pursuing this path, look for an admin partner who can support your growth from syndicating your first deal to raising a committed capital fund. Sydecar is here to help.

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Looking to syndicate your first deal but don’t know where to start? Learn more about our Syndicate product and get in touch today.

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.

Get in touch to learn more about Fund+! 

Co-investment strategies have gained popularity over the past several years. Co-investing allows LPs to back individual deals alongside fund managers rather than (or in addition to) committing to a blind pool fund. Emerging managers often use co-investments as a way to build relationships with and create value for prospective fund LPs. High-net-worth individuals and family offices, who often back emerging managers as LPs, are particularly drawn towards co-investment opportunities given that they tend to prioritize customized and relationship-based investing more than institutional investments. Co-investment strategies are particularly attractive to investors during periods of macroeconomic volatility because it allows them to deploy capital more slowly and with more control. 

We recently hosted an office hours session with Coolwater Capital to discuss the value a co-investment strategy can play for emerging fund managers. The conversation was full of rich insights and tactical takeaways, so we’re sharing an overview along with the full recording with our community. If you’re an emerging manager or syndicate lead who’s looking to expand your investor base and strengthen relationships with LPs, this is for you.

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Coolwater Capital is an educational community and fund-of-funds for emerging managers. Since launching in 2021, they have:

• $1.5B raised across cohort funds

• 298 LP-led themed modules

• 924 1:1 value-added intros made

• 41 in-person events hosted since 2022

• 62% funds with diverse GPs across 159 funds

• 3600+ portfolio companies across funds pre-cohort

• 2500+ portfolio companies targeted across funds by 2025

• 83 NPS score rated by GPs

Sydecar and Coolwater have partnered to provide emerging fund managers with the full-stack resources they need to launch and manage their investment business while setting the foundation for an enduring firm past Fund I. 

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Co-Investing as a Competitive Advantage

Key takeaways:

• Co-investment has distinct benefits for managers, LPs, and founders

• Managers can deploy more (and increase their upside) into deals they love

• Managers can split economics with other funds or syndicates to align incentives

• Potential LPs can get deal-by-deal access before committing to the fund

• LPs who are already in the fund can increase their exposure to exciting deals

• Managers can increase their value-add to founders and win more deals if they can deploy larger checks through a co-investment network 

• Co-investments can give founders access to additional value-add angels that may not be able to meet fund minimums 

Should co-investment opportunities only be offered to fund LPs?

• Up to the manager to decide how to leverage the opportunity.

• Can be used as a way to build trust with potential future LPs.

• Can also be used as an exclusive benefit of being in the fund.

• A hybrid solution is to offer different terms for different participants. For example, LPs in the fund could pay 10% carry while potential future LPs could pay 20%.

How can managers avoid making one-off SPV investments feel transactional?

• Be intentional with your outreach and positioning. Approach LPs with investments that you believe will be especially valuable and relevant to their strategy.

• If you’re investing out of your fund and using a co-investment SPV to top off allocation, the conviction is clear.

• If you’re not also investing out of a fund, be active and transparent in your communication. 

“Present the deal as an opportunity, not a sales pitch. If you’re excited about a deal but can only fill part of your allocation because of your fund size and mandate, give investors an opportunity to increase their exposure as though it is a gift. There’s immediate alignment if you’re already putting in money from the fund, which can make it feel less transaction.”

- Zander Rafael, Founder and GP of Spring Tide Capital, who has deployed over $100M through 20 SPVs

If you are able to fill your allocation through co-investment, how do you manage the risk of coming up short?

• One of the biggest challenges of syndicating capital is managing founder expectations. Underpromise and overdeliver.

• Know your LPs. The better you know them, the easier it will be to estimate how much you can raise in early conversations with the founder. 

• Build a process to gauge interest from investors and calibrate it over time.

• Founders will have more patience for your process when markets are slow vs. hot. 

“It’s much better if you try to come back and ask for a bit more than to have to go back to the founder and tell them you couldn't fill it. You want to start to get a window that you can share with the founder, which should be a conservative estimate. The more you do it, the more opportunity you’ll have to calibrate and refine your process.”

-Rob Lusk, Head of Partnerships at Sydecar

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Want to dive in further? Listen to the full recording of the office hours session here: https://youtu.be/Tx5uYat7uBE.

The past several years have brought significant evolution for the venture capital industry, from updated regulatory frameworks, the explosion of venture capital, and a decades-long bull market followed by a meaningful downturn. Now, even more changes are afoot — this time, in the form of regulatory shifts. In what has been called the biggest rule-making event in venture capital (VC) since Dodd-Frank, the SEC recently passed a series of rules that have significant implications for any private fund managers, including venture capitalists. 

The five new rules passed by the SEC cover a range of issues under the Advisers Act. This Act, which was passed in 1940, regulates anyone who receives compensation for advising others on buying or selling securities. The law requires all advisers (GPs) to either register with the SEC, making them a Registered Investment Adviser (RIA), or qualify for an exemption. One avenue for exemption is by qualifying as an Exempt Reporting Adviser (ERA), which is the path taken by most VCs. As an ERA, you can pursue a venture capital strategy (meaning that 80% of your investments are made directly into private companies) and raise capital from accredited investors while avoiding formal registration with the SEC. Instead, ERAs file a truncated Form ADV. 

An overview of the rules

Keep in mind that these rules have changed slightly from the proposed versions that we highlighted in our Sydeletter on August 22, 2023. Overall, most of the rules were adjusted to restrict certain behaviors rather than prohibit them altogether.

Out of the five rules that were passed, two directly impact ERAs, while the rest will only impact RIAs. The rules that are most relevant for VCs who are registered as ERAs are: 

Advisers (GPs) are prohibited from offering preferential redemption or information rights to a subset of investors unless such rights are offered to all investors at the same time. Any preferential treatment relating to material economic terms offered to a subset of investors (e.g. via side letters) must be disclosed to all current and prospective fund investors (Rule 211(h)(2)-3).

Advisers who engage in certain sales practices, conflicts of interest, and compensation schemes must disclose (and get consent for certain activities) from all fund investors (Rule 211(h)(2)-1). Those restricted practices include: 

• Non-Pro Rata Fee & Expense Allocations: Generally, advisers cannot charge fees related to a portfolio investment on a non-pro rata basis when multiple funds managed by the adviser are participating – unless the adviser distributes advance written notice of the charge with a description of how the allocation approach is fair and equitable under the circumstances.

  • E.g., if your primary fund is investing in a company and you’re also launching an SPV for co-investors, you will have to share legal and other expenses that benefit the fund and SPV pro rata across both vehicles.

• Certain Regulatory Fees & Expenses: Advisers are prohibited from expensing fees to the fund that are associated with any regulatory, examination, or compliance fees related to the adviser unless the fees are disclosed in advance. Expensing fees to the fund that are associated with an investigation of the adviser is prohibited unless there is written disclosure to and consent from all investors. If an investigation results in adviser sanctions, the adviser may not expense such investigation fees.

  • E.g., you cannot expense fees for your annual Form ADV filing to your primary fund or SPVs, as this is an expense that benefits you as the adviser to these entities rather than the fund or SPVs directly.

• Reducing Clawbacks for Taxes: Advisers are prohibited from reducing the amount of a clawback obligation by actual, potential, or hypothetical taxes applicable to the adviser unless they disclose the pre-tax and post-tax amount to investors within 45 days of the end of the fiscal quarter.

  • E.g., if your fund has an American waterfall and, at the end of the fund, you determine that received more carry than you should have – because earlier liquidity events were more successful than later ones and you received more carry across all investments than what you agreed to receive – then when your excess carry is “clawed back”, you can no longer reduce the amount you give back to the fund by taxes you paid on the earlier pay–outs without appropriate disclosure. 

• Borrowing: Advisers are prohibited from borrowing money, securities, or other fund assets, or receiving a loan or an extension of credit from a fund unless they provide written notice of the borrowing terms and obtain consent from a majority of the fund’s investors.

The three additional rules are specific to RIAs: 

• 211(h)(2)-2: Fairness opinion or valuation opinion are now required for private fund adviser-led secondary transactions.

• 206(4)-10: A mandatory audit of private fund financial statements to, among other things, serve as a check against misappropriation of assets and calculation of adviser fees is now required. 

• 211(h)(1)-2: RIAs must deliver fund quarterly statements with certain specific information, including uniformity in fee presentation. 

The intention of the rules is clear: to increase the level of transparency between fund managers (GPs) and their investors (LPs). If you are at all familiar with the lengthy document called the Limited Partnership Agreement, or LPA, that is signed by all investors in a fund, you might be surprised to hear that the SEC feels like there isn’t enough transparency between GPs and LPs. LPAs are typically several hundred pages long and include a huge number of requirements and disclosures between the two parties. The document limits everything from what the GP can invest in, how long they can invest for, and even how they spend their time outside of investing. However, given that venture capital is still, relatively, a cottage industry, there is a lot of grey area around what is or is not allowed. Because most venture capital investors benefit from the Venture Capital Exemption and are considered Exempt Reporting Advisers, they have relatively limited compliance or regulatory obligations to the SEC or to their investors (outside of what is explicitly laid out in their LPA). This gives VCs, who operate in an industry that moves quickly and is largely based on relationships, a fair bit of flexibility with how they operate their businesses. 

As an example: there is a long history of GPs negotiation special LP arrangements outside of their LPA through side letters (or secondary agreements used to create bespoke terms between two parties). The primary purpose of a side letter is to give an investor (either a VC or LP) some special or additional rights that are not granted to all of the other investors involved in a transaction. In almost all cases, these additional rights are advantageous to the investor. Venture fund managers use side letters to grant preferable terms to specific investors, oftentimes in order to secure their anchor or an otherwise large or strategic investor. Under most LPAs, the fund manager is not required to disclose any side letters to their other investors. 

Organizations like the Institutional Limited Partner Association (ILPA) have expressed their support for these rules, highlighting that additional regulation would help to level the playing field for all parties and ultimately increase the efficiency of private markets. They also point out that close to 97% of LPAs are initially drafted by the GP’s external counsel, and that the terms have become increasingly GP-friendly, especially with the consolidation of law firms leveraged by VC firms. Given that a fund investment is typically a 10+ year commitment, having terms that align the interests of GPs and LPs is crucial to a healthy ecosystem. 

Additional scrutiny of private markets can be attributed to the increase in private market participation over the past few years. In the past five years alone, there has been an 80% increase in the gross assets of private funds. Despite popular narratives, this growth has not been significantly hindered by the current market downturn: private markets are expected to hit $13 trillion by 2027. As attorney Chris Harvey points out: 

“Several years ago, private markets started outpacing public markets in terms of financing volume for private deals. Even with a down market in 2023, private markets still eclipse public markets in terms of total amount raised for equity financing. In fact, just the private funds industry alone has eclipsed the U.S. banking industry since 2021.”

What does this mean for emerging fund managers?

Many VCs are discouraged, rightfully so, by the push for tighter regulation; meanwhile, proposed rules that could decrease barriers for fund managers (like increasing investor limits or granting accredited investor status via a knowledge-based test) have fallen by the wayside.

However, don't despair just yet. Because emerging managers are already starting with limited leverage and bargaining power, these changes may have less of an impact if you are raising your first fund versus your fourth, fifth, or tenth. The biggest hit will likely be to mega funds, many of which have existed on the cusp between true VC funds and private funds for years. Funds like Andreessen, Bessemer, and Sequoia became Registered Investment Advisers over the past few years, largely driven by the desire to invest more into non-VC-qualifying assets like crypto, secondaries, and public companies during the bull market.

Maybe it’s not all bad 

The increased scrutiny isn't necessarily bad for emerging managers. The lack of clear guidance for early-stage VC leaves a lot of ambiguity over questions like how management fees can be charged or what constitutes a reasonable amount. SEC guidelines might prove to be a valuable compass for new entrants looking to better understand how to negotiate with LPs. Such rules could help answer questions and prevent abuses, creating safe harbors for legitimate activities. Good business can thrive in a clearer landscape.

And, in the meantime, if you’re looking for guidance on standard fees, check out our recently published report on Standard Terms for Emerging Managers.

What’s next? 

Now that the rules have been passed, the SEC will move forward to publish the final versions in the Federal Register. The date for this publication is still to be determined. Once the final rules are published, the clock will start on a 12-month period for advisers with >$1.5B AUM or an 18-month period for advisers with <$1.5B AUM, which will dictate the applicable compliance date. RIAs have two months to comply with the "Compliance Rule Amendments," which require a written annual review of their compliance policies. TDLR: VCs and other private advisers will not have to comply with these rules until late 2024 or early 2025. 

Importantly, the SEC is also providing legacy status for existing vehicles, meaning that any governing agreements (such as LPAs or side letters) that are executed prior to the compliance date will not be expected to comply with the Preferential Treatment or Restricted Activities Rules.

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Continued reading:

• From the horse’s mouth: check out the SEC’s own press release about the passage of the new rules. 

• It’s no surprise that the Institutional Limited Partners Association (ILPA) is in favor of the rules. Read their statement and check out the helpful chart on Page 6 of their report.

• What does this mean for emerging VC fund managers? Hear what Nik Talreja, CEO of Sydecar, has to say.

• Emerging Fund Lawyer Chris Harvey breaks down what the rules mean and where the biggest impact will be felt.

• A group of VC, PE, and hedge funds are threatening a lawsuit against the SEC. Among them is VC darling Andreessen Horowitz. Read more about their complaints here, and check out a16z’s specific comments on the SEC’s website.

• The Wall Street Journal calls the proposed rules a complete “overhaul.”

Emerging managers are historically a great bet. As Heather Hartnett points out in her Forbes piece entitled “When Public Markets Experience Volatility, Experts Say To Invest In Emerging Managers” the data is clear:

Data from Cambridge Associates shows that new and developing firms are consistently among the top 10 performers in the asset class, accounting for 72% of the top returning firms between 2004–2016. (article source / data source).

So why is raising as an emerging manager so hard?

To get more insight on this topic,we spoke with three emerging managers who have first-hand experience raising funds over the past few years. First, some introductions:

Al Bsharah is the Managing Partner at Interlock Capital, a unique community-driven startup fund. After starting his career in Detroit's auto industry he set out for the San Diego startup scene in 1998. From there Al embarked on a 20+ year entrepreneurial journey, during which he founded three companies and invested in over 100 startups.

Carey Ransom is the Founder and President of Operate Studios, which focuses on building innovative companies from the earliest stages. Carey is also the Managing Director of BankTech Ventures, which invests in early-stage technology to transform community banking. With experience taking multiple startups from launch to exit as well as managing two funds, Carey knows quite a bit about what it takes to raise from both VCs and LPs.

Hem Suri is the Founder & Managing Partner of Spark Growth Ventures, where he’s democratizing access to venture investing through an innovative, community-driven model  Hem has two decades of experience across various industries as an entrepreneur, investor, board member, and executive leader. Hem's extensive career includes serving on over 20 boards, and executing 50+ venture and M&A transactions. 

Al, Carey, and Hem joined us for a live panel to discuss their experiences fundraising as emerging managers, during which they shared invaluable insight and tactics. Check out the live recording here, or read on for a rich summary of the conversation.

Winning LP Trust Is Key

By definition, emerging managers come with limited track records. Although a new manager may have some successful angel investments, they will not have a significant history of showing differentiated returns. When a manager goes out to raise their first fund, they are largely selling themselves to potential investors rather than their portfolio. Because of this, building trust with LPs is key.

This is not unlike the fundraising process for first-time founders. LPs are betting on the manager’s ability to source exciting investment opportunities in the same way a VC is betting on a founder’s ability to stand up a team, build a new product, and bring it to market. In both situations, there is limited data early on and the investment decision hinges on the confidence in an individual.

Trust Doesn’t Just Happen – It Takes Work

The managers we interviewed each had their own approach to building trust with LPs, but a couple of themes emerged:

1. Bring active and prospective LPs into your process. Share opportunities, discuss deals, and be collaborative. This gives you an opportunity to show prospective LPs how you think, which can help to build trust independently of demonstrated returns.

2. Leverage Special Purpose Vehicles (SPVs) as a tool to expand your network and create value for LPs. Give prospective LPs the opportunity to co-invest through SPVs so they can choose investments a-la-carte before they make the bigger decision to get involved in the fund. Use SPVs to give active LPs the chance to increase their exposure to companies that excite them the most.

You Can’t Rush Trust

Trust takes time and any attempt to rush the process is risky. All three of the managers we spoke to have spent decades building trust with LPs. This can be hard to hear as a prospective emerging manager who has the itch today, but is a great lesson in taking the long view –something that is required for any successful venture investor.

Differentiated Deal Flow

The last (and maybe most obvious) theme is that emerging managers need to have differentiated access to deals. You might be able to earn trust from LPs, but if you can’t get access to the best founders, it’s going to be hard to put that money to work. Showing off a unique ability to access the best opportunities is a key part of the process.

In summary, why is raising as an emerging manager so hard?

As you may have noted, three of the four sections in this article talk about building trust, while only one mentions the logistics of operating a fund. Trust is what makes raising as an emerging manager hard. If the best way to build trust is to have a track record of success, but you can’t have a track record without trust, where does that leave emerging managers?

On the LP side, the data tells a different story. For established funds, past performance is not a predictor of future success. Historically, almost three-fourths of top-returning funds are led by emerging managers. But, raising as an emerging manager is still hard. That’s because - ironically - most LPs aren’t making data-driven decisions. The decision to invest behind a manager is often more emotionally driven than one might imagine.

So what can you do?

First, recognize that the LP’s decision will be 75% emotional (trust) and 25% logical (data). Second, build a strategy around this reality. Third, execute consistently over time. 

As an emerging manager, the highest impact activities to build trust are: 

1. Build a community of investors around you and communicate with them regularly.

2. Give investors the opportunity to make smaller commitments to your deal flow by way of SPVs.

Raising as an emerging manager is hard, but if you can execute in line with the strategy above, you may just have LPs knocking down your door asking you to launch a fund. 

Amber Illig spent much of her career adjacent to venture capital, working in exciting high-growth companies like Apple, Snap, and Cruise. After 10 years as an operator, Amber developed an itch for venture investing. She knew that her startup background and angel investing experience gave her the tools she needed to dive in. She decided to start off with 30 angel investments over three years. Starting with syndicates, Amber has grown from small angel checks to now running a community and fund. We talked to Amber to learn more about her path and investing strategy.

Getting Started with Syndicates

“I was more excited than nervous by the time I wrote my first check. I did so much research and prep that I was ready to rip off the bandaid. I also read several books on angel investing, including Angel by Jason Calacanis. Once I read through that book, I thought: ‘Okay, I can do this.’”

Building a budget

A common rule of thumb for novice investors is to allocate 5-10% of their net worth for venture investing. Given the high likelihood that the investments go to zero, 5-10% should represent an amount of money that the investor is willing to lose completely without impacting their basic needs and lifestyle.

Amber started off investing 5-10% of her net worth. However, as she invested, the work was so rewarding that she reevaluated to allocate up to 20%. This may seem like a large amount to invest in such a high-risk asset, however, Amber knew that the experience, exposure, and connections she was building through her investments were invaluable. Like many other angels, she compared the investment to the amount that one might spend on business school. Both the education and network gained through investing rivals that gained in business school. However, in addition to these shared benefits, investors are purchasing equity that offers financial returns. 

After gauging her appetite and budget for angel investing, Amber worked backward to the number of investments she could make. She opted to maximize the number of investments by choosing to only invest small amounts around $5k. Knowing she would make mistakes early on, these small checks allowed her to gain experience without costly losses. In the past three years, her angel portfolio has grown to 30 companies. 

Direct Investing as an Angel

“If you're thinking about doing this as your career, at some point you have to prove to yourself and others that you can source deals and diligence them on your own. My Phase Two was figuring out how to source companies without a syndicate.” 

With syndicates as the onramp, Amber fell in love with investing. She had a network from her many years in Silicon Valley, and she had the operating and investing experience to know she could lead and diligence her own deals. This is when she knew she could graduate from investing via syndicates to direct angel investments. 

This switch meant sourcing and diligencing deals on her own. While investing became more time-consuming, she also gained control. She developed her own due diligence checklist and could shape a thesis around what she knew best. Given her background working in automotive and supply chain management, she was drawn to companies solving problems for similar legacy industries.

Before the end of these three years, her success was clear. She had invested in companies ahead of rounds from YCombinator, Lightspeed, and Softbank. Her portfolio was showing growth, including one company marked up 36x. Her sourcing abilities and decision-making had her ready to launch a fund. 

Community, Fund, and Beyond

“If I hadn't created a community and stepped into a role where I'm providing value to that community, investing would have been far more difficult. The community has created a unique source of deal flow for me and also portfolio support for our founders.”

An essential support for Amber’s investing has been the angel investing community, The Council Angels. Founded by Amber and 9 other women, they were all operators who were working full-time while starting to invest. Since the early days, Amber has co-led this community alongside Anabel Lippincott Paksoy and now Shriya Nevatia. What started as a small group of women has grown to over 145 members with experience from large tech companies and top startups.

When it came time for Amber to raise a fund, these women were some of her first LP checks. While they were small checks, the Council’s membership got Amber to her first close and allowed her to start investing in the fund’s first 10 companies. This community then gave her introductions to family offices, funds of funds, and banks to reach institutional capital. She now has 56 LPs that allow her to keep growing her investing work and fund. 

With 17 investments made from Fund I, Amber is looking to the next challenge: scaling up to a larger Fund II. For many emerging managers, this can be one of the toughest raises, as they become too large to take small checks from individuals, but are not yet raising a large enough fund for many institutions. Fund managers have to seek out the right institutions willing to invest in an emerging fund, which can be a whole new network from their existing angel investor LPs. 

Nonetheless, Amber’s background as an operator, her track record from angel investing, and her community through the Council have prepared her for the challenge. In three years, she has gone from working as an operator to knowing that she can be a full-time fund manager. Through her three phases of investing, Amber has tackled the venture investing world to grow her investing from a part-time passion to a full-time career. 

Venture capital (VC) is more than financial backing; it is a lifeline for many venture-backed startups. The rocket fuel propels novel ideas from concepts into tangible, market-altering realities. Yet, to differentiate their firms from the competition, venture capitalists know their role extends beyond writing a check—it involves providing strategic counsel, opening doors, and mentoring entrepreneurs.

Above all, it encompasses building meaningful, enduring relationships with the startups they back. 

We have collaborated with the relationship-building CRM, 4Degrees, to discuss the essentials of building stronger relationships with startups. This comprehensive guide explores how VCs can foster more robust relationships with startups, enhancing their investment outcomes and strengthening the broader entrepreneurial ecosystem and the success of their portfolio companies. 

The Role of a Venture Capitalist

As a VC investor, your role goes beyond investing. You are responsible for assessing and managing risk, providing advice, and offering introductions and networking opportunities. You are a partner on the startup's journey, helping it navigate the complex landscape and achieve its ambitious objectives.

Providing value beyond capital involves leveraging your experience, industry connections, and your firm's institutional resources to support the startup. The goal is to position yourself as more than an investor—you are a valuable partner contributing to the startup's growth and success in multiple, far-reaching ways, from helping entrepreneurs find talent or close key deals to providing them with hands-on operational support. 

Strategies for Communicating With Startups

The best investors communicate openly with their startups, creating a positive relationship built upon respect and mutual growth. These relationships require an ongoing commitment and purposeful strategies, such as:

Empowering and Respecting Autonomy: Despite providing guidance and advice, respecting the founders' autonomy is crucial. They are the visionaries driving the enterprise; your role is to support their vision, not supersede it.

Building Trust and Transparency: Trust forms the bedrock of any relationship. You can build and maintain trust with the founding team by demonstrating honesty, transparency, and consistency in your actions.

Understanding and Navigating Conflicts: Conflicts will inevitably arise. The key is recognizing potential issues early, understanding where people are coming from, and handling disagreements constructively.

Assisting Startups Beyond Capital Investment

The monetary investment is just the tip of the iceberg regarding how venture capitalists support startups. Nowadays, VCs are expected to provide additional value. Strategic guidance, networking opportunities, and mentorship are critical aspects. 

Strategic Guidance: You have deep industry knowledge and experience as a VC, which allows you to provide strategic guidance on market trends, competitive landscape, and growth strategies, helping founders refine their business models, identify target markets, and make informed decisions regarding product development, pricing, distribution, and many other areas. Identify your expertise as this is where you can be the most helpful.

Network and Connections: You have extensive networks of industry experts, potential customers, partners, and other investors that founders need. You can also leverage your firm's network to assist with talent acquisition, helping founders identify and recruit key team members. Using a relationship intelligence platform will allow you to keep tabs on your network so you always have a connection ready. 

Fundraising and Investor Relations: You have expertise in fundraising and can guide in navigating subsequent funding rounds, for example, introducing founders to potential new investors, helping them refine their pitch, preparing for due diligence, etc. Your team may advise on valuation, term sheet negotiation, and structuring deals, areas most first-time founders are unfamiliar with. Additionally, you can assist with investor relations and help founders navigate interactions with existing and prospective investors.

While these are all helpful to a founder, VCs must remember to guide with the company’s best interests in mind and trust the founder’s instincts to avoid overstepping.

Common Pitfalls and How to Avoid Them

Unfortunately, potential pitfalls can strain VC-startup relationships. These issues often include:

Misaligned Expectations: This is perhaps the most common pitfall. Startups might expect more hands-on help from their VC partners than they are willing or able to provide.

Poor Communication: Both parties need to maintain open and transparent lines of communication. If either party feels left in the dark or is surprised by decisions or changes, it can create tension and trust issues.

Lack of Transparency: This can be about finances, company status, or plans. Lack of clarity can breed mistrust, lead to surprises down the line, and damage the relationship significantly.

Overbearing VCs: Sometimes, VCs overstep their bounds and try to exert too much control over the startup, which can lead to conflict. While VCs certainly have a stake and a say in the business, they need to respect the founders' roles as company operators.

Poor Cultural Fit: A VC and a startup need to have compatible cultures for a successful relationship. If the VC's approach is fundamentally at odds with the startup's culture, it can lead to misunderstandings and disagreements.

Early identification and proactive management of these issues are essential to preserving the relationship's health. Regular check-ins, establishing clear communication protocols, and respecting each party's roles can avert these problems from escalating.

Long-term Relationship Management with Startups

Managing long-term relationships with startups involves continuous engagement, support, and communication. It's not about occasional check-ins; it's about being a part of the startup's narrative, sharing in its triumphs and setbacks. It's also about forward-thinking, encompassing discussions about future milestones, exit strategies, etc.

To simultaneously manage your relationships with multiple startups and provide them with high-value mentorship and introductions, your network must work for you while ensuring nothing falls through the cracks. 

Successful VCs have introduced relationship intelligence CRM platforms such as 4Degrees to ensure they make proper introductions and provide the most value to their portfolio companies while maintaining a robust deal pipeline.

Technology is driving change in Venture Capital. Ideas for value-add that used to get shot down due to operational complexity are now possible. For example, auxiliary structures that would have cost a fund $25,000 per year can now be done for $5,000. These new structures and creative solutions will be a theme of the next decade.

This month, we hosted an event with Costanoa Ventures’ CFO Mike Albang to discuss their scout funds and how technology makes it possible. Mike shared his vision for the Costanoa Scout fund program, the successes they’ve had, and the value it creates for both the founders and LPs they partner with.

Here’s some quick context on scout funds before we jump in:

A strategy employed by firms like Sequoia for over a decade, scout funds are small, dedicated funds where the main fund is the sole LP. The fund commits a relatively small amount of capital to an auxiliary fund that is managed by a “scout”. These scouts are typically domain experts and may be rising investors or entrepreneurs. In working with a fund, the scouts can build their track record and establish themselves in VC. The fund will give the scout carry, take the upside of the capital commitments, and most importantly, gain access to deals they otherwise would not see. These deals create opportunities for the fund to co-invest in the company or keep tabs on them for the next round.

Why run a scout fund?

As Mike explained, there are two core drivers for Costanoa:

1. Expand the fund’s network.

2. Empower the fund’s network.

A diverse network of experts engaged with your firm can impact everything from sourcing, to diligence, to winning deals. Scout funds have proven to be a great way to build this network of experts.

Not all networks are created equal. A LinkedIn connection may be considered part of a network, but it will rarely deliver value. Scout programs are the opposite. By tying an expert to their firm through a scout position, VCs gain value-driving individuals in their network. When Costanoa chose their scouts, they were able to strategically select scouts from different backgrounds and industries that would expand and diversify their network.  

The next step is empowerment. As mentioned above, going deeper with a few experts is more impactful than a lightly-connected, larger network. Empowering experts through check writing is a great way to realize this impact. By giving them the ability to invest, VCs empower scouts to build their skills as investors, grow with the firm’s success, and contribute to the firm’s further expansion.

Why hasn’t everyone launched a scout fund?

First, there is the math of the matter. 

Historically, the cost of running a scout program was too high for most firms to justify. Funds like Sequoia have in-house legal and finance operations allowing them to spin up auxilary structures. Not many others have that scale.

For those without in-house teams, VCs had to run scout funds with traditional fund admins that require hundreds of manual hours to set up and maintain the back office. A scout fund with a traditional fund admin would cost up to $25,000 per year. 

These yearly fees add up. Costanoa Ventures, for example, runs four scout funds alongside each core fund. These funds, like most early-stage vehicles, have a 10-year shelf life. That means ten years of fees. Therefore:

The total cost to run a scout fund before was around $250,000. 

Given these costs, VC firms could not make scout funds worth it. Costanoa allocated each scout $200,000. A scout fund would not be possible if it cost $250,000. 

Through automation, Sydecar has brought this cost to $5,000 per year. Now, the math can make sense. 

Beyond the cost, there is the operational burden.

If you have run a fund or even just a Special Purpose Vehicle (SPV), you know how painful things like assembling documents, signing, and wiring can be. That operational burden, like the fee, adds up.

For a fund thinking about adding value to its core practice, many ideas get written off due to the distraction they cause. The level of operations for writing small checks is similar to that of writing larger ones, so spending time on a small check or auxiliary fund can be a waste of time.

This is another place where technology comes into play. A centralized platform to manage everything from signing to wiring decimates the workload and is the difference in whether or not a scout program is viable.

The operational efficiency gained through technology made Costanoa’s scout funds easier to manage and thus worth the strategic upside. For funds smaller than Costanoa Ventures, which has over $2 Billion assets under management, this is even more true.

Scout funds are just the beginning.

For Mike, scout funds are only one of a few common structures that are available to firms. Co-Investment SPVs and Opportunity Funds have also been common strategies of funds in the past, and they are now more feasible through technology.

These structures are all tools in the toolbelt of a firm to drive better returns for their LPs. These aren’t new structures or novel ideas. Instead, it’s the cost of execution of these strategies that have been the limiting factor. Now, as technology redefines their viability, these strategies are open to any VC that wants to bring innovative value to their LPs. 

Click here to watch the full interview. 

Want to learn more about running a scout fund? Reach out to us here. 

In 2021, Bobby Housel was returning to the University of Michigan following a gap year and was anxious to catch up with the founder friends he had made at school. Fueled by this excitement, he started hosting small gatherings of his closest founder friends. Quickly, he observed that  these entrepreneurs were a lot more interested in meeting each other than catching up with Bobby. 

What became clear was that college entrepreneurial programming was failing in two primary ways. Firstly, it was failing to connect the top college founders with one another. At a large school like Michigan there are more than ten different entrepreneurial communities for students. Beyond that, they are massive, lumbering institutions shrouded in red tape and forced to cater to the “average” entrepreneur. This means the top 10% of founders find themselves ignored by most college entrepreneurial programming.

As Bobby held more of these meetups, it became clear there was an opportunity to build a better community for top college entrepreneurs. He soon teamed up with Barry Sabin to launch Founder’s Cupid, a community to help tell founders’ stories through strategic media partnerships, introduce them to their first hires, and provide other support.  

What started as a community focused on connecting like-minded founders has quickly evolved into much more. They now reach three university ecosystems and over 350 founders. From telling founders’ stories through strategic media partnerships to introducing them to their first hires, Founder’s Cupid does whatever it takes to support the top college founders. In addition to providing education and community, Founder’s Cupid launched a syndicate in 2023 to connect pre-seed and seed founders with capital and mentorship. Their first two investments in Ultima Insights, a fintech AI company for investment research, and Fundwurx, a corporate social responsibility company for SMBs, are set to close in June. 

More than Just Consumer Startups

Housel and Sabin believe that colleges across the US are letting value slip through the cracks when it comes to student founders. Common beliefs about this population – from the lack of experience and perspective to the belief that student founders exclusively build simplistic consumer companies – result in this population not being taken seriously. 

But these dated biases are an opportunity for open-minded investors. College students are gaining work experience earlier, sometimes leaving high school with 1-2 internships already under their belt. Students can develop industry expertise through internships, cutting-edge knowledge through university research, and the fresh eyes needed to rethink a stagnant industry. Investors who recognize these shifts will find themselves ripe with opportunity to invest into promising student-founded companies .

Student Founder Communities Must Be Flexible by Default

Balancing schoolwork, extracurriculars, and company building is an extraordinary challenge for student founders. The support that comes from joining a founder community is valuable, so long as membership is flexible and doesn’t become an additional obligation.

Founder’s Cupid has built its community upon radical openness and activities that are opt-in. In letting founders choose when they engage in the community, the community never becomes a burden. Student founders are busy individuals. A required commitment to a community is counterproductive to their startup’s success. 

In connecting students with alumni investors, Founder’s Cupid seeks out investors that have the skillsets and willingness to help in a concrete way. Intelligent matchmaking is key to ensuring that no one’s time is wasted. Founder’s Cupid focuses on delivering value in every match  by seeking out alumni investors that both want to be involved with their alma mater and have conviction in the school’s talent pool.

Betting on Student Founders for the Long Run

Students can be some of the most motivated and visionary founders. But they have different challenges to navigate, from discouraging parents, demanding classes, and the general distractions that come with  the college experience. Investors working with student founders should understand the unique challenges that they face so that they can provide better, tailored support.

Student founders are often stretched in a million directions. While top student founders are wizards of time management and optimization, they typically don’t operate like other founders. Their work on their startup may be concentrated on weekends and evenings, or they may have to ease up on their speed of execution during finals week. 

Student founders are more likely to pivot as they refine their personal mission and gain knowledge from their studies. But, even if their first idea doesn’t find product market fit, the entrepreneurial itch often found within student founders will likely lead them to another exciting idea before too long.  From an investor’s perspective, supporting a young founder early in their journey can pay dividends. Rest assured that they will come back to the investor with opportunities for years. Some investors describe this as “tagging founders” -- investing money super early as a way to keep tabs on them for years to come. 

Investors can expect to be more hands-on with student founders than they might be with more experienced company builders. Investors who demonstrate an ability to help and advocate for student founders, not only further win their trust, but can supercharge their growth. 

Knowing these differences will help you navigate the promising pool of student-founded startups. Startup investing is already a wild experience. Investing in student startups will make the entire process more wild and rewarding in every way. 

Roots

Walter Chen was exposed to entrepreneurship at a young age. His aunt founded Golden Wok, one of the first Chinese restaurants in Central Pennsylvania, and he has watched his family operate the business for most of his life.  A Taiwanese immigrant, she started the restaurant with only Walter’s father’s support.  With this investment, Golden Wok took off and ran for 30 years.

It was a teenage Walter who bought the domain for GoldenWok.com and built their website. An entrepreneur at heart, Walter has been dedicated to helping startups, learning from founders, and understanding how businesses build. This passion led to him co-founding Sacra, which publishes research reports on private companies. When his aunt sold Golden Wok, Walter took the domain back to build Golden Wok, the venture capital version. Much like his father, he is using the Golden Wok name to invest in other companies, helping founders bring their vision to life.

Turning to Secondaries

Golden Wok has primarily focused on helping companies in their founding stages. Walter’s passions and expertise have led him to work with founders to build their businesses from zero to one.

“I am excited not about investing per se, but about building businesses with people I have a good relationship with.”

In addition to feeding his passions, Walter also knew that early-stage investing was where he could get the best returns. But with the recent downturn resulting in compressed valuations for tech companies, he realized that there were more and more appealing opportunities within the secondary markets. He saw shareholders looking for liquidity, giving secondary investors an opportunity to buy shares at great prices. 

Taking the leap into secondary markets didn’t mean a departure from Walter’s investment thesis. Just like his early-stage investing is premised on relationships, many of his secondary investments have come about from relationships built over time. 

Relationship-based Secondary Sourcing

Walter and Chris Savage, CEO of Wistia, have been friends for over a decade. Walter had long admired the company and enjoyed watching it grow over the years. While he has long wanted to be a shareholder, the timing had never worked out. Wistia had only raised outside capital (a modest $1.5M) to seed their business in 2005. They used that initial funding to build a highly profitable, capital-efficient business off the bat.

Given the recent downturn, some Wistia shareholders sought liquidity, finally opening up an opportunity for Walter to invest. 

This process of sourcing a secondary deal through a relationship was not new to Walter. His investment into Podia was similar. It was sourced out of an 8-year relationship with the founder. 

Given these long-standing relationships, the diligence process for Walter’s investments in Wistia and Podia looked a lot different from his early-stage investments. Instead of having just a few days or weeks to look through a startup’s data room before making the investment, he benefited from years of watching the founders build their companies. He had first-hand knowledge of the founders’ capabilities and knew that he wanted to invest long before the investment opportunity came about. This expedited his due diligence process and gave him full confidence when investing. 

Beyond the financial opportunity, Walter found these investments extra rewarding, as he had grown with the founders and cheered them on for years. 

Early-stage to Secondary Investing

For investors familiar with early-stage investing, secondaries seem like a whole different game. Due diligence in early-stage investing often revolves around qualitative analysis, focused on the founders, the market opportunity, and an idea. There are few (if any) revenue numbers to consider. In contrast, secondary transactions usually occur later in a company’s lifecycle. These investment decisions are typically made based on years of performance data and pattern-based predictions.

Despite these core differences, early-stage investors have an advantage when considering secondary opportunities. They have a surfeit of relationships with founders from the earliest stages. In watching these founders and companies grow, investors develop a full picture of market opportunities that informs their due diligence process. They are primed to evaluate deals at any stage within their specific sector. 

This advantage can make secondaries a fitting supplement in an early investor’s strategy and help assuage their FOMO from early-stage deals they do not do. Investors who miss out on early-stage deals need not fret with regret over missing a great deal. In this market, there may be a secondary opportunity. 

Looking forward, Walter envisions secondaries will continue to play a role in his investing and a larger role in the ecosystem as a whole. It is speculated that with fewer distributions, investors may turn to secondaries to gain liquidity. 

While secondary investors will have to sift through companies that have been overhyped with inflated valuations, they are many opportunities to purchase equity at a significant discount from the past year or two. This is the time for early-stage investors who missed out or felt priced out to leverage their relationships and bring secondary investing into their strategy. 

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Interested in executing a secondary transaction? Sydecar supports secondary SPVs of all sizes starting at just $4,500. 

There are endless nuances and parameters involved in setting up and managing a venture fund. While often funds have custom provisions or side letters that cater to the needs or preferences of the GP and LPs, certain key terms tend to be similar across funds of similar sizes. Emerging fund managers, who are typically raising from entrepreneurs, high-net worth individuals, and family offices, should be aware of the standard terms that these types of LPs expect to see reflected in a fund’s controlling documents (i.e. LPA or LLCA). Understanding these standard terms will create efficiency for emerging fund managers as they establish their fund documents and structure.

Let's review industry standard terms and trends that fund managers need to know when fundraising.

Standard Fund Terms for Emerging Fund Managers

For the purpose of this article, we’ll define emerging fund managers as those who are managing their first, second, or third venture fund with a fund size under $30M. Based on our research, these funds share the following standard terms:

• Management Fees: 2% or 2.5%

• Carried Interest: 20%

• Hurdle: None

• Investment Period: 2-3 years

• Term of Fund: 10 years

• GP Commitment: ~1%

As mentioned, high net-worth individuals and family offices will largely be familiar with these standard terms, so it is often in the best interest of the fund to adhere to these standards. However, institutional investors such as pension funds, sovereign wealth funds, or foundations may have special requests for the fund’s terms, such as customized management fees or carry. In these cases, fund managers will create side letters to reflect the custom provisions.

Fund Terms Trends for Emerging Fund Managers.

While the industry standard is a helpful starting point, emerging fund managers should also pay attention to trends in fund terms. Since emerging managers tend to have a higher risk tolerance, move faster, and achieve higher returns on investments, investors and fund managers may negotiate terms that deviate from the standard if they allow the fund to execute more effectively on their specific strategy. The most common variations we’ve observed for emerging fund managers pertain to management fees, co-investment, hurdle rate, and warehousing.

Front-loading Management Fees

Typically, the management company charges a 2% annual fee to the fund to cover management services, office, salaries, and other operational expenses. However, emerging fund managers may front-load management fees by increasing the management fee during the investment period (typically the first 2-3 years) and then decreasing it in the post-investment period when the fund focuses on monitoring deals. For example, during the investment period, the management fee could be between 3%-4%. Post-investment period, the fee might be down to 0.5%.

This practice is common for first-time fund managers. Since management fees are proportional to the fund size, first-time fund managers tend to receive less than established fund managers do. Front-loading the management fees allows emerging fund managers to have the capital they need to get started and pay themselves a salary prior to receiving a return (in the form of carried interest) from their investments. Front-loading management fees allows those who do not come from generational wealth to become VCs while still making a living.

Recycled Management Fees

Management fee recycling is a tactic used by fund managers to maximize returns. Since management fees reduce the amount of capital the fund can deploy, fund managers may “recycle”, or re-invest, a portion of the returned proceeds. Recycling gives fund managers more capital to deploy, thereby increasing the amount invested and potential returns to investors. 

Hurdle Rate

In VC, the hurdle rate is the minimum rate of return before the fund manager receives carried interest. The hurdle rate can align incentives so that fund managers aim to overperform.

Typically, fund managers can expect their performance compensation in the form of 20% carried interest with no hurdle rate. 

However, first-time fund managers looking to demonstrate their ability may agree to a hurdle that gives them higher carried interest once the net multiple is above a certain return threshold. For example, if a $10M sets a 2x hurdle rate, the fund would have to return $20M to investors before the manager receives carried interest. 

Co-Investments

Emerging fund managers aim to access the best deals, which may require raising additional money to meet check minimums on occasion. In order to bolster the average check size out of their fund, some managers turn to co-investing. Co-investing allows fund managers to raise capital alongside their funds. Fund managers will set up a co-investment SPV that allows for investment from investors, whether they are investors in the fund itself or not.

Co-investing benefits all parties involved. Investors in the fund enjoy capturing more allocation in companies they love. Additional investors access deals without committing to the fund and build familiarity with the fund manager’s investment style for future opportunities. Fund managers secure deals they otherwise could not access.

Given the increasing popularity of co-investing, Sydecar’s Fund+ product supports this seamlessly. You can read more about how we structure co-investments here.

Warehousing

Before raising a fund, emerging fund managers use syndicates or angel checks to build their track records. For some investors, their existing portfolio is very attractive to potential investors. When this is the case, investors might negotiate warehousing terms.

Warehousing allows emerging investors to “store” or transfer investments that occur before the fund is set up. The investors then acquire an investment interest in these deals. Often, warehousing allows investors to participate in marked-up deals from the fund manager’s portfolio at lower valuations. Through these deals, investors can de-risk the fund. Beyond just seeing the fund manager’s track record, they take part in it.

Summary

The terms that govern your fund are no small matter. Fund terms will impact its whole strategy, including capital deployed, the target rate of return, and deal allocation. While it may be tempting, and ultimately recommended, to stick with the industry standard terms, there may be cases where custom provisions are helpful, especially if you are an emerging fund manager.

As murmurs about an impending recession rippled through the startup community in early 2022, many became anxious and risk-averse. But Gadi Borovich and Daniel Ha recognized the opportunity. At the end of 2022, they were wrapping up deployment of their fund at XX, an accelerator associated with WeFunder, and had a strong feeling the timing was right to start their own fund. Thus, Antigravity was born. 

For Daniel, the second half of 2022 reminded him of 2008, when he started his company, Disqus. Noticing the similarities with 2008’s macroeconomic environment, he felt that the next couple of years would be one of the best times to start a company. More importantly, he knew that any seed funds deploying capital during this time would have some of the best performing vintages.

Daniel came into the startup ecosystem as the co-founder of Disqus. A product expert, Daniel led the company through finding product-market fit, and upon exiting the company, he brought that knowledge to seed stage companies as an advisor and investor. In 2020, he joined XX as a Partner and met Gadi Borovich. In Gadi, he found a partner with energy, work-ethic, and insight that pushed him to think about what more they could do together as investors. 

Gadi started his career on Wefunder’s growth team then became a Partner at XX. During his two and half years at XX, he backed 40+ companies and demonstrated insight across sectors from HealthTech to EdTech. A proven investor, it seems inevitable that he would launch his own fund. 

Now, after working together for two years at XX, Daniel and Gadi are launching Antigravity to bring their product and growth expertise to a new generation of founders.

Finding Fund-Market Fit

A product guy at heart, Daniel approaches fund building with a focus on finding what he refers to as “fund-market fit.” To him, this means identifying a specific customer pain point (with his customers being early stage founders) and offering a solution that addresses that pain point directly. Finding fund-market fit for Antigravity means identifying what they can contribute to both portfolio companies and their investors, whether that is anchored in their relationships, insights, or deal identification. Operating in this way will create a feedback loop that allows Daniel and his partner to constantly refine and improve their offering for companies and investors.

Finding fund-market fit also means articulating Antigravity’s unique vision and selling it to investors. The team’s secret sauce lies in their ability to provide very early capital paired with hands-on guidance – but knowing that is not enough. Daniel and Gadi are constantly adjusting how they package and present their value to investors, many of whom are inundated with opportunities. 

“There is a constant challenge of needing to justify your existence to yourself and to the people that are on your side – your investors, your companies, and other partners.” - Daniel Ha

Like any product looking for market fit, Antigravity's approach has evolved since its inception. While the recession was a catalyst for launching the fund, they are also building an edge that will allow Antigravity to endure through economic cycles. These are the challenges that give Daniel an excitement reminiscent of his experience as a founder 15 years ago.  

New Approaches

As first-time fund managers, Daniel and Gadi were intimidated by the mechanics of launching a fund. They used this to their advantage by questioning traditional methods and looking for opportunities for innovation and disruption. 

“We wanted to examine and break down the principles of running a fund. We wanted to question what others took as fundamental truths. We started by saying: ‘Why does it have to work this way? What could we do to make it better?’” - Daniel Ha

This philosophy led them to Sydecar where they immediately felt like they had an aligned partner who would walk them through the challenges of setting up their first fund. In Sydecar, they found a team that inspired confidence and a product that would streamline the mechanics of starting and running a venture fund.

“As investors, people come to us when they don’t know exactly how to think about a problem set or a market, and we give them a source of confidence. Sydecar does that exact same thing for us as fund managers.” - Daniel Ha

Whether you’re building a product or starting a fund, it’s easy to follow what other people have done. The harder route is creating something that is distinctly yours. Venture capital is a young industry that is built on disruption and challenging established norms. With this in mind, Daniel and Gadi are committed to executing a strategy and defining a voice in the industry that rises above the noise. 

Summary

Managing a fund for the first time can seem scary, but Daniel and Gadi are diving in. Bringing their experience as accelerator investors and product experts, they are approaching the fund like a product, seeking to find its unique voice and perspective. Fueled by the opportunity brought by a downturn and their success working on XX, they hope to build something distinctly theirs.

Prota Ventures was founded in 2018 by a team of ex-founders who were passionate about providing the support to the next generation of startups at the earliest stages. They’ve come a long way over the past five years, building a portfolio that boasts several unicorns, a reputation of a high caliber, and now with the goal of launching their first fund.  

As repeat founders themselves, Prota’s competitive advantage lies in their ability to identify strong leaders. They know that subject matter expertise doesn’t always translate to strong leadership skills – and a lack of strong leadership is one of the primary reasons that startups fail. 

Prota approaches their portfolio with a multi-pronged approach and seeks to support founders in a customized manner. They run an incubator, a startup lab, and a traditional venture capital fund and take a hands-on approach to helping founders navigate changing needs as they grow. Their portfolio includes companies like Figment, Stix, and BirdBuddy. 

For close to five years, the Prota team has built a compelling track record through their SPV investments. This strategy acted as a proof of concept – an opportunity to test their thesis and share their decision-making process with LPs. With several breakout companies in their portfolio, there’s no question that Prota has proven their concept. At the end of last year, they set out on the path to raise their first fund, with a focus on formalizing their processes around diligence and deal execution.

Establishing a Track Record

Prota started out operating as a partnership and syndicating their investments using SPVs. The partnership would invest and find other investors who join on individual deals. Given the work of coordinating and collecting information, SPVs were getting unwieldy, so Prota turned to Sydecar. 

It was important to find a tool that would complete investments quickly and for a variable price that could flex with each investment, given the size and stage of their investments.

“Once we started using Sydecar, we closed deals five times faster than our previous manual workflow allowed. On the average, a deal would take almost a month and a half to close. Now we're able to do it within about a week.” - Gary Raju, Fund CFO

Starting with an SPV strategy allowed Prota to prove out their ability to source high quality deals, diligence appropriately, and collect commitments to fill allocations. The track record that Prota established through syndicated investments has helped them build relationships with investors and demonstrate the value of their approach, setting them up for a successful fundraise.

Launching a Formalized Fund

When making the transition from SPVs to fund management, the Prota team knew that they needed sophisticated processes. A larger pool of capital to deploy meant more LPs to keep track of and more founders to support. They needed to operate more efficiently and spend less time keeping track of who has signed fund agreements, who has sent money, and who has access to documents. They also knew that they needed to prepare for a potential audit when raising funds from institutional investors.

With these goals in mind, Prota turned to Sydecar’s Fund+ product. Sydecar’s platform allows Prota to handle everything from LP onboarding to commitments to K-1s in one place. It acts as a one-stop shop to raise and manage their fund and their investors. The Fund+ product also provides a document center where Prota can streamline communication with LPs during the fundraising process.

“Sydecar gives us real time visibility into all of our our capital commitments and capital call schedules. We love having a document center where every single deal and every single document is easily accessible. We’ve spent significantly less time managing spreadsheets and email threads as compared to our previous fundraises.” - Gary Raju, Fund CFO

Cultivating trust with investors is top of mind for any emerging fund manager. They’re tasked with the challenge of inspiring confidence in their experience, their investment strategy, and their ability to execute. Especially as they raise from new investors, there is a higher demand for organization and clear processes. Prota knows that their fund provider can either contribute to building that trust or detract from it. They saw in Sydecar not just a product that would allow them to operate more efficiently, but a team that would act as an extension of theirs and inspire trust with investors of all types. 

Summary

Prota has grown from a friend group of ex-founders to an incubator and fund by leveraging the experience of their founding team and working with founders early. After building a strong track record through their labs and SPVs, they are now raising for a new fund with the goal of a more formal process. With the support of Sydecar, Prota is able to raise and manage their fund on a product that both their team and investors love.

Today, we’re excited to launch a new product that will empower emerging venture capitalists, syndicates, angel groups, and investor communities to spin up venture funds in a fraction of the time (and at a fraction of the cost). Sydecar's Fund+ was built for venture investors who want to put their capital to work supporting world-changing startups, not paying for exorbitant fund administration fees. 

Launching a venture fund has historically been expensive, complex, and time consuming. The costs and time involved with fund formation leaves capital allocators with two options: raise tens of millions of dollars to justify fees, or pay for fund expenses out of pocket. For most, both options are out of reach.  

Sydecar's Fund+ provides a third option: end-to-end fund formation and administration with reasonable fees that scale with fund size. Our standards-driven approach allows emerging fund managers to get into business quickly without forking over $50k+ to draft legal documents from scratch.  Our structure, illustrated below, combines the stability of a committed capital fund with the flexibility of deal by deal investing so that fund managers never have to turn away capital. Sydecar's Fund+ offers automated banking, compliance, contracts, tax, and reporting, all built on our proprietary general ledger software.

“Sydecar’s Fund structure allowed me to go all in on venture investing. I’ve been angel investing and running a syndicate for several years, but I never imagined being able to do this full time because of how expensive and time consuming running a fund typically is. Because of Sydecar's product-driven approach, I’ve been able to scale to a $10M fund in just a few months without the headache that comes with traditional fund admins.” - Nik Milanovic, GP of The Fintech Fund 

Learn more about the Sydecar Fund+ Product

After a decade-long bull market, the recent downturn presents a huge opportunity for anyone deploying reasonable amounts of capital into early stage companies.  While many institutional VCs appear “closed for business,” emerging fund managers, syndicates, and operator-investors are eager to back the exciting companies forming during this time. Sydecar’s approach enables these new stakeholders, making it possible to raise micro-funds as small as $1M.

“We are launching Fund+ at a pivotal moment in venture capital,” says Founder & CEO Nik Talreja. “As the bull market gives way to a downturn, traditional models for supporting capital allocators - from marketplaces to manual service providers - start to break down. The industry’s focus on short term growth has led to a proliferation of bespoke structures and custom legal agreements that require the support of lawyers, fund accountants, and tax advisors. All of this is costly and unscalable.” 

We developed the Fund+ structure to fit the unique needs of emerging venture fund managers. Our standardized legal documents limit the need for lengthy negotiations with investors. Emerging fund managers can get started raising capital in just a few days, so that they can get back to what they do best: building relationships and backing amazing companies. Our documents are informed by months of research into industry standard terms that provide appropriate protections to both fund managers and their investors.  

The Fund+ structure allows managers to: 

• Launch a fund and accept capital commitments in less than a week. 

• Offer customized terms and economics for each investor depending on your unique relationship.

• Streamline investor onboarding with mobile-friendly subscription agreements and fund and compliance documents.

• Invite third-party investors to an opportunity while maintaining a single line on a company’s cap table. 

• Remain in full control of your fund by leveraging a self-managed entity, while Sydecar acts solely as the administrator, taking direction directly from the manager.

• Avoid paying expensive service providers for fund formation, regulatory filings, tax, accounting, and reporting. 

“Sydecar gives us real time visibility into all of our capital commitments and capital call schedules. We love having a document center where every single deal and every single document is easily accessible. We’ve spent significantly less time managing spreadsheets and email threads as compared to our previous fundraises.” - Gary Raju, CFO of Prota Ventures

We’re excited to be growing with the next generation of venture investors who have already embraced our standards-driven approach to SPVs. With this launch, we are furthering our mission of bringing more efficiency, transparency, and liquidity to the private markets. Our journey to transform the way private markets operate is just beginning, and we’re grateful for all that choose to embark on it with us. 

“We wanted to work with smart people who would push the envelope a little bit on approaching things from a different angle, especially since we're navigating this entire journey as first time fund managers.”  - Daniel Ha, GP of Antigravity Capital 

Interested in launching a Fund+? Check out our product overview or schedule a demo today.

Syndicates are a great way to build a large investing community that shares capital, dealflow, and knowledge. However, launching an investor syndicate can feel like a cold start problem. Much like a marketplace, a successful syndicate must manage the demands and growth from two sides: the LP base and the deal flow. Syndicate leads can feel like they are being stretched in two directions, trying to create the best quality on both sides.

Colin Gardiner knows a thing or two about marketplaces, having worked in leadership positions at companies like Roamly and Outdoorsy. After spending over 5 years as an angel investor, Colin launched the Yonder Ventures syndicate in the fall of 2022 to scale his investing. Since founding Yonder, Colin has run 6 deals and grown his LP base to 200+ investors. We chatted with him to learn more about his experience building a syndicate, how he works with his investor network, and how he works with his investors to inform thesis and dealflow. 

Setting up and growing a syndicate

Sydecar (SC): Why did you decide to start a syndicate? 

Colin Gardiner (CG): After working on four startups and raising over $200M, I started advising a few companies and helping them with fundraising. In doing this, I realized that I was sending these great companies to everyone else when I have a group of friends that I should be inviting to invest. I wanted to help these friends bring in their capital and participate in the upside, so setting up a syndicate was the clear next step. 

SC: What was the set up process like?

CG: When I was ready to get started, I explored a few providers and was struck by how expensive most SPV platforms were.  

That's how I came to Sydecar. I was excited that the fee structure could be flexible with my deal size. Sydecar’s product is private, which is important for me as well. In my first deal, the company didn't want me to send it out broadly. They were concerned about privacy.

SC: How did co-syndicating a deal affect your syndicate?

CG: I launched my second deal in December as a co-syndication with Harry Campbell. Through co-syndication, Harry and I were able to leverage our combined networks, allowing me to reach a new pool of investors. My LP base grew from around 25 investors to almost 200 – just from this one deal. All of a sudden, my deals were filling more quickly. It’s been fulfilling to see these new investors get excited about my deals, give me  feedback, and send referrals to new investors.

SC: Speaking of the growth that you've had, you are a fan of “building in public”, largely through your social media and podcast . Why do you share your journey so openly?

CG: After years of advising startups, I’ve seen how important access to knowledge is. When information is out in the open, the whole ecosystem benefits. Investing is not a zero-sum game. I need to know tons of people to get deal flow. They bring me in on things, and I bring them in.

A lot of my work in launching this syndicate has been talking to people. I want to synthesize and share that knowledge to help people start investing. The more capital that's out there, the more companies can be funded. This gives us more innovation and a better startup ecosystem. 

Understanding the needs of your investor base

SC: You talked about the challenges when you were first starting out, but how have those challenges changed as you grew? 

CG: With over 200 LPs, I am now running into scalability problems. The more deal flow I have, the more time I have to spend on diligence. I can’t send my investors every single deal I get excited about because then my capital pool will be stretched too thin. It’s more important than ever that I pick the deals that will most resonate with my syndicate investors. 

SC: How do you learn what will excite your investors? 

CG: One useful practice I have is that I send a welcome email to every new syndicate member. It describes my investment thesis and where my edge is. It also lists any open deals in the syndicate and asks what they would like to see. I store this information in a large Airtable which allows me to track what each investor likes and which of my deals they have invested in. I am starting to see trends in their interests. This helps me evaluate the likelihood that they'll invest in future deals.

Finding exciting startups and securing allocation

SC: What types of startups are you investing in?

CG: Marketplaces are my area of expertise. I believe there will be exciting growth in “marketplace+” models. These are marketplaces plus something else, such as Marketplace+SaaS or Marketplace+FinTech. Everything will trend this way, whether it be through a vertical SaaS adding a marketplace or a marketplace adding in vertical SaaS.

In this day and age, building a horizontal marketplace is really hard. Most things have already been done, and most marketplaces are cleaving verticals out of a horizontal marketplace. I am looking for businesses that are trying to embed deeper with either the demand or the supply side and build software to capture GMV from horizontal marketplaces.  

SC: How do you ask for the right allocation and predict what you're going to be able to raise?

CG: Early on, I did not know how to predict the amount I could raise. Now, when I see a deal that I have conviction for, I take the bet on raising more than what feels safe. If I feel I’ve found a great deal, I trust other investors will think the same. 

If I know less about a space, I will reach out to angels to get feedback on the deal before I ask for a certain allocation. Often, asking investors for advice will lead to them investing, helping fill the allocation.

Pushing yourself to raise more builds your audience, your LP base, and your network. In turn, that will make it easier to fill your next allocation. I think people get scared they can't raise enough. I'm getting to the point where I'm less concerned about that piece and more concerned about getting the best possible deals. If I can do that, then I know I’ll be able to fill the deal quickly. 

Organizing an investing syndicate is the ultimate test of coordination at scale. On top of all the work of finding new investors, managing existing ones, and coordinating their commitments, syndicate leads also have to identify the best deals and negotiate their allocation. 

We’ve teamed up with AngelSchool.vc to create the ultimate syndicate tech stack. AngelSchool.vc gives angel investors everything they need to launch and scale their own syndicate. 

The platforms, providers, and systems you use to run your syndicate can make a world of difference. Hours of collecting signatures becomes sending one link. Days of sending out K-1s becomes an automated process. Removing repetitive and cumbersome tasks allows investors to focus on what matters: analyzing deals and building relationships. 

As you start to build your syndicate tech stack, you should consider the following: 

The size of your syndicate

Communicating with a group of 20 investors is very different from 200. While a smaller group can be handled by a simple document or email list, 200+ investors will likely require a contact management tool that allows you to filter, sort, and view your group in various arrangements. 

User experience

An intuitive interface will not only make your life easier. For any tool that you need to have your LPs use, you want to make sure they have a great experience. This will make you look good and make you the syndicate they will come back to. Consider what the experience is like on both your side and theirs. 

Plans for scale

While you may be concerned with the most budget-friendly option when your syndicate is small, you should look for tools that can grow with your community. Many software tools have variable pricing tiers based on size or usage, which gives you the flexibility to expand functionality as your budget increases. On the flip side, if you plan to keep your syndicate relatively small, you may be okay with the cost efficient option. 

Marketing

• LinkedIn

• Beehiiv

• Medium

Investor Relationship Management

• MailerLite

• Affinity

• Airtable

Dealflow and Diligence

• Crunchbase

• SeedScout

• Twitter

Portfolio Management

• Visible VC

• Pulley

Deal Execution

• Traditional Fund Admin: Standish Fund Management, Vector AIS, Juniper Square

• Tech-enabled funds and SPVs: Sydecar 

Education

• AngelSchool.vc 

• Venture Deals

• OpenLP

Thank you to AngelSchool.vc for teaming up on this toolbox! AngelSchool.vc is a Fellowship program dedicated to helping Angel Investors build their own syndicates. We equip Program Fellows with a syndicate blueprint in just 8 weeks. After that, they’re invited to our Investment Committee (IC) to gain real deal experience and earn carried interest. Apply to our next cohort.

Angel School’s syndicate is backed by 1000+ LPs and deploys $MNs annually. Subscribe here for access to our exclusive dealflow.

We’re teaming up with our friends at Junto Law to publish a three-part series on legal (and non-legal) aspects of starting (and running) a venture capital fund. Junto Law supports emerging founders and funders as they form, fund, and scale their ventures. They offer fixed-fee packages and courses that promote communication, efficiency, and transparency. Junto allows you to spend your time growing your business instead of worrying about the bill.

You can read our first post on the  common structures and players, and our second on the key economic and non-economic terms for venture capital funds.

In this post, we will focus on the legal and regulatory aspects of raising and running a venture fund, specifically, the compliance obligations and regulations that impact a VC.

The Securities Act of 1933

The Securities Act of 1933 (the “Securities Act”) governs the offer and sale of securities by the fund to LPs.

Under the Securities Act, “securities” means “any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a “security”, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.”

The SEC has used “investment contracts” to include a broad range of assets, contracts, instruments, and relationships as securities. Given this definition, an offer and sale of interests in a fund should be considered an offer and sale of securities. 

In order to properly offer and sell securities under the Act, the fund (also known as the “issuer”) must do so under a valid registration statement or pursuant to an exemption from registration. 

Given the regulatory and administrative requirements, registering fund interests is not practicable, so they are offered and sold through the exemptions offered by Reg D–commonly under Rule 506(b) and Rule 506(c). 

Rule 506(b)

Rule 506(b) allows a VC to raise capital from an unlimited number of accredited investors and up to 35 non-accredited investors (more on this later).

Generally, a non-accredited investor must be a sophisticated investor who can evaluate the economic risks and merits of the proposed offering.

What is an Accredited Investor?

The SEC summarizes the definition of an “accredited investors” as:

One of the benefits of Rule 506(b) is the streamlined process of validating an LPs status as an accredited investor.

Under Rule 506(b), an issuer must reasonably believe an LP is an accredited investor, which it often satisfies by conditioning a subscription on receiving an investor suitability questionnaire with a “check the box” providing the basis of an LP’s accreditation.

Despite the ability, many issuers do not allow non-accredited investors to invest in a Rule 506(b) offering because the issuer must provide more detailed disclosures (e.g., two years of financial statements and a more detailed description of the issuer’s business and the risks involved). If an issuer makes these disclosures to non-accredited investors, it will also need to provide such information to its accredited investors. 

The biggest limitation of Rule 506(b), however, is the prohibition on general solicitations and advertisements. In practice, this means the issuer must have a substantive and pre-existing relationship with the prospective investor. There can be a fine line between a substantive and pre-existing relationship and a general solicitation. 

Generally, Rule 506(b) offerings cannot advertise the offering in the general media (e.g., tweet about the offering) or engage in cold outreach campaigns or solicitations (e.g., direct messaging a prospective LP on LinkedIn). 

Rule 506(c)

For many VCs, Rule 506(c) is the more appealing exemption because it allows the VC to advertise that it is raising a fund. This may be particularly important for VCs with large networks that want to leverage those networks to reach a broad base of LPs.

The tradeoff of this benefit is that Rule 506(c) is not available for non-accredited investors, and there are heightened duties on a VC to verify an LPs status as an accredited investor. When using Rule 506(b), most VCs will require LPs to submit a statement from an attorney, CPA, or investment professional verifying the LP's status and/or require the submission of detailed financial information (e.g., tax returns or bank statements). 

Form D and Blue Sky Filings

As part of a Reg D offering, VCs must file a Form D with the SEC within 15 days of the first sale (e.g., the initial closing) or a binding commitment to purchase securities (e.g., an accepted subscription agreement), whichever is earlier.

Form D requires the issuer to disclose certain information about the sale, such as the name of the issuer, the types and amounts of the securities offered for sale, and the number of accredited and non-accredited investors.

Securities offered under Rule 506 are considered "covered securities" under the Securities Act, which means they are exempt from state-level securities laws, also known as Blue Sky laws. However, state regulators may still require issuers to file certain state notices and pay associated fees.

Fortunately, the North American Securities Administrators Association Electronic Filing Depository (NASAA EFD) system offers electronic submission of Form D notice filings to participating state securities regulators.

Investment Company Act of 1940

The Investment Company Act of 1940 (“Investment Company Act”) regulates investment companies, such as those in the business of pooling assets from investors (e.g., mutual funds, private equity funds, hedge funds). 

Similar to the reliance on exemptions under the Securities Act (i.e., Reg D), venture capital and other private equity funds typically rely on an exemption under the Investment Company Act, namely the exemptions under Sections 3(c)(1) and 3(c)(7).

The exemption a fund uses will depend on the nature of the fund and its LPs.

Section 3(c)(1)

Section 3(c)(1) is a common exemption for venture capital funds and exempts issuers that are not making or proposing to make a public offering of their securities and are limited to a certain number of investors. 

For venture funds with less than $10M in aggregate capital contributions and uncalled capital commitments, the fund is limited to 250 “beneficial owners.”

For funds over $10M in aggregate capital contributions and uncalled capital commitments, the fund is limited to 100 “beneficial owners.” 

This 100-investor limit has been questioned by VCs for years as the limit forces funds to focus on LPs that are capable of contributing substantial capital. This limit pushes funds to have higher minimum check sizes, leading to the investment being inaccessible to investors with less available capital.

For instance, in a $50M fund, the 100 limit would impose an average check size of at least $500,000, which is well beyond the means of even those that are otherwise accredited investors.

When counting the number of beneficial owners entities are generally counted as a single investor unless the entity LP (a) was formed for the specific purpose of investing in the fund or (b) is a private investment company and owns 10% or more voting securities of the fund.

Section 3(c)(7)

Section 3(c)(7) is available for issuers whose securities are only owned by persons who are “qualified purchasers.”This allows a private fund to have an unlimited number of investors so long as it does not engage in a public offering and limits its investors to qualified purchasers.

Whether an LP is a qualified purchaser must be evaluated at the initial investment commitment. 

The term “qualified purchaser” includes:

• An individual investor or a family office with at least $5 million in investments.

• The qualified purchaser is an individual or an entity that invests at least $25 million for their own accounts or on behalf of other investors.

• Any entity where all owners are qualified purchasers.

The limits imposed by Section 3(c)(1) (as to the number of investors) and Section 3(c)(7) (as to status as a qualified purchaser) do not apply to a fund’s “knowledgeable employees” (i.e., such employees do not count toward the 100 limit).

These individuals have financial knowledge, expertise, and a close relationship with the fund, and therefore do not need the protection of the Investment Company Act.

Parallel Funds

In Part II, we discussed parallel funds but focused on the use of parallel funds in the context of non-US LPs. 

However, parallel funds are also used to increase the number of LPs eligible to invest in a fund. 

For instance, a GP may establish a Section 3(c)(1) fund and a Section 3(c)(7) fund to invest in parallel. 

Investment Adviser Act of 1940

Unlike the Securities Act and Investment Company Act, which regulate the fund, the Investment Adviser Act of 1940 (the “Adviser Act”) regulates investment advisers, such as the management company providing investment advisory service to the fund.

Similar to the Securities Act and Investment Company Act, the Adviser Act provides paths to registration (i.e., registered investment advisers or IRAs) but is more often triggered by exemption (exempt reporting advisor or ERAs).

Dodd-Frank amended the Adviser Act to exempt investment advisers to venture capital and other private funds–specifically, the Section 203(l) and Section 203(m) exemptions.  

Section 203(l)

Section 203(l) provides that an investment adviser solely to one or more “venture capital funds” is not subject to registration under the Adviser Act.

Generally, a “venture capital fund” is a private fund that:

1. Pursues a venture capital strategy;

2. Invests no more than 20% of the fund's capital contributions in non-qualifying venture capital investments (e.g., at least 80% of the portfolio is equity and convertible equity);

3. Is not significantly leveraged (e.g., does not borrow 15% of fund assets);

4. Only issues illiquid securities, except in extraordinary circumstances (e.g., not redeemable except in extraordinary circumstances);

5. Is not registered under the Investment Company Act and is not a business development company.

Section 203(m)

Fund managers can also claim an exemption under Section 203(m), which exempts an investment adviser of private funds if such adviser acts “solely as an adviser to private funds and has assets under management in the United States less than $150M.”

Form ADV

An investment adviser relying on Section 203(l) or Section 203(m) may operate as an exempt reporting adviser by filing a truncated version of Form ADV with the SEC (a less robust version of those submitted by RIAs).

Form ADV is not an application, and the SEC does not have the authority to deny an eligible adviser’s ability to take advantage of the exemption. 

An ERA must file Form ADV within 60 days of relying on an exemption and file annual amendments within 90 days of the end of each fiscal year.

Part 1A of Form ADV requires information about an ERA’s beneficial ownership, clients, private fund information, employees, disciplinary actions, and certain business practices. 

Notably, ERAs do not file Form ADV Part 2, which is for RIAs and requires a “brochure”–a plain-English narrative of its advisory business. 

Form ADV must be submitted electronically through the Investment Adviser Registration Depository (IARD). 

Like Blue Sky laws, advisers may be required to register or make certain filings under state law. 

Other Notable Regulatory Regimes

CFIUS

The Committee on Foreign Investments in the United States (“CIFIUS”) is an interagency committee that evaluates certain foreign investments into U.S. businesses, and has the authority to mitigate security risks such as by enforcing divestiture. 

Historically, the scope of CFIUS was reserved for defense contractors and controlled technologies under U.S. export laws. However, the 2018 enactment of the Foreign Investment Risk Review Modernational Act (“FIRRMA”) significantly expanded the application of CFIUS. 

CFIUS has the authority to review “covered transactions,” which are transactions (e.g., M&A deals, joint ventures, and non-controlling investments) in which a “foreign person” could be deemed to control, directly or indirectly, a U.S. business engaged in matters concerning critical technology, critical infrastructure, or sensitive personal data or otherwise have access to material non-public technical information.

An entity may be considered a foreign person even if it is a U.S. entity and has its principal place of business in the U.S. if a foreign person is deemed to have control (e.g., board representation), access to “material non-public technical information“ or substantial decision-making authority.

Generally, if a transaction is a covered transaction and not otherwise exempt, it will be subject to CFIUS review. 

CFIUS concerns may impact a VC’s ability to bring on certain GPs or grant increased information or oversight rights to LPs out of concern that such a person may render the fund a foreign person, which could impact the fund’s relationship with a startup (e.g., holding a board seat).

Tax

VC funds are typically taxed as partnerships, and subject to partnership tax laws and reporting obligations.  

However, many VC funds must also satisfy unique tax requirements to accommodate certain LPs (e.g., non-US investors). 

Moreover, most VCs structure their investments to qualify as “qualified small business stock” to receive the tax benefits associated with QSBS. 

Sufficit to say that the legal and compliance obligations related to tax are beyond the scope of this post, but we plan on addressing these considerations later. 

Summary

This concludes our three-part series on starting and operating a venture capital fund. In this last post, we discussed various legal and compliance issues applicable to VCs (and their LPs). Specifically, we discussed the most common Reg D exemptions (i.e., Rule 506(b) and Rule 506(c)), the Investment Company act and the limits on the number of LPs in a fund, and the compliance hurdles of the Investment Adviser Act. 

About the Author

Hey, if you like this article, you should follow Shayn on Twitter or check out what Junto Law is building!

Disclaimer from Shayn: While I am a lawyer who enjoys operating outside the traditional lawyer and law firm “box,” I am not your lawyer.  Nothing in this post should be construed as legal advice, nor does it create an attorney-client relationship.  The material published above is intended for informational, educational, and entertainment purposes only.  Please seek the advice of counsel, and do not apply any of the generalized material above to your facts or circumstances without speaking to an attorney.

If you are raising a fund in the U.S. with foreign investors, you want to be on the lookout for frequently used offshore tax evasion schemes. 

“Round-tripping” is a form of offshore tax evasion by which money earned in the U.S. moves outside the country - usually to visit a tax haven nation, such as the British Virgin Islands or the Cayman Islands. This money is then invested back to the U.S. As the name suggests, the funds make a round trip! The amount invested annually in the U.S. through “round-tripping” is estimated to be between $34 billion and $109 billion.

Let’s explore some of the key concepts of “round-tripping” equity investment and how it affects you as a fund manager.

What is the purpose of “round-tripping” U.S. equity investment?

Investors use “round-tripping” to hide funds and evade ordinary and capital gain tax rates applicable to their securities investments. In order to do so, the investment is disguised as a foreign investment. This allows returns to be taxed as a foreign investment, which has a more favorable tax treatment than a domestic investment. Further, sending funds to a tax haven nation allows for the lowest tax liability.

What is the difference between tax evasion and tax avoidance?

“Round-tripping” is difficult to detect. Because of this, governments have international tax exchange agreements to prevent tax evasion, and investments coming from tax haven nations are under more scrutiny than others.

However, there may be legitimate reasons to channel investments through vehicles located in a tax haven. For example, it could occur for regulatory or tax avoidance when investing along a foreign trading partner.

Investors must distinguish between tax evasion and tax avoidance. While both may be deliberate, only tax evasion is criminal. The main characteristic of tax evasion is the illegal nature of the scheme chosen to hide funds from the IRS. Tax avoidance is done through reading the law in the most favorable way to reduce tax liabilities (e.g. claiming tax deductions or credits).

When in doubt, it is better to consult with a tax advisor or avoid getting into tax haven territories.

What are guidelines for fund managers?

So, as a fund manager, what can you do to ensure your fund stays in compliance? 

The IRS can come to you to request information about investors suspected of engaging in criminal activities, so you want to be prepared. Failure to comply can lead to civil and criminal liabilities. That said, “round-tripping” is difficult to detect, so the best you can do is to hold yourself to the highest professional standards of fund management by following guidelines:

• Run your investors KYC

• Maintain complete and accurate records of all investments and investors

• Ensure that your investment agreements include standard language about the origin of the funds

• Report suspicious offshore tax evasion activities to the IRS

• Consult with an international tax advisor or avoid getting into tax haven territories if you don’t fully understand the legal complexities and liabilities at stakes

Working with a provider like Sydecar can help you stay on top of compliance matters, as the platform will handle KYC, keep investment records accurate, and provide standard investment agreements that include language about the origin of funds. This will significantly reduce the amount of work you have to spend on compliance and free you to focus on running your fund.

Schedule K-1s, shortened to “K-1s,” are used to inform investors about their share of income and expenses in an investment. Investors use this information when filing their tax returns. Specifically, they take into account the gains, losses, interest, dividends, and other distributions (known as “taxable events”) from an investment vehicle (including an SPV or fund). An investment vehicle must issue K-1s to investors every year in which a taxable event occurs. These forms are due to investors by March 15, giving investors time to include them in their own tax returns before their April 15th deadline.

Why do K-1s have such a bad reputation?

Typically, the preparation of a single entity’s K-1s takes days of manual work by deal sponsors, fund administrators, and accountants who have to review the entity's financial statements, determine the allocation of income, deductions, and credits, fill out the K-1 form for each beneficiary, and distribute the forms. At tax season, fund administrators who support hundreds or thousands of investment vehicles are left scrambling to prepare tax returns for up to tens of thousands of investors. This process quickly becomes arduous, costly, and often results in missed deadlines given the manual labor and variability involved. Venture investors have become accustomed to filing an extension on their personal taxes due to delayed K-1 distributions from their investments.   

Can we automate K-1s? 

Sydecar proudly delivered thousands of completed K-1 forms to investors starting in the first week of February. As of February 28th, we delivered 100% of K-1s to investors who participated in an investment into a private company.

The foundation of Sydecar’s product is a proprietary ledger system that records all accounting events within an SPV or fund. There are a number of different events that could occur in an investment vehicle: an investor contributes capital; capital is invested into a company; capital is paid back to investors; an investor sells their interest in a fund to someone else. Because we standardized our SPV and Fund structures, Sydecar is able to automatically record everything that happens within them. In contrast, traditional fund administrators support a wide variety of SPVs and funds with non-standard structures, which requires tax and financial reporting to be done manually. Many of these companies elect to use off-the-shelf software and hire accountants to manually enter data.

Rather than hiring accountants to work through each vehicle and the individual investor’s allocations manually, Sydecar’s product connects ledger data directly to our tax software and inputs the values for each investor instantaneously. With our K-1s generated and distributed by the product, our process was overseeing data integrity and reviewing any special circumstances that may arise. This automated process allowed the team to avoid the hours of manual inputs, review, and corrections to human errors which can lead to significant delays.

Through standardization and our ledger, Sydecar has been able to deliver K-1s not just on time, but early, easing the stress for deal leads, accountants, and investors alike this tax season. We are excited to continue building the rails for an easier tax and compliance process for private market investors. 

We’re teaming up with our friends at Junto Law to publish a three-part series on legal (and non-legal) aspects of starting (and running) a venture capital fund. Junto Law supports emerging founders and funders as they form, fund, and scale their ventures. They offer fixed-fee packages and courses that promote communication, efficiency, and transparency. Junto allows you to spend your time growing your business instead of worrying about the bill.

In Part I, we discussed the structures, players (GP, LPs, management company), and (some) key terms, including capital commitments, capital calls, and internal rate of return.

In this post, we will focus on all things terms. Particularly two buckets: (1) economic or financial terms and (2) other terms, such as those related to governance, structural, and regulatory terms. 

Economic Terms

Fund Expenses

Starting and running a venture fund can be expensive. Luckily for the GP, many fund expenses are paid out of the capital contributions of the LPs. Fund expenses are the costs incurred for the day-to-day operation of the fund, including organizational expenses (e.g., the costs and expenses in forming the fund) and operational or administrative expenses (e.g., sourcing investments, legal fees), and accounting fees (e.g., tax returns, audits, financial statements). Fund expenses do not ordinarily include expenses related solely to the GP, such as office space or salaries. 

Fund expenses are paid directly out of the LPs’ capital contributions, meaning that a GP does not invest the full amount of capital that they raise. These costs and expenses are separate from the management fees.

Management Fees

Most VCs charge an annual management fee that is calculated as a percentage of the capital commitments of an LP over the life of the fund. Management fees are payable by the LPs to the Management Company out of the capital contributions. The standard management fee in VC is 2% annually. Regardless of how the VC chooses to call capital, the Management Company is entitled to take an annual management fee on the full amount of the capital commitments.

Management fees are ordinarily paid to the Management Company as compensation for its services. The Management Company can use this pool of money to operate the fund and to cover the costs and expenses associated with its services (e.g., compensating employees, travel expenses, and other day-to-day expenses).

Similar to how fund expenses reduce the overall amount of dry powder, or cash available to be deployed into investments, it may not be advantageous for the VC to take the entire management fee. For instance, for a $50M fund with a 10-year life, the aggregate management fees would be $10M–which may drastically cut the amount of dry powder, and thus the number of investments possible.

To address this, the limited partnership agreement (“LPA”) often provides that the management fees may be recycled (e.g., used to make investments)–thereby increasing the capital deployed and increasing the odds of generating a profit. 

Importantly, management fees must be returned to LPs before the GP receives any carry. In a way, the payment of management fees is like an interest-free loan to the GP, which further incentivizes the GP to recycle some of the management fees.

Further, because most of the VC’s activity occurs during the investment period, the management fee may be reduced in later years (e.g., drop by .5% for periods after the investment period or for all times after the investment period, be measured as 2% of the unreturned capital to the LPs).

Carried Interest and Waterfall

Carry or carried interest refers to the portion of the fund's profits that the GP is entitled to keep out of the distributions paid through the waterfall.

The waterfall refers to the tiers of payments to be made through the Fund. Typically, LP capital is returned in its entirety, then profits are returned to LPs (typically 80%), and then carry to the GP (typically 20%). 

When the GP can distribute these profits to itself, however, it is subject to significant negotiations with the LPs and outlined in the LPA. 

To better illustrate the GP’s entitlement to carry and distributions under the waterfall, let's look at an example:

Example: Junto Ventures Fund I, LP is a $50M fund. The Fund invests $5M in a portfolio company (PortCo 1) which exists with a $30M distribution after three years.

In our example, the fund has received $25M in profits for its investment in PortCo 1, Inc.. If the GP can distribute, the LPs will receive $25M ($5M as a return on capital invested and $20M as 80% of the profit) and the GP would receive $5M (being, 20% of the profit).

A fund’s GP is often required to contribute a portion (e.g., 1%) of the total capital commitments (often referred to as the GP commit). For the purposes of returning capital in the first tier of the waterfall, the GP commit would be treated the same as the capital contributions of the LPs – so,  the GP would be entitled to repayment of the GP commit prior to a distribution of profits to LPs).

The key, however, is whether the GP can distribute the $5M to itself, which largely depends on the status of its other investments. 

Let’s look at a few scenarios:

If the investment in PortCo 1, was one of a few exits and the other investments yielded returns of, say, $100M, then it is clear that the GP is entitled to distribute the carry.

Conversely, if all the other investments were marked down to zero, the GP could not take any carry (i.e., the total amount returned was only $30M of a $50M Fund). 

Those are relatively easy, but unlikely situations. 

Instead, what if none of the other investments had matured at the time of the exit of PortCo 1–could the GP take carry? Typically, the LPA dictates that the GP can take carry on the exit from PortCo 1, so long as the portfolio's value on paper would still render the fund “in the money” for the purposes of the GP’s receipt of carry.

There are a few ways that VCs value their portfolio for the purpose of carry calculations. The most common approaches are the (i) Last Round Valuation and (ii) Comparable Company Model. 

The Last Round Valuation model would look at the last round of an investment and mark the value of the investment based on the valuation in that round multiplied by the Fund’s ownership (e.g., if the last round was at a valuation of $100M and the Fund owns 10%, then the value of the investment is $10M (i.e., $100M x 10%). 

Conversely, the Comparable Company Model looks at the key valuation metrics for similar publicly traded companies (e.g., ARR for a SaaS company) to determine a metric to apply to the portfolio company, subject to a discount for lack of marketability (e.g., the portfolio company securities cannot be readily be sold)

If it turns out that those paper marks were incorrect, and the final results were such that the GP would not have been entitled to take $5M as carry, the GP’s would need to give that money back. This is called clawback. 

The GP could also be subject to clawback if the distribution waterfall provided for a hurdle or preferred return, and the final results of the investments did not clear the applicable threshold.

Hurdle Rate: Unless the Fund generates a return over a certain threshold (e.g., 6-8%) the GP is not entitled to take any carry.

Preferred Return: Similar to a hurdle in that it requires the GP to pass a certain annual threshold (6-8%), but also provides that the LPs receive all cash until that preferred return is exceeded, and the GP would only receive any carry over the preferred return.

Similar to the recycling of management fees, GPs are often entitled to re-invest the carry received on early investments. For instance, in our example, the GP could re-invest the $5M it received from the exit of PortCo 1, Inc. in hopes of generating even greater returns. 

Other Terms

Fund Thesis and Strategy

GPs have considerable freedom in managing their fund and selecting investments. However, the LPA does impose certain restrictions on their ability to make investments outside of a specified scope, typically outlined in the "purpose" clause.

Investment limitations can differ in scope. For example, the LPA may broadly state that the fund will invest in "early-stage, privately-held companies," while others may be more specific, mentioning the stage, criteria, or industry (e.g., "venture capital investments in early-stage, privately-held companies focused on the healthcare technology").

The GP pitches LPs and raises the fund by describing its strategy and thesis.  Central to this thesis is the industry (e.g., B2B SaaS), stage (e.g., seed), check sizes ($500k-$1M), and portfolio construction (e.g., 65% initial investment/35% follow-on reserves) strategies.  LPs must evaluate a GP's thesis and strategy to ensure it aligns with their investment goals, as they are signing up for a blind pool of investments.

Side Letters

Side letters are agreements that grant additional rights to specific LPs. These agreements are similar to those received by the VC from a portfolio company. Side letters are usually only given to a select group of investors, such as the lead VC in a startup round or a prospective LP providing a significant investment. Side letters may also be granted to attract certain investors or to manage regulatory constraints on an LP's investment, such as those imposed by the Employee Retirement Income Security Act (ERISA). 

The content of a side letter can vary, but may include:

• Rights to more detailed information about each investment (e.g., its status and size)

• Reduced carry or fees (e.g., a waiver, reduction, or cap on management fees)

• Co-investment rights (e.g., the option for LPs to invest alongside the Fund)

Alternative Investment Vehicles

Certain LPs may be subject to legal, tax, or regulatory issues that make investing in the fund untenable–unless certain special purpose vehicles (“SPVs”) are used. The most common SPVs are parallel funds, feeder funds, alternative investment vehicles, and co-investment vehicles.

Parallel Vehicles

Parallel vehicles are typically established for LPs with a distinct tax status requirement that differs from other LPs.  For example, if a fund has non-US LPs, it may be beneficial to create a parallel fund in an offshore jurisdiction (“Parallel Fund”), such as the Cayman Islands, that is more favorable to these LPs.

Aside from specific legal, tax, and regulatory differences, the Parallel Fund will have the same investment strategy and terms as the main fund.  The Parallel Fund will also invest in the same assets and at the same time as the main fund. The allocation into an investment will be pro rata between the two funds based on their respective portion of the total capital commitments.

Feeder Funds

Another way to accommodate non-US LPS with unique legal, tax, or regulatory concerns is by using feeder funds.  A feeder fund is an investment vehicle organized as a corporate taxpayer. Instead of investing directly into the fund, the LPs invest in the feeder und, which then invests into the fund.  The feeder fund acts as a blocker in the relationship between the LP and the fund. Because the feeder fund is a corporate taxpayer, it will pay taxes on allocations and distributions, relieving the non-US LPs from filing and paying federal taxes in the US.

Alternative Investment Vehicles

Alternative investment vehicles are typically structured to address the legal, tax, and regulatory issues that may arise when certain LPs invest in a particular opportunity.  While a Parallel Fund invests alongside the main fund in each investment, alternative investment vehicles are limited to a single, specific investment.  In this way, alternative investment vehicles can provide a more focused approach for certain LPs, allowing them to tailor the investment to their specific needs and objectives.

Co-Investment Vehicles

Co-Investment vehicles are SPVs created to invest alongside the fund on specific investments.  For example, an SPV may be used when the GP receives an allocation larger than the fund's limits.  In this situation, the VC may establish an SPV to invest the additional amount with one or more LPs or non-LP investors (i.e., investors that are not LPs in the Fund).

Summary

In this post, we provided an in-depth overview of the legal and financial components of starting and running a venture capital fund.  We also shed light on the expenses and management fees associated with the process and explained the concept of carried interest and waterfall. The article further highlighted how the GP's entitlement to carry and distributions are determined through negotiations with the LP and outlined in the LPA.

From Shark Tank to Instagram to the ankles of hikers at Los Angeles’ Runyon Canyon, Bala has built an iconic brand that reimagines fitness products in a fashion-forward way. Co-founder and CEO, Natalie Holloway, has led the company from a one-product brand pitching on Shark Tank to a globally recognized brand that just fundraised on Sydecar. We chatted with Natalie about her experience developing and growing Bala, as well as her tips for fellow consumer founders!

Sydecar (SC): Bala’s Instagram marketing has brought a fresh, unique look to workout equipment. How did you gain conviction that this brand direction would be effective? 

Natalie Holloway (NH): Early on, we wanted Bala to stand out in the fitness industry and we felt that no other brand was leaning hard into the fashionable side of fitness. We felt that Bala could blend your fashion self with your fitness self and so we made our photoshoots and product shots highly stylized. We have stayed true to this vision since the beginning, so fashion is part of our ethos. 

SC: What were key decisions that you think shaped Bala’s success so far? 

NH: We are always looking for innovative ways to sell our products to customers, and we focus  on the product first and foremost. In the early days, we did not overthink things. We just kept executing and did not look back. We created momentum. 

SC: As a consumer goods founder, what were the challenges you encountered when fundraising? Did you discover any best practices? 

NH: Fundraising is tough. You have to tell a really compelling story as a brand about why you must exist in this world and why customers need you to exist. You have to demonstrate a great product roadmap and financial model, and tell a compelling story on how you will achieve your goals. Let the no's roll off your back and keep moving. Approach people shamelessly because you likely will have to approach hundreds of people before you get your first yes! 

SC: How has fundraising for this recent round compared to your experience on Shark Tank?

NH: When we went on Shark Tank, we were a completely different company. We were a one product brand. Today, we have built a reputable brand and have years of revenue to prove our position in the market. The biggest change is in my personal confidence. I’ve pitched myself and my business hundreds of times, and the stage fright has gone away.

SC: How are you using your new funding? What product launches or campaigns are you most excited to execute? 

NH: We are launching a slew of cool products this year. We are very excited to show our customers what we have been working on to enhance their fitness routines. We will also do a bigger push on our workout platform Balacize. I’m really excited to get more people working out with us online. 

SC: Any advice for founders building their own consumer brands?

NH: First and foremost, focus on getting the product right, and stay true to your vision. If you have a great product, the customers will come. Value action over inaction, and make sure you are always experimenting. Don't let the no's get you down. There will be a million no's before you get to the yes's that really matter.

We’re teaming up with our friends at Junto Law to publish a three-part series on legal (and non-legal) aspects of starting (and running) a venture capital fund. Junto Law supports emerging founders and funders as they form, fund, and scale their ventures. They offer fixed-fee packages and courses that promote communication, efficiency, and transparency. Junto allows you to spend your time growing your business instead of worrying about the bill.

Throughout the series, we will discuss: (1) the legal structures and players, (2) the common and important terms, and (3) the regulatory hurdles.

What Are VC Funds?

Venture Capital funds, or VC funds, are used to pool capital from investors and deploy it into companies identified by the venture capitalist, or VC.

A venture capital fund is a type of private fund that: (i) holds itself out to investors as pursuing a venture capital strategy, (ii) holds at least 80% of its assets in "qualifying investments" (e.g., equity or cash), (iii) does not hold debt of more than 15% of its aggregate capital contributions and commitments, (iv) the interests of the Fund are not readily redeemable, except in extraordinary circumstances, and (v) is not registered under the Investment Company Act of 1940

An investor's investment into the VC fund ("Fund") is known as a capital commitment and is made in exchange for an interest in the Fund.

Investors do not typically pay capital commitments at the outset or all at once. Instead, capital calls are made over the Fund's investment period, which is the period in which the VC is authorized to deploy capital (e.g., 3-5 years).

This allows for investors to avoid having their money lay dormant while the VC identifies investment opportunities.

Capital calls are also helpful to the VC, who does not want to start the clock on its internal rate of return by calling capital before it is ready to be deployed.

Internal Rate of Return ("IRR") is a more accurate metric for evaluatingFund performance than simple multiple calculations, as IRR analysis accounts for the time value of money by (i) starting the clock when the capital is called and (ii) stopping the clock when capital is distributed to the investors.

Structures and Players

As we will discuss throughout this series, there are few technical barriers to becoming a VC.

While there are plenty of regulatory hurdles to becoming a VC, there are no required licenses, specific education, or testing requirements. A VC isn't even required to be an accredited investor independently. In fact, the VC may qualify as an accredited investor simply by raising a Fund above $5M or being a knowledgeable employee of the Fund (more on this in Part III).

So far, we've used the term VC generically, but many different people and entities contribute within VC.”

General Partners ("GP")

The founders of the VC firm are often considered the "VC," but the more precise title for the founders of a VC firm is general partner or GP. The GPs usually wrap themselves in a legal entity–most commonly, an LLC (e.g., Junto GP I, LLC), to limit liability and operate through a corporate existence.The GP designation also denotes its role in the traditional fund structure–as the general partner of a limited partnership.

In the traditional fund model, the Fund is organized as a Delaware limited partnership, which is structured to include a general partner (e.g., GP entity) and one or more limited partners (i.e., the investors).

In a Fund that is formed as a limited partnership, the GP has the power and authority to manage and act on behalf of the Fund, making investment decisions, signing contracts (e.g., the Investment Management Agreement with the Management Company), filing tax and regulatory filings on behalf of the fund, and deploying the Fund property.

The Fund investors grant broad discretion and authority to the GP in managing the Fund, however, the Fund's governing documents (in a limited partnership, the Limited Partnership Agreement) do include important restrictions on GP authority without the investors' consent. For instance, the GP may be limited to making investments consistent with a particular Fund thesis, which may be based on stage (e.g., seed, growth, late-stage), industry sector (e.g., enterprise SaaS, biotechnology, blockchain, clean-tech), or philosophy (e.g., geographic-based).

Limited Partners ("LPs")

The most important players in a Fund are the limited partners or LPs, which are the Fund's investors.

Just as the existence of a startup may depend (at least to some extent) on the involvement of a VC, the VC is as much reliant on its LPs.

Typically, LPs are wealthy individuals, family offices, endowments, funds of funds, pensions, etc.

Many LPs look at VC investments as a piece of their overall investment portfolio (e.g., along with public stocks or bonds). They expect that the VC investment will generate outsized returns with the tradeoff of higher risk. Along with these expectations, LPs will have certain expectations related to the GP. For instance, the LPs will expect that the GP has some “skin in the game” by requiring the GP to contribute at least 1% of the Fund's capital contributions.This is particularly true for first-time fund managers who may not be able to point to a significant track record to garner LP trust.

Just because someone is a first-time fund manager does not necessarily mean they don't have a significant track record. For instance, many fund managers start by making angel investments, syndicating smaller deals through special purpose vehicles ("SPVs") within a small network, or working as an associate or venture partner at an established firm.

Despite contributing almost all of the capital (e.g., 97-99%), LPs do not receive (and do not expect) substantial governance rights. Instead, the predominant rights of the LPs are economic in nature (e.g., the top tier of the distribution waterfall), which we will discuss in more detail in Part II.

Put simply, LPs rely on the GP and its team to handle the day-to-day operations of the Fund.

Management Company

In addition to the GPs, the Fund (directly and indirectly) relies on the individuals employed or hired by the GP to carry out and manage the Fund and VC firm.

For instance, VC firms often employ  analysts, associates, and principals that identify and evaluate investments. A VC firm may also employ (or outsource) back-office support teams, including accountants, lawyers, and other administrative personnel.Some of these individuals may be granted a portion of the carried interest or carry paid to the GP (e.g., 20% of the profits generated from the Fund after returning capital to LPs (plus any preferred return), more on this in Part II). This right is usually subject to vesting (more on vesting in other contexts here).

Instead of housing these individuals within the GP entity, the VC often forms a management company (e.g., Junto Manager, LLC) to compensate and employ these individuals.The GP and the Fund often enter into an "Investment Management Agreement" with the Management Company. In this agreement, the Management Company is delegated to sourcing investments and is entitled to the Fund's management fees (more on this in Part II) and reimbursement of the costs and expenses of each Fund.A traditional (i.e., closed-end) structure is shown below:

The above image represents a traditional fund structure. In recent years, a variety of other structures have emerged with their own nuances, such as rolling funds, evergreen funds, syndicates, and DAO Investment Clubs.

Conclusion

A VC Fund is used to pool capital from LPs, which is then called over the investment period by the GP to be deployed into startups.

Although the term VC is often used generically, there are various players under that umbrella, including the GP, the Management Company, and the other stakeholders of the GP or Management Company (e.g., principals, associates, advisors, back office)–each with a unique role.  

In Part II, we will dig deeper into some key terms related to starting and running a venture capital fund.

If you like this article, you can follow Shayn Fernandez on Twitter (I tweet about venture, web3, and sports (with plenty of dad jokes)), check out Junto Law, or set a time to chat.

Disclaimer: While I am a lawyer who enjoys operating outside the traditional lawyer and law firm “box,” I am not your lawyer.  Nothing in this post should be construed as legal advice, nor does it create an attorney-client relationship.  The material published above is intended for informational, educational, and entertainment purposes only.  Please seek the advice of counsel, and do not apply any of the generalized material above to your facts or circumstances without speaking to an attorney.

Investing as a Limited Partner in a Venture Capital fund has a high barrier to entry. Minimum check sizes will often be over $100,000 and only investing in one fund does not allow diversification in strategy. Historically, this has prevented smaller check writers from participating as LPs. This particularly affects investors from marginalized backgrounds as they are less likely to be able to invest the minimum check size into several funds. 

3-VC is looking to change this. Gale Wilkinson of Vitalize Venture Capital, Caroline Lewis of Rogue Women’s Fund, and Mac Conwell of RareBreed Ventures have teamed up to provide a new way for LPs to invest in funds. Through 3-VC, accredited investors can invest in all three funds with only a $10,000 minimum commitment. This structure allows smaller investors to participate in funds, even as the funds grow. In allowing a diversified, low commitment option to invest in VC funds, they hope to increase access for underrepresented and female investors.

Sydecar is thrilled to be supporting this initiative that aligns with our mission of increasing access to and transparency in the private markets. We chatted with the team on their backgrounds as investors, how to increase access, and their vision for 3-VC. 

Was there a specific experience or moment that made you realize the importance of increasing access to venture capital, leading to your interest in forming 3-VC? 

Caroline Lewis (CL): When I first was getting started as an angel investor, I went to a local investment group. I will always remember walking in and seeing a room that was 98% Caucasian, cis men over the age of 45. Many were supportive, but I remember feeling like I didn’t belong. Subsequently, when I spoke to a few funds, many of the investors said I shouldn’t even consider investing unless I had at least $250K to invest. 

I was a leader at a large corporation, was making good money, and had saved for angel investing purposes, but I still felt locked out of the industry. In my experience working with underrepresented investors, I found there is an initial risk aversion, often due to social and environmental conditioning. In talking to Mac and Gale, we realized  that many of the investors in our funds wrote small checks or were first time investors. They were key to us getting started, so we are all committed to ensuring they can grow with us as our funds get bigger. 

Mac Conwell (MC): In my experience as founder, working at a fund, and launching my fund, my ethos has always been about access. In my first fund, I had a diverse group of over 200 LPs who were getting a chance to access the venture asset class. As I was thinking about raising a much larger second fund, the smaller check writers investing less than $100,000 weren’t going to be able to access my fund. That was going to be the vast majority of my first fund’s LPs. It felt wrong that they would be excluded. 

Gale Wilkinson (GW): I have been in the VC industry for 10 years and I haven't seen much movement in terms of the percentage of dollars going to underrepresented founders. I believe the way to fix this is to dramatically increase the number of dollars being deployed by underrepresented general partners and limited partners. 3-VC provides an accessible on-ramp for more people from underrepresented groups to invest. As these investors dip their toe in the VC waters, they take the first step to deploying more capital in this asset class down the road. 

What was a key learning you had in starting a diversity-aware fund that emerging investors should know? 

CL: The Rogue Women’s Fund is specifically focused on investing in founders who identify as women and non-binary. This segment represents the majority of the US population, but yet still remains a minority when it comes to investing. Report after report shows that this population continues to outperform – in a bull or bear market – by a significant amount, yet funding is still critically low. If you’re an accredited investor, working a high paying job, and you care about this issue, then you need to be part of the solution. There isn’t going to be “someone” else that steps-up and starts funding more women. It’s you. If you care about women’s social and economic empowerment and you care about making more money, then you should be investing.

MC: Throughout my career, I was taught that venture was done in a specific way. That funds and fees are to be set up in a specific way. There was this playbook. In raising my first fund, I learned that you don’t have to follow this playbook. Venture as an asset class is not fully baked. There’s so much room to do things differently and to be innovative. Just because nobody’s seen it before or nobody’s done it before doesn’t mean it can’t be done or shouldn’t be done.

Do you see this new structure changing how you approach investing and portfolio support?  

CL: The biggest advantage of this new structure and opportunity to how we invest and support founders is furthering the investor support that Rogue Women is able to offer through an even broader and more robust LP base of skilled individuals that want to help the portfolio companies.

Have you encountered unexpected challenges in coordinating between yourselves or with LPs? 

CL: The only challenge was finding a trusted partner for the facilitation of the legal, accounting, and platform for this vehicle that shares our values and commitment to excellence long term. We’re grateful that Sydecar is that partner. The benefit of working with Mac and Gale is that we have a foundation of trust that we built through the Kauffman Fellowship program.

MC: It's worth it. This is not without precedent. We've seen funds have successful strategies building large LP groups of qualified purchasers, as the restriction is up to 2000. We knew it was viable. The more positive aspect of coordination has been getting to educate people about this asset class, how to work this asset class for their personal benefit and to share with others to help grow the asset class. 

What do you hope will be the long-term impact of 3-VC? 

GW: I hope more accredited investors are able to invest in VC funds, which have historically required high minimums that prevent many individuals from participating. A VC investment is a great way for new investors to begin investing in private markets, as each fund will have a diversified portfolio which by definition helps to mitigate investor risk.

CL: I hope that this opportunity inspires the outsiders, underdogs, and those critical to our society to leverage the power and wealth they’ve worked so hard to gain to change the world through investing in this asset class. 

MC: I hope to help grow wealth for significantly more people from more diverse backgrounds. The ability to put $10,000 a year for four years into a vehicle allows somebody the opportunity to learn and grow, becoming more proficient and able to invest in more vehicles. The long-term hope is that we will see more diverse GPs getting more capital because the pool of capital is more diverse.

Some of the best startup operators are generalists who wear multiple hats. They have to play multiple roles, dive into new areas of expertise, context switch, and push themselves beyond comfort. They become great at working across a wide range of skills and find this best unlocks their potential.

However, as companies mature, responsibilities are divided and roles are specialized. The startup operator is faced with a paradox of expertise: the more closely a person is immersed in an industry, role, or company, the harder it can be to see new patterns, prospects, and possibilities. To keep reaching new knowledge, startup operators can turn to investing. By investing into early stage companies, they regain exposure to a wide variety of professional experiences, company dynamics, and strategies. These experiences in turn inform the challenges they face. Their portfolio creates a wealth of knowledge that they can tap into for their work as a startup operator or future investments. 

This power of diversified experiences is clear for Carey Ransom, who has worked across various roles in startups, is an investor, and is the Founder and Managing Partner of Operate, a venture studio that invests capital and a world-class team into product-centric entrepreneurs building data-centric software companies. We chatted with Carey on his experiences as a startup operator and investor, and how the studio model allows him to synergize his experiences.

Sydecar (SC): How did you first get into startups?

Carey Ransom (CR): I got into startups almost 25 years ago. My first experience was on a startup team within an existing software company where I got to observe how quickly things could move.

I really liked that, so then I went to a smaller company, and then an even smaller company where I was effectively a co-founder. I realized that very early stage was my sweet spot.

There's a difference between someone who has to be a founder and someone who's generally entrepreneurial. There are people who have to be the founder. It has to be their idea. I tend to be more entrepreneurial. I like to be around an interesting idea that I can contribute to in some way, but I don’t need to be in charge.

After doing this for eight or nine years, I realized I’d been almost everyone. I've been CEO, I've been the SDR, I've been the CFO, I've been the product manager. So then I thought, “How do I do work with a whole bunch of founders in parallel?” And that's how I ended up starting Operate. 

SC: Why did you choose a studio model vs a traditional venture fund?

CR: We called it a venture studio because we wanted to have flexibility for whatever we wanted to do, whether we start a company or lead a seed round.

This model has allowed me to go super wide, which is best for my personality and skill set. I’ve seen more companies than most people I’ve met, and I’ve seen that there are always multiple different answers to any question that comes up at a startup.

SC: How does Operate use SPVs?

CR: We initially used a fund structure so that we could just do a diversified pool. But then we started to see that there were cases where either the company needed more money than we were willing to invest out of the fund or we wanted to own more of these companies through a follow-on investment. SPVs were the perfect tool to accomplish what we wanted to do.

Today, we have 25 portfolio companies and our relationship with each one is totally unique. We deploy capital and provide services in a way that makes sense for us and our companies. That’s where SPVs came into play, because they allow us to have this level of flexibility with how we deploy capital.

We'll continue to use SPVs because there is some amount of balance that we need in a pooled fund. For example, if we have a $10 million fund, we don't want one investment in there to be half of that. But, we will have companies where we need SPVs as a way to increase our amount invested or ownership.

SC: How do you evaluate investment opportunities?

CR: The market says put a pitch deck together, pretend like you have it all figured out, and then go convince the market to give you money… so that you can go figure it out.

I take the total opposite approach. You pitch me as a founder, and I say “Look, I know you don't have it figured out, so let's not play this game. Let's have a real conversation about who you are, what you've learned, what you're trying to learn.”

We feel like we're pretty self actualized. We know where we can help or can’t help, so we want to have an honest conversation with founders. With this approach, you're putting yourself in the position to have the best outcome and to provide the most value to these companies. 

SC: How do you see the industry evolving? Do you envision more studios popping up?

CR: I don’t necessarily see that. You've got to have a real stomach for a venture studio. People don't know how to invest in these yet. People want structure and predictability, and studios don’t have that, so it's almost counterculture to venture. 

I've told a lot of people the best way to do this is to fund it yourself. Or you can have a single LP who is captivated by your vision. The most interesting studios that I've met have a single LP funder, or they're funding it themselves. 

Given the choice, I would fund it myself because I know how much value we've stacked and created in the last two and a half years. The funny reality is that we're going to get to a place where we can fund it all ourselves; that'll be the point at which everybody else wants to pile in even more.

This week, we hosted a discussion with Eric Bahn of Hustle Fund and Chris Harvey of Harvey Esquire on the future of private market infrastructure and how standardization is critical to building a platform with staying power. Our conversation included predictions on private markets, unrealized expectations of the industry, and standardization’s power to lower barriers to entry. Here are the highlights!

If you would like to listen to the full discussion, you can find the event recording here. 

Where do you hope to create the biggest impact in VC over the next few years?

Nik Talreja (NT):  I hope to impact how individuals participate in the private markets so it is more like the public markets, where there are fewer gatekeepers. Through Sydecar and standardization, the private markets can reflect the public markets in transparency and liquidity.

Chris Harvey (CH): Over the past several years, there have been a lot of how-to guides for startups from venture capitalists. But, raising a fund is still opaque. My biggest impact will be creating educational pieces on starting a fund

Eric Bahn (EB): My first goal is to inspire more kindness in this industry. There’s this trope of the brilliant jerk. This is completely wrong. You can be a nice person and still be enormously successful. 

My second is bringing more voices into this community. Industry leaders tend to support those that look like them. This excludes a massive population of founders who may not look like the traditional archetype, but are building enormous businesses.

Is there a trend that you predicted to play out in VC that hasn't, or hasn't yet, played out? 

NT: Given this past year of economic compression, I worried we would see a decreased number of syndicates and emerging managers. However, these stakeholders did not stop playing the game. In fact, we still see a large cohort of emerging manners indicating they remain an active part of the ecosystem. 

CH: I was hoping that opening and running a fund would be as simple as touching a button. That has not fully played out yet.

EB: Supporting underrepresented founders was convenient during the good time. In the downturn, it's less convenient. From what I can tell on LP sentiment, they are retrenching towards what feels safe, for example the privileged white male from Stanford types. 

What does standardizing private markets mean to you?

NT: Public markets are easy to engage with. Trading happens in seconds. There is no reason private markets cannot be similar. Standardizing documents and information will make it easier to execute on deals, allowing private markets to be more liquid. 

CH: You can’t have standardization without transparency. As a lawyer, the forms, market data, and processes have historically been gated. There is no single standard, so executing on investments is currently done piecemeal with intermediaries. Releasing standards into the public will create transparency and a more efficient ecosystem. 

EB: There are no standard ways for how valuations are measured in the seed ecosystem. Standardization can bring consistency to understanding startup values and fund performance. This translates to a lower cost of entry, which will be enormously helpful for the industry. 

What are the push backs from investors against modernizing private markets?

NT: There are simple items from investors who insist on signing in blue ink that we can navigate. 

On the more complicated side, institutional investors may insist on having documents reviewed by their counsel, leading to markups and changes that prevent standardization. This is an opportunity to learn what their needs are. In engaging in conversation, we see the ultimate goal is a seamless transaction, and gatekeepers will insist on changes that do not actually hold value. When we get to this understanding, we see that even large deals can be standardized. 

There will never be a point where 100% of the market is using the standards, but eventually 80% will find that they can. This will create the transparency, liquidity, and lower cost that we are building toward. 

Have you ever wondered why the majority of venture capital SPVs and funds use the Delaware LLC structure? While it may seem like an arbitrary choice, careful consideration has gone into the use of this structure in VC.

Using a Delaware LLC to structure your investments does not require you to be located in Delaware or to be investing within Delaware. While conventional businesses generally have to register and pay taxes in whichever states they “do business,” investing entities have more flexibility. Investing entities are largely exempt from the  idea of “doing business,” which allows them to choose their state of formation.

To understand why most investors and service providers choose the Delaware LLC, we’ll dive into the cost, formation, tax, and legislative implications of the structure below.  

Cost

On the surface, Delaware is not the cheapest state to register an LLC. Delaware charges $300 annually to create an LLC, while Arizona only charges $50.   However, the Delaware structure may actually be cheaper in the long run for those who are establishing a high volume of investment vehicles. This is because Delaware allows for the creation of series LLCs at no additional cost. While other states require a separate operating agreement be filed for each series LLC, Delaware simply requires the Master LLC operating agreement to mention the formation of series LLCs. This removes the need for additional filings. Delaware remains one of very few states that makes it easy to form series LLCs. Delaware series LLCs are also bankruptcy remote, can enter into contracts, and hold title to assets. All these characteristics make the Delaware series LLC an attractive structure for SPVs. 

Formation 

Delaware has one of the most straightforward processes to form an LLC. The process requires that you have a registered agent (a person designated to receive the business’s official papers) and file a cover memo and a Certificate of Formation with the Division of Corporations. You are not required to have a written operating agreement (although advisable), and you do not have to hold and record board meetings. 

Because Delaware is committed to being business-friendly, filings are processed quickly, and their office is open until midnight on Monday - Thursday and 10:30pm on Fridays.

Tax Benefits

Delaware does not impose income tax on LLCs that do not conduct business within the state. Because investing does not fall into the category of “doing business,” investors typically do not have to worry about Delaware tax liability. Additionally, you are not required to register with the Delaware Division of Revenue or hold a business license.

Legislation

To settle business disputes, Delaware formed a special court called the Court of Chancery. This means that  entities registered in Delaware benefit from  the following:

• A robust body of case law, which provides predictability and guidance.

• Specialized corporate law judges who give prompt expert attention to disputes.

• Typically, the court will side with decisions made by company leaders so long as those decisions are determined to be in the best interest of members.

  
  

Summary 

Since different jurisdictions provide different benefits, finding the right combination of benefits for your specific use case is key. In venture investing, for now, Delaware offers just that. However, this may change as other states attempt to attract more business. Sydecar is constantly exploring cost, structural, and tax benefits across jurisdiction  so that we’re able to offer the optimal entity set up for our customers. If there is a specific jurisdiction that you would like to see added to our roadmap, don’t hesitate to reach out! 

When starting to invest, emerging investors must decide if they will create a management company for their investments. Rather than taking on the management responsibilities as an individual, an investor can form a management company to keep their investment activity in a separate entity. While it may sound intimidating to create an entity, the process is straightforward, allows cleaner record keeping, and protects investors from many liabilities. 

What is a management company?

A management company is an entity (typically an LLC) that is created for the purpose of managing the operations of a venture capital fund. This includes collecting management fees, paying out and accounting for operational expenses (i.e., marketing or business travel), organizing employment or other business agreements, and handling regulatory filings. 

Facilitating these activities through a management company protects fund managers from complete liability when it comes to the fund’s activities.

How does a management company operate?

The management company is typically owned by one or multiple partners of a venture capital fund. This is referred to as a single-member or multi-member LLC. A venture capital fund typically charges a management fee to fund investors, which covers the cost of operating the fund. This includes employee salaries, office space, administrative expenses, marketing and business-related travel, and other ad hoc costs of running a business. 

A standard management fee is 2% of the fund’s assets under management (AUM) annually. In some cases, a fund manager will choose to front-load management fees in order to cover some of the upfront costs of running a fund, so they may charge 2.5% for the first half of the fund’s life and 1.5% for the second half. This is particularly common for first-time fund managers who have not experienced many exits and therefore rely on management fees as their primary form of income. More tenured investors who have already received carried interest on their investments may be less concerned with front-loading management fees. 

Why should a fund manager create a management company?

Having a management company is not a legal requirement for managing a venture capital fund. A solo fund manager may choose to take on the advisory and management responsibilities of the fund individually. However, many fund managers prefer the legal protections and separations of using an LLC. It may also be easier to use a separate LLC to manage the many operating expenses of a fund and keep records cleaner for tax and accounting purposes. Finally, if you are not a solo fund manager, setting up a management company allows for more than one member to have rights and benefits of the fund. 

How do you create a management company?

Setting up a management company is a fairly straightforward process that can be completed online using a variety of different services, such as the Delaware Registered Agent website, you can create a management company and pay out annual registration fees. If you take this route, you'll need to set up a separate bank account for your management company as well.

We recommend consulting with a legal, tax, and/or accounting professional to understand all of the nuances of running a management company.

It seems like everyone is becoming a Venture Capitalist. With everyone from influencers to industry veterans flocking to VC, the rise of emerging investors presents fierce competition to access the best deals and LPs.

Unlike established VC funds, syndicate leads and emerging managers can’t necessarily compete by writing the largest checks, offering an expansive network, or providing comprehensive portfolio support. So how are new investors expected to compete for capital and deals? 

Some of the smartest managers have decided to invest in brand building in order to stand out from the crowd.

From building an engaged following on Twitter to publishing a newsletter to writing thought leadership pieces for traditional media outlets, brand-building activities allow investors to distinguish themselves. A strong brand offers social proof, establishes you as an expert, and puts your name top of mind for founders and other VCs. As capital is increasingly commoditized, it is more important than ever to build a brand alongside a portfolio.

Raising Capital 

Having a strong brand attracts capital. This is particularly relevant with the rise in popularity of 506(c) funds. Rule 506(c) allows “general solicitation,” which means that a VC can publicly market their fundraising efforts through channels like social media. Over the past few years 506(c) has become more popular. There have been a number of examples of emerging VCs who have raised significant capital through platforms like Twitter. Mac Conwell claims to have raised “most of his [$10 million] fund off of Twitter.” And perhaps even more impressive, Minal Hasan raised $25 million for her second fund based on cold inbound on Twitter. 

As you start to build your LP network, you’re competing for investor attention as well as dollars. Building trust and truly owning the relationship with your LPs can be a huge competitive advantage. This is why Sydecar has chosen to keep our customers’ deals and syndicates private, rather than creating a marketplace that draws your investors away to other opportunities. 

Winning Deals 

Building a brand around your investment thesis, and sharing details of that thesis through public channels, will increase your inbound deal flow. You’ll become the first investor others think of when meeting a company that matches your thesis. This increases both the quantity and quality of your deal flow. A strong brand will also help to secure allocation in the most competitive deals as founders will have an understanding of the value you bring. 

Some investors create incentives around helping them with deals. Sahil Lavigna, an entrepreneur and investor with over 260k Twitter followers, created a scout program that incentivizes members of his network to share deal flow and investment memos that support the due diligence process. Julia Lipton, who made a name for herself in the crypto/venture ecosystem, parlayed her engaged Twitter following and newsletter subscribers into a “bounty board” which she uses to crowdsource help on tasks like deal sourcing, due diligence, and content creation.

Supporting Founders 

Your brand immediately demonstrates how you support your portfolio founders. In positioning yourself as an expert in an area, such as growth, product, or fundraising, your founders know they can turn to you for resources and connections on that topic. They can also ask you to utilize your reach for further advice. Lolita Taub, a VC who recently launched her own fund, frequently tweets questions on behalf of founders to crowdsource advice, creating a concise resource for founders to turn to. 

How to Build your brand 

How can emerging VCs start building their brand? The lowest barrier to entry is social media. Experiment with the LinkedIn, Twitter, or even TikTok content to find where you can shine. As you engage with others, you may find podcasts, newsletters, events, or blogs are valuable for building your brand. Here are some low-cost, high-value brand building activities that new investors can focus on: 

• Identify your voice and who you want to connect with

• Use your areas of expertise to create educational content

• Launch a newsletter for LPs to demonstrate your investment thesis and portfolio wins

• Ask questions or run polls on Twitter to get a better understanding of your audience

• Personify your brand by including pictures of yourself or telling stories in investor updates

• “Build in public” by using social media to share updates on your fundraising journey

• Host networking events in collaboration with other emerging VCs 

• Record conversations you have with founders, LPs, or investors and turn them into a podcast 

  
  

If you are looking for some inspiration, we suggest that you check out:

Elizabeth Yin

Maggie Sellers 

Nik Milanovic

Neil Devani

Michael Friedman (Reflect Ventures)

Founded in 2021, Reflect Ventures is a syndicate investing in emerging markets. They invest in core infrastructure areas where there are significant barriers to entry and where digitization can enable huge economic gains. Their portfolio represents a global approach, with dozens of companies operating in over 20 countries on 5 continents. To date, they have 250 investors accessing deals through Reflect Ventures. 

Led by four partners, Dan Deac, Michael Friedman, Jor Law, and Buddy Ye, located across the United States, China, Singapore, and the UAE, the team leverages decades of experience leading and investing in companies to bring value to their portfolio companies.

We talked with partners Michael Friedman and Dan Deac about the challenges of running a large syndicate, how they leverage syndication to conduct better due diligence, and how they provide their portfolio companies with meaningful value. 

Sydecar (SC): Tell us how you decided to start Reflect Ventures.

Michael Friedman (MF): In early 2021, my co-founder, Dan Deac, and I were both involved with a VC accelerator called SOSV. We were excited about one of the companies coming out of the accelerator, but the minimum ticket was $500k and none of us were willing to put up that much individually.

They were not willing to negotiate a minimum ticket. Instead, they said, “Bring friends.” So we went through the whole process of learning how to put together a syndicate. It was so complicated to figure out that, by the time we finished, it seemed a horrible waste to just do one.

SC: Reflect Ventures doesn’t use a traditional fund structure; instead, you allow investors to build customized portfolios. Could you tell me more about this model?

MF: We use a syndicate model which allows each investor to build a customized portfolio. We do not ask them what their portfolio objectives are, then say “Okay, We will design it for you.” We let them choose each investment that they participate in.

SC: Are there certain challenges that you encounter with this model compared to the more traditional fund structure?

MF: Definitely. First off, there are some startups that don't want to deal with a syndicate because you can’t tell them exactly how much you’re going to invest off the bat. You have to tell them: “I don't know; I have to ask my syndicate members.” A fund can move a bit more quickly.

There’s also a sense that you're always out there chasing for LPs. With a fund, you have the fundraising phase, and you have the investing phase. With a syndicate, they're simultaneous.

SC: How does running a syndicate change your investing style?

MF: By letting people choose the deals that they want to be in, you get a group of people for each deal who are particularly interested in that company, sector, or geography. So, you end up with a group of people who can be supportive to the startup later on.

Dean Deac (DD): We are indeed a syndicate, but I would say we behave more as a hybrid between a venture fund and a syndicate. A lot of other syndicators write a check to the company, and that's where the relationship with the startup ends. We spend a significant amount of time helping the companies we invest in. We always have open doors, open emails, open everything for any kind of help that we can provide.

MF: Another big advantage of running a syndicate is that it keeps you honest.

With a lot of VC firms, if everyone knows that a certain guy is championing the deal, it will get done. And it gets done, unless someone finds a real red flag. Process can be a formality.

For us, we have to go through the full diligence process on every deal. There are no shortcuts because every single deal is presented to the syndicate members, and they choose whether it gets done or not.

Even though we are planning to move forwards towards a fund, we plan to keep the syndicate because it makes us better investors. We can never take a shortcut.

SC: Have you found that your model is unlocking different kinds of investors compared to most venture capital funds?

MF: We see a huge variety of investor types. Some have been investing into syndicates and funds for a while, and some are just starting out. Our model is more accessible for smaller check investors. 

We also get people who have a different attitude towards startup investing. Not the type who wants to give you their money and forget, but the type who wants to be more involved.

SC: How did you decide to focus on emerging markets?

MF: We took a look at the US market, and especially if you think back to 2021, valuations were ridiculous.

We wanted something that would distinguish us from other investors. We wanted something where there was a big opportunity and where we had an advantage. We have various emerging markets experience, so we looked at companies in places like Pakistan and Morocco.

We saw companies in spaces where it was pretty obvious there were gonna be oligopolies or monopolies. These are spaces where there will be huge advantages to first movers, and where the winner is not gonna be based on branding, but on price, service, and efficiency.

SC: What excites you about recent deals that you've seen?

We are seeing strong evidence that our thesis is right. Industries like trucking, busing, supply chain for construction, materials for neighborhood stores, courier–all of these are being revolutionized by mobile technology.

In countries like Nigeria, Pakistan, and Argentina, the smartphone is changing from a toy for the rich to an essential business tool for the lower and middle class. A trucker in Pakistan will invest in a smartphone because it lets him get a new load more easily.

When we looked at emerging markets, we saw the opportunity that these markets will evolve the same way that China or India have in the last 20 or 30 years with an emerging middle class.

DD: As Mike said, with smartphone penetration and general behavior shifting, we think there’s going to be a huge shift. Emerging markets are a huge segment of the population, and we believe that the investment opportunity in these markets is huge

SC: How do you see venture capital changing in the next few years?

MF: First off, I think there's got to be a shakeout. There have been so many new entrants into the industry, and from what we can see, many are sloppy with their investments. And a lot of these people are going to get kicked out.

We may see new regulations. In five years, a lot of people will have lost a lot of money. There's going to be new regulation that raises the bar to be a syndicate organizer or fund manager, and to be an investor.

We also think that the people who are investing now are going to see awesome returns. Now’s a great time to invest, while valuations are down. This is a boom and bust industry — when everybody wants in, you get bad returns; when everyone's running away, you get great returns.

SC: Since you said there is going to be a shakeout, do you have advice for new entrants who want to avoid early mistakes?

MF: Ask a lot of questions of syndicate leads. Ask things like: “Beyond the good deal flow, what about valuation? What are you doing to understand the companies you're investing in?”Ask the syndicators how much of their own money they are investing. If they don't have confidence and faith in their investment, why should you? Make sure that you're comfortable with the investment strategy and process of the person you're working with.

One of the first steps to creating an SPV is establishing a Limited Liability Company (LLC). The LLC is a distinct company formed solely for the purpose of aggregating capital to invest into another company. An LLC is not the only structure that can be used for this purpose, but it’s the structure used by all Sydecar SPVs and funds for a number of reasons.

Understanding the LLC 

An LLC is a flexible business structure allowed by state statute, meaning that each state has different rules and regulations that govern their LLC structure. Fun fact: The first state to establish an LLC structure was Wyoming in 1977. LLC owners are referred to as “members,” and each member is afforded exactly what the name suggests: limited liability. Prior to the LLC, the most common alternatives were general partnerships or limited partnerships. In these structures, at least one partner is required to have unlimited liability, meaning that they could be held personally liable for the debts of the company. On the other hand, limited liability dictates that a member can only be liable for the debts/obligations of the company up to the amount they invested.

Because an LLC is a state designation, it allows flexibility in how the company is treated for tax purposes. Most LLC members elect to be taxed as partnerships. You may have heard LLCs referred to as “flow-through entities,” which means that all income and expense items flow directly through to the members, thereby maintaining their unique tax attributes. Each member then reports and pays tax (or deducts loss) on their share personally. Therefore, LLCs allow a unique combination of limited liability with the tax advantages of a flow-through entity.

Let’s explore the flexibility of an LLC a bit further…

Any type of entity can be a member of an LLC, including other LLCs, C-Corps, S-Corps, qualified accounts (IRAs) and more. This gives SPV investors the flexibility to register their membership in a variety of different ways. However, investors should be mindful of the tax treatment of an LLC. If the LLC elects to be treated as an S-Corp for tax, it will be subject to the shareholder restrictions imposed by S-Corp status. For example, in an S-Corp, only individuals or certain trusts/estates may be shareholders with a maximum of 100.

In some cases, you may want an LLC to elect to be treated as an S-Corp for tax purposes. For example, if a VC’s management company wants to payroll its owners, treating the LLC as an S-Corp for tax purposes may be advantageous. This is because paying the LLC members as employees allows for appropriate taxes – like Social Security & Medicare (FICA taxes) – to be withheld throughout the year while the S-Corp pays the employer half. This allows the LLC owners to avoid having to pay FICA taxes through their individual returns often referred to as “Self Employment Tax”.

Another benefit for the LLC structure is that it can assign management functions. For instance, an SPV or fund that is structured as an LLC can assign management functions to another LLC. This other LLC (often referred to as a management company) can be assigned as the manager of multiple funds or SPVs, thus centralizing management functions to one company. Now, as discussed earlier, the management LLC can elect for tax purposes however it wishes.

Last but certainly not least, certain states (specifically Delaware, Iowa, Nevada, Illinois, Texas, and Tennessee) allow for the creation of a special type of LLC called “Series LLCs.” Under this unique structure, there is a single “Master LLC” that is registered with the state and pays the appropriate taxes/fees on an annual basis. An unlimited number of distinct Series LLCs can be created under the Master LLC. Each Series LLC is protected from any adverse judgements against any other. This structure is particularly cost efficient for investors who are using LLCs to invest in startups on a deal by deal basis using SPVs.

LLCs and SPVs

LLCs are a powerful way to customize any business structure that can be particularly beneficial in the context of venture investing. Sydecar uses the Series LLC structure to establish our SPVs and funds because of the time and cost efficiency that it affords our customers. This powerful structure, combined with our game-changing infrastructure, makes it possible for anyone to spin up an SPV in minutes with a reasonable cost ratio. 

Conclusion

The Benefits of the Series LLC Cost Efficiency

Under this unique structure, there is a single “Master LLC” that is registered with the state and pays the appropriate taxes and fees on an annual basis. An unlimited number of distinct Series LLCs can be created under the Master LLC. Each Series LLC is protected from any adverse judgements against any other. This structure is particularly cost efficient for investors who are using LLCs to invest in startups on a deal by deal basis using SPVs.

Limited Liability: In an LLC, a member can only be held liable for the debts and obligations of the fund up to the amount they invested. In contrast, the general or limited partnership structure which has historically been used in venture capital requires at least one partner to have unlimited liability, meaning that they could be held personally liable for the debts of the fund.

Tax Flexibility: Because an LLC is a state designation, it allows flexibility in how the company is treated for tax purposes. Most LLC members elect to be taxed as partnerships. LLCs are “low-through entities, which means that all income and expense items flow directly through to the members, thereby maintaining their unique tax attributes.

Assignment of Management: The Series LLC allows you to assign management functions to another person or entity. An entity can be assigned as the manager of multiple funds or SPVs, thus centralizing management functions to one company.

Membership: Any type of entity can be a member of an LLC, including other LLCs, C-Corps, S-Corps, qualified accounts (IRAs) and more. This gives SPV investors the flexibility to register their membership in a variety of different ways.

Last week, Sydecar CEO Nik Talreja joined On Deck Angels to discuss the current investing climate, and how SPVs are the best tool for those looking to build a track record in 2022. As interest rates have soared and public company valuations have tanked over the past few months, there’s one question on everyone’s minds.

Is now a good time to invest in startups?

You’ll likely get a completely different answer depending on who you ask. Of course, there are many nuances to consider: What stage company? Which industry? Who’s deploying the capital? And what are their expectations for a return? 

While there may not be a clear path to “yes” or “no,” one thing is undeniable: investing in venture capital is a long term game, and betting on early stage companies requires seeing or intuiting something about the future that others might not see. A startup may have a low valuation today due to macroeconomic conditions, but still have a viable path towards a 10x or 100x return. The mere fact that startup valuations are significantly lower today than they were six or twelve months ago is just another reason why now is the ideal time to be investing in venture. Lower valuations, along with the slower pace of the market, allow newer investors to get into valuable deals that they may have otherwise missed a year ago – and allows them to diligence those deals on their own timeline.

A slower pace of the market gives emerging VCs more time to search for under-the-radar companies that may have otherwise been overlooked. The companies succeeding and showing traction today have to fight harder than ever to acquire customers, resource appropriately, make strategic hiring decisions, and raise capital. The teams that are fighting today will be better for it, and only the best will come out the other side. The opportunity for returns on startup investments made in 2022 are immense.

A look at the numbers

There’s no doubt that startup investing today looks very different than it did a year ago. But when you look at the numbers, the impact to early stage investing via SPVs is minimal. At Sydecar, we’re seeing that SPVs take 30% longer to close and are about 15% smaller on average. While the average number of investors in an SPV has decreased since last year, the average contribution per SPV investor has increased. With early stage startups being so far disconnected from the public markets, where valuations have dropped significantly, a macroeconomic downturn is less impactful (and less relevant) than one might think. 

Building a track record during a downturn

So if you’re an aspiring VC investor that believes that now is the right time to get started, where do you go from there? How do you convince others to trust you with their money? And how do you convince startups that they even want your money? Venture investors, and the limited partners who invest into venture funds, look for VCs who can get access to good deals and pick out the winners. Using SPVs to pool small amounts of capital to invest into companies one at a time is a great way to build a track record as an emerging VC. The deal-by-deal nature of SPVs allows individuals to opt in to a deal based on their own analysis of the target company.  As an emerging VC, keeping your SPV investors up to date on the progress of past investments through regular investor updates can help build trust in your approach and start to build a track record. 

As a newer VC, it’s best to focus on raising capital from people who you already know, and who already trust your judgment. This will help you generate momentum, get some initial “reps” in, and ultimately build a track record of success. On the flip side, attempting to raise from strangers during a downturn may be a challenge. At a minimum, you’ll likely have to spend more time explaining an investment opportunity and why you’re excited about it. The time you’ll spend convincing these investors to trust you will be a barrier to demonstrating your ability to generate returns.

As you think about ways to generate quality deal flow, consider finding ways to be helpful to founders even before an investment opportunity is on the table. Building good grace with founders before they are fundraising will put you top of mind when they do approach a funding round. It will also keep you informed of their incremental progress, which will make it easier to raise funds for an SPV when the time comes. Last but not least, being in a founder’s good graces will give you some leeway if it takes you longer to fill your allocation, given the market conditions.

Now what?

So where do we go from here? How will the changes we’ve seen over the past year impact the future of venture investing? There’s no way to know for sure, but here are a couple trends we’re watching at Sydecar:

• Trust and relationship-building will be a fundamental part of group investing.

• Syndicates and angel groups will form around existing communities across verticals – from creative agencies to sports teams to coworkers. New, flexible investment structures will emerge that allow VCs to aggregate and deploy capital more flexibly with lower transaction costs.

• Regulation may tighten (or at least, won’t loosen significantly in the near term).There will be an increased interest in (and demand for liquidity) within private markets, and infrastructure will emerge to enable more liquidity.

Sydecar is on a mission to bring more efficiency to private markets by standardizing how investment vehicles are created, executed, and managed. By doing so, we will enable thousands of new investors to launch investment vehicles instantaneously, track funding in real-time, and offer hassle-free opportunities for early liquidity. We exist to serve the most passionate and creative individuals as they fund and support world-changing companies.

But we’re not naive enough to believe that we can transform private markets solely by supporting the deal leads, fund managers, and investors who touch our platform directly. We know that transformation of this scale requires that we meet individual investors where they are: in marketplaces, community platforms, communication tools, and banks. All of these businesses – and more importantly, their customers – seek better technology to access the tremendous opportunity that exists within private markets. 

“The old and labor-intensive processes built around 30-year tech stacks [...] will not scale to 100,000+ financial advisers and millions of accredited investors. What’s more, the user experience is so bad, you would not want to scale it: PDFs, manual bank wires and clunky investor portals are the current “state of the art” here."

— Techcrunch, September 2022*

Today, we’re taking a significant step towards our goal of becoming the standard infrastructure for private market transactions. We’re excited to announce our partnership with Stonks, the official home for startup demo days. By integrating with Sydecar’s deal execution platform, Stonks aims to create the world’s fastest checkout flow to invest in startups. This flow allows investors to sign docs, connect their bank account via Plaid, and fund their investment — all in less than 3 minutes. 

“It’s like Stripe Express Checkout for Startup Investing.”

Soon after launching their Demo Day platform, Stonks realized the most powerful aspect of these events was their ability to generate real-time investor excitement about new companies. They saw thousands of angel investors flock to their platform, eager to find the next unicorn. The Stonks team was confident that they would be able to harness that excitement to fund more promising startups (while limiting friction for founders) by facilitating investments through SPVs. The only problem? SPVs can historically take days (or weeks) to create, and there’s quite a bit of friction involved in funneling investors through the signing and funding process. Stonks knew that, in order to fulfill their mission, they needed to create a real-time, low friction “checkout” process for SPVs.

Enter Sydecar. By integrating with Sydecar’s deal execution infrastructure, Stonks can now establish investment entities in real time, onboarding investors, and collect signatures in funds in minutes. Better yet, they’re able to do this all natively within their app, while providing a best-in-class user experience that allows investors to fund immediately while paperwork is handled in the background.

On top of the integration, Stonks has built a number of game-changing features into their Demo Day Vehicle product, including:

• Variable economics by investor, including an early bird discount 

• Shareable, private link for founders to share with their network

• Advanced reporting and analytics for startup accelerators 

  
  

In doing so, they’ve made it easy for any accredited investor to access world class deal flow and removed the headache for early stage founders who are looking to raise from friends, family, and angel investors.
To learn more about Stonks’ new Demo Day Vehicles, check out their recent announcement.

*"The alternative asset class needs new infrastructure — who will build it?" by David Jegen and Abdul Abdirahman. September 14, 2022.

How A Little Knowledge of Tax Law Can Accelerate Funding

There are a multitude of factors to take into account when investing into startups: industry, market, size, company stage, and location. Depending on certain factors, an early stage startup may be qualified as a “small business” in the eyes of the IRS. Equity shares of these companies are referred to as Qualifying Small Business Stock (QSBS). The tax benefits for certain investors in QSBS can be magnificent, however special conditions apply. In 1993, in an attempt to stimulate investment into startups and small businesses, the IRS enacted Section 1202 of the Internal Revenue Code to exclude some of the gain realized from the sale of QSBS.

What is QSBS?

QSBS (originating from Section 1202 of the Internal Revenue Code) excludes tax on gains from the sale of stock in qualified small businesses (QSB). A QSB is defined as a business organized as a U.S. C-corporation with less than $50M in gross assets before and after that company receives cash from an equity funding round. Although convertible debt and other promissory notes do not qualify as QSBS, the YC SAFE contains explicit language that qualifies it as an “equity” investment. The company must not be on the list of excluded business types (which includes SaaS businesses).

How does QSBS apply to SPV investments?

All of the SPVs administered by Sydecar are LLCs (pass-through entities). SPV investors qualify for QSBS benefits if they held the interest on the date the SPV acquired the QSB stock and at all times thereafter until the stock was sold.

How do I know if my SPV investment qualifies as QSBS?

Besides the qualifications mentioned above, the SPV qualifies for QSBS only if the SPV acquires original issue shares (i.e. not purchased on the secondary market) and if the stock has been held for at least five years. The company in which you or the SPV invested will know if the shares sold are eligible to be treated as QSBS. Frequently, QSBS is assessed at the time of a 409A valuation. If the stock has been qualified as QSBS, the benefit cannot be taken away until it is sold.

What are the tax benefits of QSBS?

If an SPV (or angel investor) sells shares of QSB after the five-year mark, they may exclude up to 100% of capital gains (depending on the date of purchase) of up to $10M or 10x the cost basis, whichever is greater. It’s important to note that tax laws change frequently so it’s important to check with your tax advisor on the latest developments or changes in the tax code.

What happens if I buy or sell an interest in an SPV that has purchased QSBS?

Since purchasing interest in an SPV does not qualify as selling stock directly, the stock retains its QSBS eligibility within the SPV interest that is purchased. Further, an investor who purchases interest in an SPV (i.e. via a secondary sale) actually inherits the SPV’s holding period. For example, if you purchased interest in an SPV that held QSBS for five years already, that holding period would be applied to your interest (even though you did not own it for the full five years). Conversely, if you sell an interest in a QSBS holding SPV, you are not entitled to exclude any gain on the sale, as you are not actually selling the underlying stock but rather your partnership interest. You as the seller would want to factor the benefits to the buyer into the sales price.

What else should I know?

If the business in which the SPV invested is incorporated in one of the locations below, you won’t be eligible for QSBS exclusion at the state level:

1. California

2. Mississippi

3. Alabama

4. Pennsylvania

5. New Jersey

6. Puerto Rico

Where can I go for more information?

• Section 1202 regulations

• Qualified Small Business Stock definition

• U.S. Small Business Administration QSBS discussion

• This post from Lowenstein Sandler explains the complexity and vagueness of the QSBS laws as it relates to SAFE notes.

Recent updates in technology and regulation contributed to a rise in participation in private markets, particularly for individuals investing as a group. While group investments are typically led by a single “sponsor,” there are often multiple individuals that contribute to assessing and managing a deal. Depending on their level and type of contribution, these individuals may deserve, and receive, a portion of the deal sponsor’s carry as compensation. This is known as “carry sharing.”

What is carried interest?

Carried interest is a share of any profits that the deal sponsor receives as compensation for managing the deal. In venture capital, it’s common for the sponsor of an SPV or fund (the “GP”) to receive a standard 20% carry of the profits made from their investments. Carried interest is only paid after investors’ initial capital has been returned. In the case of a fund making multiple investments, the fund manager will only receive carry once each investor, or limited partner, has received a return on their initial investment. As a result, the manager typically has to wait until they have enough capital to return to initial investors and will not receive any profit from a fund’s early liquidity events.

Many investors have turned to SPVs as a faster, more efficient way to deploy capital and see returns. Deal sponsors are able to receive carry on a deal-by-deal basis when they invest this way. Since SPVs are generally limited to a single investment, the lead only needs to return capital on a successful investment once before receiving carried interest on those profits. If the return to an SPV is less than the initial investment, the deal sponsor does not typically receive any portion of the return.

How does carry sharing work?

A deal sponsor will share carried interest, or carry share, with another individual who contributed to managing an investment, or helped the sponsor in ways that contributed to the success of the deal.

Generally, a carry share is executed using a “side letter,” which is a secondary agreement used to create bespoke terms between a deal sponsor and an investor, in addition to the terms of the SPV that all other investors receive. The side letter agreement, which is signed by both parties as well as the fund administrator, outlines the percentage of carry that the carry share recipient will receive at a liquidity event. Similarly to the deal sponsor, the carry share recipient will only receive their portion of the carry once the investment has returned at least 1x to its investors.

What are the benefits of carry sharing?

Carry sharing can be especially powerful for groups of investors working together and contributing to each other’s success, generally referred to as syndicates. Syndicates typically have a primary “deal lead” who is responsible for bringing deals to the group, performing due diligence, and supporting the portfolio companies. But it’s near impossible for an individual to do all this work on their own. They are often supported in various ways by other participating members of the group based on individual areas of expertise. For instance, one syndicate member may pitch in on due diligence given their specific domain knowledge, and another may support a portfolio founder on hiring for a specific role or building out their go-to-market strategy. The syndicate lead may choose to share a portion of their potential 20% carry from a specific deal with members of the group to compensate them for their contribution, without violating specific requirements around securities brokers and dealers.While participation in venture deals is generally limited to Accredited Investors, you do not have to be accredited in order to receive shared carry on a deal. This creates an opportunity for just about anyone to participate (albeit indirectly) in venture investing. By contributing to sourcing, evaluating, and managing a deal, a non-Accredited Investor can build their own track record while simultaneously generating wealth. This expands and benefits the entire ecosystem.

What are some of the challenges of carry sharing?

For emerging VCs, carry sharing can be a powerful way to expand your network. Offering someone a share of your carry may incentivize them to share the opportunity with members of their network and thereby drive capital to the deal. But it’s important to be mindful of the regulation that governs the use of carry sharing.Per the SEC, any individual receiving compensation (through carry, cash, or any other form) as part of a VC deal must have contributed to sourcing, diligencing, or negotiating the terms of the deal. An individual cannot be compensated solely for influencing others to invest in a deal. This means that it’s fair game to share carry with someone who introduced you to a founder, helped you write an investment memo, contributed subject matter expertise to the diligence process, or supported the deal execution from an operational perspective. However, if an individual drove capital to a deal (i.e. made introductions to other investors or shared an investment opportunity with their network) but did none of the above, then receiving compensation (via a carry share) would put them in broker-dealer territory in the eyes of the SEC. A broker-dealer is a person or organization that buys and sells securities on behalf of someone else (typically a paying client). Generally, VC investors want to avoid this activity as broker-dealers are required to register with the SEC and FINRA. This registration process, and the regular requirements of registered broker-dealers, is complicated, time-intensive, and costly. Ultimately, the majority of venture investors can leverage carry sharing while avoiding these requirements – so long as they are intentional about operating your investor network.

Using carry sharing to expand your network – compliantly

As mentioned above, carry sharing can be a powerful tool for venture investors who are looking to expand their network. If you’ve recently launched a syndicate and are looking to grow your group, incentivizing syndicate members to share investment opportunities with their networks seems like an obvious choice. Luckily, there are ways to leverage this approach in a compliant manner by involving syndicate members in the process of evaluating or managing a deal. This could mean introducing an individual to a founder to better understand their business model, asking them to contribute to a deal memo to share with the syndicate, or having them actively manage the deal after the investment has been made. So long as an individual has participated in one of these activities, they can help drive capital to a deal and receive carry without being considered a broker-dealer.

Hear from some members of the Sydecar community about how they (compliantly) using carry sharing to build community:

“At Pearl Influential Capital, we work with deal co-leads on many of our investments. Bringing co-leads in to provide additional support to deal management and execution has allowed us to scale our community effectively while driving more investments for our portfolio.” - Alyssa Arnold, Co-Founder of Pearl Influential Capital

“Sydecar’s carry share feature enhanced our scout program, making it easy to assign carry to individuals contributing in scouting and conducting due diligence on a deal without all the back and forth we experienced before.”- Michele Schueli, Managing Partner at ARMYN Capital

Time for a pop quiz! 

We hope you learned something from this article - now it’s time to put your new knowledge to the test! 

Jamie runs a community-driven syndicate where she leads investments into pre-seed and seed stage fintech companies in the US. In the following scenarios, can Jamie share a portion of her carry with a syndicate member (who is not a broker-dealer) in exchange for participation in the deal?

1. John, a syndicate member, introduces Jamie to a founder, and Jamie decides to invest into their company. John has never met the founder in real life and does not contribute to due diligence. Can John receive carry?

2. Margaret has a background working in fintech startups. Jamie calls Margaret because she is doing diligence on a deal and wants to get Margaret’s perspective on the space. Can Margaret receive carry?

3. Julie is super excited about a new company that the syndicate is investing into, so she emails a couple investor friends to ask if they want to participate. One of them ends up investing in the deal through Jamie’s syndicate. Can Julie receive carry?

4. Jamie has brought on her friend, Robert, to support the syndicate in a part time capacity. He is responsible for setting up deal pages in Sydecar, adding investors to the deals, and coordinating with portfolio companies when they have updates to share. Robert also occasionally shares the investment opportunities with individuals in his network that Jamie doesn’t know directly. Can Robert receive carry?  

Answer key: Yes! Even though John hasn't met the founder in person, his introduction still counts as deal sourcing.Yes! Since Margaret contributed to due diligence, she is eligible to receive carry.No! Julie’s excitement about the deal doesn’t qualify as identifying, evaluating, or managing the deal, so she cannot receive carry solely for driving capital to the opportunity.Yes! Since Robert helped actively manage the deal in addition to sharing it with his network, he can be compensated for his involvement. 

For those finishing up college or early in their careers, starting a career in venture capital may seem intimidating– or even impossible. Established venture firms rarely post their open roles online, and even when they do the prerequisites are aplenty. Historically, landing even an entry level role in venture capital has required industry experience and an MBA. The competition can be fierce, and the job itself is not always glamorous. Like many entry level jobs, working as an analyst or associate at a large venture firm often means you are far away from the action. 

And yet, the generation currently exiting their college years and joining the workforce is a powerful one. Today, Gen Z is closest to emerging trends and technologies, and soon to be one of the most significant factions of spending power. Brands (and the investors behind those brands) want to hear the Gen Z perspective. 

But how does someone from Gen Z – with little to no work experience – land a job in venture capital, one of the most exclusive and opaque industries out there? For those that don’t want to go down the MBA path, consider venture scouting. 

What is a venture capital scout?

A venture capital scout works part time with a VC firm to identify the best startups to invest in. Many venture firms run scout programs to help diversify deal flow and increase their chances of investing in the next unicorn. Venture scouts are typically individuals who work full time in the startup ecosystem (founder, operators, community builders, etc.) and have used their position to cultivate a community of entrepreneurs. Although scouting is usually part time, some firms hire internal scouts to support full time. 

What does a venture scout do?

The best venture scouts immerse themselves into the startup ecosystem in order to decipher which early stage companies their VC firm should invest in. Scout programs typically last anywhere from four to twelve months. During this period, scouts attend online and in-person events and workshops to expand their networks and meet one-on-one with founders to build relationships and understand business models. The scout may be assigned by the firm to focus on a specific stage of company (i.e. Series Seed), a specific industry (i.e. healthcare), or a specific geography (i.e. Midwest). Sometimes scouts are “given” a predetermined amount of capital to invest into companies at their own discretion, or sometimes they are simply responsible for identifying promising companies to introduce to a firm and handle the rest of the process. 

Why would someone participate in a scout program?

One of the primary benefits for VC scout is the opportunity to learn the craft of venture investing and get hands-on experience in the industry. Many scout programs provide an educational curriculum to participants, including notable speakers, workshops, content, and networking events. 

Being a scout is also a great way to build an investment track record. Young individuals who want to build a career in venture but don’t hold a full time role at a VC firm can participate in a scout program in order to refine their deal sourcing, due diligence, and relationship building skills. At the same time, they can track their scouted investments in order to demonstrate their ability to source good deals. For individuals who want to start their own fund or syndicate down the line, this is a great way to build a track record. 

Another benefit of being a scout program is the financial upside. Scouts typically receive carried interest (or “carry”) when a deal that they sourced turns a profit. This means they are only rewarded for successful deals (those that bring in a return higher than the investment made). Sometimes, scouts will also receive closing fees to compensate them for bringing in deal flow which helps to align incentives between the scouts and the firm. 

Finally, scouting for a VC firm is a great way to build a network in the startup and investor ecosystem. VC scouts typically don’t have exclusive relationships with the firms they support, so some individuals will scout for multiple firms at once in order to build their network and refine their craft. Since meeting new people (both founders and investors) is such a pivotal part of being a successful scout, it’s a great option for anyone looking to build a career in the investing or startup ecosystem. Many of today’s most celebrated investors and founders started their careers in scout programs as a way to build their networks.

Why should more Gen Zs become venture scouts?

Most Gen Z are not accredited investors, meaning they can't legally invest in startups. Scouting for VC firms is a great way for non-accredited Gen Zs to learn the mechanics of venture investing, establish relationships with investors and founders, and build a track record of success. Regardless of your career aspirations, scouting is a phenomenal way to build a network across the tech, venture, and startup ecosystems which will pay dividends as you continue to develop your career. Having more Gen Zs in scouting roles is also world-positive, as they largely prioritize topics like diversity and equity, climate change, education, and future of work. Having a Gen Z influence on which companies and founders get funded will have a net-positive impact on our society.

How can I become a scout? 

There are a number of scout programs that offer educational resources and compensation for folks looking to gain experience in VC. Here are a few recommendations crowdsourced from our community: 

1. GenZScouts is a 6-8 week fellowship that educates Gen Z students on the venture capital industry and gives them first-hand experience. Participants get access to educational content, weekly speaker sessions with top VCs, virtual office hours, and happy hours. While GenZScouts doesn’t directly compensate participants for sourcing companies, they do pair scouts with venture capital firms, accelerators, and angel investors to give them hands-on experience.

2. The BLCK VC Scout Network provides Black scouts and angel investors with the knowledge, network, and tools to make better investments. The goal is to empower Black scouts and angel investors to make more investments and become better investors by helping them expand their sourcing pipelines, increase their ability to efficiently diligence companies, and build networks to co-invest alongside other investors. 

3. Dorm Room Fund, spun out of First Round Capital starting in 2012, is where investors and entrepreneurs start their careers. The fund, which supports the strongest community of student entrepreneurs across the nation, backs student founders with a network of investors, mentors, and their first check.

4. Seed Scout helps founders build their network (online and in person) to make raising capital a more efficient use of time. Seed Scout pairs their founders with a network of venture partners to jam on their company, provide feedback, and increase the founder's luck surface area.

5. Contrary Capital Fellowship is a diverse and selective community of the top engineers, designers, and product minds. Fellows receive lifetime access to an exclusive network of highly talented peers, invite-only events, and so much more.

6. Susa VC Venture Fellows Program is a six-month training program for aspiring venture investors. Venture Fellows will receive 1:1 mentorship from the Susa partnership and participate in Susa’s sourcing, evaluation, and investment processes in order to gain hands-on experience and build a body of work. This program is an opportunity to see how our team and venture capital work from the inside. 

7. Undercover VC Fellows are curious, creative, and driven students across the country passionate about startups, investing, and problem-solving. Fellows will work with startups on their campus on behalf of UndercoverVC, connect with the UndercoverVC community, attend events, meet guest speakers, and learn skills core to VC.

When making investment decisions, venture investors typically focus on companies with high growth potential. However, some investors seek out tax-efficient investments that generate passive income outside the US. In 1986, in an attempt to close a loophole that created certain tax advantages, the IRS created a designation of passive income investments called PFICs, or Passive Foreign Investment Companies.

What are PFICs?

PFICs are non-U.S. based companies that either (i) generate 75% of gross income from “passive income” sources or (ii) use 50% of the company’s assets to generate “passive income.” Generally, passive income is income generated from sources that are not related to the company’s regular business operations. Principal forms of passive income as they relate to PFICs include interest, rents, royalties, capital gains, currency gains, and dividends. In general, most investors want to avoid PFICs because the IRS taxes gains from these investments at the ordinary income tax rate, as opposed to the lower capital gains tax rate.

How do PFICs apply to venture investments?

When investing outside of the US, VCs should be aware that some companies can inadvertently fall under the definition of a PFIC. Most commonly, PFIC designation may arise when an early-stage company is in a research and development stage and is therefore not generating any revenue from their regular business operations. For example, let’s say a company has raised millions from outside investors on a promising new product or service. The company generally will not spend all the money immediately, so excess cash is put into interest-bearing accounts until needed. Since the only income being generated is from interest on the deposits, this would fall into the first condition “generating 75% of gross income from passive income.” Further, it could fall into the second condition where 50% of the assets (most likely only cash raised) are generating passive income. Fortunately, the IRS has since created exceptions that help alleviate some of the traps that could catch non-US companies in PFIC classification.

What to look out for?

While it’s typically pretty easy to avoid PFIC restrictions when investing directly via an SPV or fund, an SPV investment into a fund (“fund of funds”) has the potential to trigger PFIC. SPVs are considered “look-through” vehicles for tax purposes, so it’s important to look at the underlying investment (especially if it is a foreign fund). If the company receiving the investment is a PFIC, investors must determine whether they are direct or indirect shareholders of the PFIC. In general, investors using Sydecar’s platform would not be “direct” shareholders of any PFIC since shareholders only own interests in SPVs. That said, a final determination is typically made by speaking directly with the company receiving investment.

How are PFICs treated for tax purposes?

If it is determined that an investment is a Passive Foreign Investment Company, there are three different ways a taxpayer can elect:

1. The Excess Distribution Regime: This is the default tax treatment and usually results in a larger tax burden. Generally, this election allows you to defer taxes (pay them later), but when taxes are due, they are very steep and include interest charges.

2. Qualified electing fund: A taxpayer must elect into this treatment. This method more closely follows US tax treatment of passive income with long-term capital gains retaining their favorable treatment. This is the most common PFIC election.

3. Mark to Market for Marketable Stocks: If a taxpayer’s holdings are regularly traded, they can elect this method. Basically, the taxpayer adds up all their gains and losses (realized & unrealized) each year and the result is taxed at higher ordinary income rates. Losses can only reduce gain to zero. This method is perhaps the most difficult to assess favorability.

What is Sydecar doing to avoid PFIC investment issues?

At this time, Sydecar has made a policy to not support SPV investments into PFICs, but we are here to help you find the resources that can help with the PFIC rules. If you indicate the target company is a PFIC, it’s important to understand the IRS Form 8261 filing requirement.

Where can I go for more information?

• Cornell Law School: Passive foreign investment company

• IRS: Instructions for Form 8621

• PFICs: How do I know if I have it?

• Golding Lawyers: Common Examples of PFIC Investments

While secondary sales present the greatest opportunity for liquidity in the private markets, they come with quite a bit of baggage. Understanding the regulatory nuances of secondary transactions can help create more opportunity for elegant transactions, and subsequently more opportunities for early liquidity.

Considerations for secondary investors

Despite their many benefits, some VCs chose not to participate in secondary transactions given the implications around reporting, tax, and SEC registration. In venture capital, secondaries are considered “non-qualifying” investments, and fund managers are currently limited to 20% non-qualifying investments per fund or SPV. VCs who surpass this 20% threshold in any single fund or SPV, and who manage $150M+ in investments overall (based on fair-market value), may no longer benefit from certain VC exemptions. These managers 1) may have to register as an investment advisor with the SEC, which is a burdensome process that comes with additional reporting and financial audit requirements, and 2) they can only raise money from “qualified clients,” defined as individuals who have a net worth over $2.2 million.

Opportunities to build an effective secondary market

Previous attempts at creating an efficient secondary market have been thwarted given the absence of four factors: 1) homogenous assets, 2) sufficient supply and demand, 3) limited gatekeepers, and 4) reasonable transaction costs.

Venture capital assets are generally homogeneous (common or preferred stock in Delaware corporations) and demand for secondaries is plentiful given the associated benefits. While volume may be sufficient for a functioning marketplace, access is fractured and gatekeepers abound. A transfer of shares in a secondary transaction typically requires consent from a number of stakeholders, including the company’s board. The board may choose to reject the transaction simply because they don’t have the adequate time to evaluate whether it’s in the company’s best interest. Most companies also have a “right of first refusal” which allows the company and often some of the company’s shareholders to block a secondary transaction. They may choose to do so because of the implications such a transaction could have on valuation. Secondary share prices are typically determined by the buying and selling parties without the company’s direct input. If the price becomes public knowledge, it could impact the company’s future efforts to fundraise at a substantially higher valuation. In a similar vein, secondary prices can impact a company’s employee incentive plans, thereby making it difficult to offer a reasonable strike price for future employees.

Private companies are not obligated to share detailed information on stock price or valuation with all investors. This lack of transparency has made it difficult to establish an efficient secondary market. Because of the implications on valuation, many companies will specifically decline to share information if they sense that a stockholder plans to use the info to solicit secondary interest. This results in information asymmetry between buyers and sellers, and means that subjective factors such as industry news or product trends may impact pricing in a secondary transaction.

Using SPVs to build an effective secondary market

As noted above, a secondary transfer of shares directly on a company cap table typically requires board approval, review of transfer restrictions, and waiver of investor rights. However, a transfer of shares within an investment vehicle itself (such as an SPV) is generally free of these burdens — especially if the transfer involves a minority interest of the SPV and both the buyer and seller are accredited. Thus, there is a legitimate opportunity to create an efficient secondary market in which fund or SPV investors transfer their ownership of a vehicle rather than transacting directly on a company’s cap table.

These intra-vehicle transfers require that accurate and up-to-date information on the underlying investment is shared with the buyer, so the lack of price transparency still presents a challenge. SPV investors do not typically receive regular updates about portfolio company valuation events (i.e. follow-on rounds), partially due to their lack of information rights. Given that the rise of SPVs via syndicates is still relatively recent, there have not yet been efficient communication and information sharing channels built between portfolio companies and SPV investors. SPV investors typically do not have full transparency into the value of their (indirect) stake in a company and, on the other side of the table, companies don’t have efficient channels to leverage the support of their full network of investors.

If investment vehicles are created and maintained in a standardized way, with data stored in a structured manner, it would be easier to share valuation and other portfolio company updates with SPV members. This would give each SPV investor transparency into their specific interest in a company, and make it easier for them to entertain secondary opportunities. In many ways, a standardized approach to creating and maintaining investment vehicles is a significant first step towards an efficient secondary market with reduced regulatory burdens.

Over the past few years, tech entrepreneurs and investors alike have flocked toward web3. Innovating and investing in blockchain projects is seen as a way to increase ownership, access, transparency, and efficiency – what’s not to like, right? On top of those promises, investors celebrate web3’s promises of early liquidity via token warrants (as opposed to traditional venture capital investments, which can take a minimum of 5-10 to become liquid).

While much of web3 still occupies a regulatory gray area (look no further than the recent Coinbase litigation), venture investors who dabble in web3 investing are still held to the same expectations (and limitations) of venture capital regulation. At the center of that regulation is Section 203(l) of the Investment Advisers Act of 1940 (known as the Venture Capital Adviser Exemption). Investors who pursue a “qualifying VC strategy” benefit from certain regulatory exemptions. A “qualifying VC strategy” means that more than 80% of the capital that it raises must be used to acquire equity securities from a private company directly. Read more on what it means to pursue a qualifying VC strategy.

Why this matters for web3

The determination of 1) who can invest in an SPV or fund, 2) what filings are required, and 3) the obligations of the sponsor comes down to two simple questions:

1. Is the GP receiving compensation (carried interest or management fees) in exchange for organizing the transaction?

2. Does the transaction involve contributing >20% to anything other than equity securities acquired directly from a private company?

Web3 investments typically occur via a SAFT or a direct purchase of cryptocurrency tokens, both assets which are not equity securities issued by a private company directly. If more than 20% of a fund or SPV’s assets are SAFTs or tokens, the fund is not considered a qualifying VC fund. The sponsors of these vehicles would no longer benefit from VC exemptions and they may be subject to additional requirements (reporting and filings) and restrictions (only raising funds from qualified clients). Finally (and perhaps most significantly), if the deal sponsor accepts capital from accredited investors (or non-accredited investors) and wants to avoid these restrictions, the sponsor may not be permitted to receive any compensation (carry) for organizing a deal. There has to be another way…

A proposed middle-ground for web3 investments

Can web3 VCs have their cake and eat it too? Perhaps!

 As summarized above, structuring transactions through an SPV/fund that pursues a “VC” strategy permits the broadest base of investors and reduces overhead and complexity for the deal sponsor. By conforming web3 investments to the requirements of a qualified VC fund, deal sponsors may be able to avoid some of the requirements put on non-VC private funds.

Wait, what? 

Let’s start with SPVs. A key requirement of a “good” VC is that more than 80% of the capital it raises is directed to the acquisition of a private company’s equity securities from the company directly. In a traditional web3 investment, a company issues a SAFT or tokens directly, which are not equity securities. So, in order to comply with the 80% requirement, the company must issue an equity security together with tokens (or an instrument that can later be exercised to acquire tokens). It is key, however, that at least 80% of the capital raised by an SPV be used to acquire the equity security, and that the exercise price for the tokens is less than 20% of the capital raised by the SPV. 

A new standard for compliant web3 SPVs

VC investors can remain compliant and benefit from the relevant exemptions if web3 investments are structured in the following manner: 

1. Standard stock, SAFE or convertible note sale in an original issue amount that equals or exceeds 80% of the capital raised in the SPV.

2. Standardized token warrant to acquire tokens for an issue price and aggregate exercise price that sums to an amount equal to or less than 20% of the capital raised by the SPV. Any cash that isn’t funded to acquire the equity (#1 above) or warrant at the SPV’s closing will be parked and utilized to fund the warrant’s exercise.

3. Bonus: Side letter between the web3 company and the SPV that ensures that if for any reason the SPV cannot exercise the Token Warrant in full to comply with regulatory hurdles (e.g. the value of the tokens underlying the warrant is deemed higher than 20% of the SPV’s value), then the SPV may assign a portion of the warrant rights to the SPV’s members pro rata. 

It’s generally expected that the tokens purchased via a Token Warrant exercise (#2 above) will ultimately have a market value that far exceeds their exercise (strike) price. This could potentially occur as early as the expiration of the warrant lock-up. 

So, how does this impact the 80% requirement? Well, under applicable law, the SPV sponsor (GP) generally determines how to value private assets and as long as the determination around fund reporting is consistent, then the GP can determine that both the value of the warrant and the value of the assets (tokens) being acquired (at purchase and exercise respectively) are equal to the original issue prices. 

To bring it all home, an SPV sponsor can leverage an SPV to acquire web3 assets and stay within the VC fund exemption by: (a) packaging any non-equity assets (tokens) together with an equity investment (e.g. a SAFE); (b) ensuring that the value of the qualifying equity investment is at least 80% of the SPV’s raise; and (c) remaining consistent on how the assets are valued for accounting purposes and reflecting all SPV assets at their original issue/exercise price. 

A new standard for compliant multi-asset funds 

Multi-asset funds generally have more flexibility than SPVs as the 80% requirement applies across the entire fund. This means that up to 20% of the fund’s total capital raise can be contributed to non-VC qualifying assets, such as SAFTs or tokens. A multi-asset fund can generally acquire a SAFT or a Token Warrant without having to package the transaction with a qualifying equity issuance (...as long as the sum of all of its non-VC qualifying assets represent less than 20% of the fund’s capital raise). 

That said, web3-focused funds might want to consider the strategy laid out above for SPVs when executing investments in order to avoid having to register as an RIA. If a web3-focused fund embraces a standard protocol of packaging a (sometimes nominal) SAFE/equity purchase with a SAFT/Token Warrant, then even web3-focused funds can remain qualified VC funds and enjoy all of the benefits of a VC fund while investing primarily in web3 assets (e.g. continuing to work with accredited investors, avoidance of RIA status and the onerous audit/compliance obligations it presents). By standardizing this process at the fund level, web3 investors have a better chance of maintaining their VC status even as web3 and crypto regulations evolve.

Over the past decade, group investing has risen in popularity, typically occurring in the form of sponsor-led investments. Deal sponsors (typically referred to as GPs in the context of a fund, or deal leads in the context of an SPV) are responsible for obtaining an allocation, running diligence on a deal, and garnering interest in an investment. A deal sponsor leads investments on behalf of passive co-investors, who decide to invest in deals on the recommendation of the sponsor and are not actively involved in the vetting and sharing of the investment opportunity. Deal sponsors are typically compensated for their involvement via carried interest – upside in the investment after investors in the deal are returned the amount they originally invested. This structure results in the vehicle being considered an investment fund, and the deal sponsor an investment adviser. While these terms may sound scary, there are certain exemptions for VC investors that make it possible for almost anyone to syndicate VC investments. 

If VCs are regulated, how can almost anyone be a VC? 

The regulation governing investment funds (including SPVs) and the individuals that organize them is, at its core, the same regulation that governs private equity, hedge, and real estate funds. But funds and fund advisers (or sponsors) who pursue a “qualifying VC strategy” benefit from certain regulatory exemptions. As we’ve previously highlighted, a “qualifying VC strategy” means that more than 80% of the capital that it raises must be used to acquire equity securities from a private company directly. 

The federal compliance requirements for funds that meet this qualification are:

1. A Form D, which is a very simple form that has to be filed with the SEC anytime a company raises money (since the fund is a company), and

2. A short-form version of a Form ADV, which is a form that an investment adviser should file with FINRA and the SEC within sixty days of first engaging in advisory activity – e.g. structuring an SPV where the adviser receives carried interest as compensation (note, an adviser to “qualifying VC” funds that registers with FINRA & the SEC using the short-form Form ADV is referred to as an “Exempt Reporting Adviser,” or ERA).

These requirements apply to every VC SPV and fund out there, regardless of whether the investments are structured through a law firm, a fund admin, or SPV platform. Advisers to qualified VC funds are generally permitted to accept “accredited investors” as investors in addition to “qualified clients” or “qualified purchasers”, which each present significantly higher wealth thresholds for participation. 

Wait, I thought you said VCs are exempt from requirements?

While the above requirements for a qualified VC fund may seem onerous, they’re relatively straightforward as compared to those that apply to other types of (non-qualifying) private funds. Private (non-VC) funds include those that purchase shares in a secondary transaction, funds that syndicate debt investments (other than convertible notes), funds that acquire cryptocurrency assets, or funds that invest in other SPVs or funds. Any private fund that pursues a non-qualifying VC strategy opens Pandora’s box of state regulations. Such regulations create additional restrictions and requirements for funds and advisers; for example, they may be limited to accepting capital only from “qualified clients” or “qualified purchasers,” and require audited financials, elevated compliance obligations, and the completion of lengthy forms. 

These onerous requirements are triggered at a certain threshold of assets under management (AUM). An adviser that syndicates any non-VC private fund (even a single SPV), and manages a total of over $150M in assets (based on current value), is required to register with FINRA and the SEC as a registered investment adviser (RIA). Registering as an RIA is no simple feat, and requires a long-form registration on Form ADV, adherence to strict fiduciary duties, the appointment of a Chief Compliance Officer, maintenance of books and records related to market transactions, audited financial statements, a formal custodian for fund securities, and notably, limits the adviser to raise capital from qualified clients (individuals with net worth over $2.2M). In addition to these SEC federal requirements, they also may be subject to additional restrictions and requirements under their individual state law. As mentioned, this is potentially in addition to more restrictive and onerous state law.

What does it all mean?

So, that was all pretty complicated. Let’s go through a few specific examples of investment vehicles and identify whether they would qualify for the VC fund exemption.

Example 1: Preferred or common stock purchased directly from a private company

• Qualifying VC? Yes

• Who can invest: Accredited Investors+

• ERA or RIA? ERA

Example 2: SAFE issued by a private company directly

• Qualifying VC? Yes

• Who can invest: Accredited Investors+

• ERA or RIA? ERA

Example 3: Convertible Promissory Note issued by a private company directly

• Qualifying VC? Yes

• Who can invest: Accredited Investors+

• ERA or RIA? ERA

Example 4: Promissory Note not convertible for company equity issued by a company directly

• Qualifying VC? No

• Who can invest: Qualified Clients+

• ERA or RIA? ERA until AUM exceeds $150M, then RIA

Example 5: YC SAFE and a Warrant to acquire governance tokens (a “Token Warrant”), all issued by a private company directly

• Qualifying VC? Yes, but only if the SAFE’s value at the time of every fund investment is >80% of the value of fund assets (all cash committed and contributed to the SPV/fund)

• Who can invest: Accredited Investors+

• ERA or RIA? ERA

Example 6: Preferred/Common Stock and a Token Warrant, all issued by a private company directly

• Qualifying VC? Yes, but only if the Preferred/Common Stock’s value at the time of every fund investment is >80% of the value of fund assets (all cash committed and contributed to the SPV/fund)

• Who can invest: Accredited Investors+

• ERA or RIA? ERA

Example 7: Common Stock or Preferred Stock acquired from anyone other than a private company directly (e.g. acquired from a founder, another investor, etc.); typically referred to as a “secondary” transaction

• Qualifying VC? No

• Who can invest: Qualified Clients+

• ERA or RIA? ERA until AUM exceeds $150M, then RIA

Example 8: SPV interests or another Fund’s LP interests

• Qualifying VC? No

• Who can invest: Qualified Clients+

• ERA or RIA? ERA until AUM exceeds $150M, then RIA

Example 9: Any assets other than equity securities issued by a company directly that: (a) are >80% of the SPV/fund’s total assets and (b) that also results in the total value of funds/SPVs managed by the sponsor exceeding $150M.

• Qualifying VC? No

• Who can invest: Qualified Clients+

• ERA or RIA? RIA

TLDR: as long as at least 80% of the cash committed across all of the SPVs or funds you organize is used to purchase equity securities from a company directly, then you can generally raise capital from accredited investors and avoid limits around your AUM.

Want to learn more about the VC fund exemption? Check out this article.

This post was written in collaboration with Doug Dyer, CFO at Chapter One. Chapter One is a full-stack crypto fund built for early-stage founders, that strives to be the first check-in powerful stories they want to co-write alongside incredible founders.

What is accounting and why it matters 

Generally speaking, accounting is the process of measuring and communicating the value of different financial assets and dates back to the year 1494. While accounting is primarily backward-looking and based on past transactions, strategic finance professionals can use it to understand the present and predict the future. 

What role does accounting play in venture capital?

Venture capital (VC) is defined as a form of investment for early-stage, innovative businesses with strong growth potential. VC accounting helps stakeholders keep track of the money and understand the value of their investments. VC requires lots of money movement as deals are struck. Given this money movement, regularly changing valuations, and the increasing role of regulation, VC fund accounting can get confusing pretty quickly (Doug has written about this previously here, where he shares notable fund administration firms dedicated to helping VCs manage this on an ongoing basis).

One of the primary ways VC differs from traditional company accounting is that a VC firm is investing other peoples’ money, which brings additional reporting requirements for transactions and investment values to stakeholders. On top of that, each investor that participates in a venture fund (or other investment vehicle) can contribute a different amount of capital, meaning they each own a different percentage of the fund’s investments expense obligations. A fund accountant is responsible for keeping track of these varying percentages and reporting changes to each fund investor. 

How does fund accounting work?

Fund accounting revolves around a ledger, which is used to track any instance in which money moves in or out of the fund. This includes capital calls, fees and expenses, investments, and distributions. The ledger “ties” to the bank accounts or other “sources of truth” for cash movements.

When an LP (“limited partner”) signs a contract to invest in a fund, they don’t transfer the full amount of money they commit (their “commitment”) at the get-go. In most cases, funds are transferred over a predetermined period of time using what are referred to as capital calls. A fund accountant is responsible for tracking capital calls as LPs fulfill their commitments over time.

Fund accountants also manage valuation reporting, or the process of tracking, updating, and communicating changes in value of the fund’s investments. For a venture fund that is investing in early-stage companies, valuations typically change when a portfolio company raises a subsequent financing round, although that is up for debate (see Fred Wilson’s latest, Valuing a Venture Capital Portfolio). 

An accountant will use the details of the financing round (such as company valuation and price per share) to determine how the financing event has increased (or decreased) the value of the fund’s previous investment. These reports are delivered to the fund’s LPs on a predetermined cadence (usually quarterly) that is set by the fund’s Limited Partnership Agreement (LPA).

How does accounting work for SPVs?

SPVs are vehicles typically formed by VCs or individual investors to make a single investment into a single company (vs. a traditional VC fund, which invests in a portfolio of companies in one fund vehicle). Because SPVs there is only one company in the vehicle, the accounting and reporting requirements are much simpler than those of a fund. 

Typically, money moves into the investment vehicle when the initial investment is made and out of the investment vehicle when an “exit” or distribution occurs. Additionally, since the SPV investors fund their entire commitment upfront, there are no capital calls to keep track of going forward. 

Given the simplicity of an SPV, accounting values (e.g. each investor’s ownership % and the value of an asset) can typically be tracked without the hands-on involvement of a fund accountant.

Why does it all matter?

VC fund and SPV investors are judged on their investment performance but this can take years! Along the way, both VC funds and SPVs are required by their investors to accurately account for and present their investments, expenses, and financial transactions. Doing this in an accurate and clear manner inspires confidence from investors, which can only help VC fund and SPV managers as they grow.

Thanks for reading! If you’re interested in learning more about fund accounting,here are a few resources we recommend:

• NVCA’s Accounting Auditing Standards

• ILPA’s Best Practices: Quarterly Reporting Standards

• Fred Wilson’s VC Investor Relations

It’s no secret that venture capital is being disrupted, in large part due to the influx of new entrants.  The bull market of the past decade, punctuated by massive tech exits, low interest rates, and stimulus checks, has made it viable for more individuals to invest in startups. This disruption has also been enabled by developments in investing infrastructure and technology. New structures for investing, including syndicates, investment clubs, and DAOs, have made it possible for individuals to build a diversified portfolio of venture investments via checks as low as $1k. Simultaneously, the technology supporting these investments has driven down transaction costs. Finally, there are more great companies being started than ever before, in large part due to the reduction in costs required to start a company. 

Venture investing has been on fire for the past several years. Records have been broken (and then broken again): more first-time funds have been launched, more SPVs have been created, and more dollars have been deployed into startups than ever before. The increasing participation in venture capital is good. VC has outperformed any other asset class over the past several years, and those returns shouldn’t be gate kept by a select few. Greater diversity amongst capital allocators will lead to higher levels of both innovation and representation. Individuals from under-estimated groups and non-traditional backgrounds have had an easier time (though not always an easy time) raising capital to invest. With so much liquidity in the market, and so many eyes turning towards VC, it’s been easy to be optimistic. 

But now we’re in a bear market. Wallets are tightening and due diligence is becoming more rigid. VCs who had an easy time raising millions of dollars last year are now wringing their hands with anxiety, asking: “Is the fun over?”

For some, yes. Emerging VCs who haven’t yet demonstrated success (via returns or markups) will have a harder time raising fresh capital to deploy. First time fund managers who plowed through their first fund in a 12 or 18 months will be thinking about raising fund II. Typically, this means talking to institutional investors, many of whom are pulling back, and who have higher expectations regardless of the macro-economic environment. Some fund managers will turn to SPVs to keep up their investing momentum without the burden of raising millions of dollars for a fund.

What about syndicate leads? During the bull market, every syndicate deal was oversubscribed, timelines were compressed, and money was thrown at deals with little to no diligence. Syndicate investors weren’t given the time to build relationships with the people they were entrusting with their money. Because of the compressed timelines, investors felt the pressure to make investment decisions before they had an opportunity to truly understand a syndicate lead’s approach and investment philosophy. The tradition of a “GP commit” – where a deal or syndicate lead is expected to contribute a meaningful amount of capital into their own investments – was often thrown out the window. In many cases, gaining an allocation into a “hot” deal was enough to gain the trust of hundreds of LPs. Relationship building was deprioritized while everyone had money signs in their eyes.

There’s an ongoing debate on VC Twitter about whether or not early-stage investing is (or should be) heavily impacted by the impending recession. While many investors are pausing due to uncertainty, others argue that a downturn is the prime opportunity to increase investment volume. Prices are more reasonable, slower timelines allow for true due diligence, and founders are more disciplined and determined. Regardless of where you stand on this topic, the data is clear: syndicate volume and pace have dropped significantly over the past several months. This is for the best, since the pace and valuations of the past few years were unsustainable. As wallets tighten, there’s more competition to capture the attention of LPs. And as investing pace slows, LPs will have the time to think twice before making an investment decision. They’ll be more inclined to allocate their capital to syndicate leads they understand and trust.

Capital allocators who spent the past few years using FOMO to drive activity, neglecting due diligence, and straying from their investment thesis did so at the expense of building trust and sustaining relationships with their investor community. On the other hand, those who stayed honest, diligent, and focused have earned the trust of their investor base. They took their time on investment decisions and gave community members a chance to hear directly from founders, ask questions, and voice their opinions. They brought in subject matter experts to vet opportunities and spark fruitful conversations. They syndicated deals based on genuine interest from their community, rather than following the hype. They might have even missed out on deals. But through it all, they built a community.

Communities are built on trust and conviction, which take time to develop. They are also built on shared interest and common understanding. The original form of a VC community, before the rise of syndicates, was angel groups. Angel groups commonly form around specific geographies and, before the pandemic, typically met in person on a regular basis. This structure and cadence allowed for that trust and shared understanding to develop over time.  Today, there are syndicates that form around business school classes or coworkers, but the vast majority are made of people who have only ever interacted on the internet. The relationships between syndicate leads and their investors are often brokered through marketplaces, making them feel impersonal and transactional. These relationships often lack the sense of responsibility, aligned incentives, and discipline that exists in a true community.

A year ago, we laughed at investors who missed deals because they took too long to poll their investors, or because they were too disciplined. Today, the tables have turned. The diligent fund managers still have capital on hand to deploy. The diligent syndicate leads have built a community built on trust, and can leverage that to maintain their investing activity. They can raise capital to do deals and take advantage of reasonable entry prices. 

So, if there’s anything we’ve learned from the past few years, it’s that, if you’re building a syndicate in a bear market, don’t neglect your community.

A few months ago, we published an article unpacking some of the proposed updates in the JOBS Act 4.0, which could have massive implications for emerging VC and many of the investors we talk to everyday at Sydecar. We were thrilled with the response to our article and hopeful about the many productive conversations it has spurred with organizations like the Senate Banking Committee and the NVCA, other emerging technology companies, and – perhaps most importantly – many of our customers. In order to keep these conversations going within our community, we wanted to share a letter that our founder & CEO, Nik Talreja, submitted to Congress expressing our support for the proposed updates.

I write this letter in support of the JOBS Act 4.0, which in large part addresses systemic issues that prevent widespread participation at the intersection of wealth creation and innovation: venture capital (“VC”).

While the Jumpstart Our Business Startups (JOBS) Act of 2012 enacted a number of modifications to securities law that have increased retail participation in early-stage venture investing, it left significant areas of the venture capital landscape untouched. In the past decade, the landscape for venture investing has changed dramatically. Notably, participation in venture capital has increased substantially, but the regulatory environment that governs this channel of capital allocation has left many participants at the wayside.

The Emerging Venture Capitalist’s Vantage Point

I hope to present a vantage point for your consideration: that of the early-stage venture capitalist. I feel well-prepared to do so, being an early-stage investor myself as well as the founder and CEO of Sydecar, Inc. (“Sydecar”), a platform built for this specific segment. In addition to professional investors, this group includes individuals in professional services, leaders of technology companies, and industry thought leaders, all who have access to investment opportunities in early-stage companies. It is often these individuals – the solo capitalists, angel syndicates and emerging managers (collectively, “emerging VCs”) – who are the most helpful to, most interested in, and most diligent and passionate about companies that will shape our future. While emerging VCs might have the most coveted access to investment opportunities, they are not as prepared to understand and navigate the nuanced regulatory landscape created by the Securities Act of 1933, the Investment Company Act of 1940, and the Investment Advisers Act of 1940.

As you know, professional counsel is cost prohibitive, and it is only through counsel that many nuances of the law can be translated. For example, an emerging VC today may have an opportunity to invest in an early-stage company’s offering of securities directly (e.g. “Preferred Stock”), as well as acquire an equal value of a very similar security (e.g “Common Stock”) from early employees of the same company. If an emerging VC structures even the simplest investment vehicle to acquire these securities (a special purpose vehicle that is set up to acquire just this company’s securities, and where participating investors have discretion over whether or not to deploy capital behind this investment opportunity (an “SPV”)), the emerging VC may come up against restrictions set by  the Investment Advisers Act and related rules. In this example, because the SPV acquired both “primary” securities from the company, and more notably, “secondary” securities from early employees, this SPV is no longer a “qualifying VC fund.” This emerging VC has now set itself on a path of: (1) complying with complex and varying state rules and regulations (since the benefits of a federally qualified VC fund may not apply to this SPV across all states), and (2) potentially having to formally register as an Investment Adviser (an “RIA”), as the benefits of being an “exempt reporting adviser” may evaporate if this emerging VC is successful and the value of assets that it manages exceeds $150,000,000. While this may seem like a very high threshold, the value of an emerging company investment on paper may multiply quickly even though the realizable value of these investments may still be distant. 

The above issues – whether an SPV or fund is a “qualifying VC fund” or an exempt “private fund” – would apply to any SPV or Fund with substantial exposure to anything other than a direct acquisition of equity securities from a private company. On the surface, this seems benign. In practice, this limits a number of fund (SPV) transactions that present massive opportunities for positive impact and wealth creation, including: 

1. acquisitions of securities in “secondary” transactions (above example),

2. investments in venture capital funds or SPVs, and

3.  investments in non-equity securities, such as private debt and blockchain-based “tokens.”

How the JOBS Act 4.0 Decreases Complexity 

The updates proposed in the JOBS Act 4.0 address many of the material limitations currently facing emerging VCs. The JOBS Act 4.0 proposal notably:

• Expands the definition of a “qualifying VC” investment to include secondaries and fund-of-fund investments, meaning that VCs employing these strategies can avoid having to register as an RIA.

• Allows any American to invest up to 10% of their income in private assets (as opposed to the current requirement of being an accredited investor).

• Increases the investor cap to 500 LPs for exempt private funds under $50M (as opposed to the current cap of 250 investors for a fund <$10M).

• Shifts the burden of verifying accreditation under Rule 506(c) “general solicitation” from the fund manager to the individual LPs. This would allow LPs participating in 506(c) deals to self-attest their accredited status (similar to the current 506(b) process), rather than require the GP to verify each investor’s status.

Why This Matters

The updates proposed in the JOBS Acts 4.0 are timely, given recent shifts in the venture capital landscape. VC is no longer preserved for institutional GPs and LPs. At Sydecar, we believe the future of VC — and in many ways, the future of innovation — will be defined by a new generation of capital allocators, from solo-capitalists to emerging funds to individual angel investors. Regulation changes, along with proper tooling, is a necessary first step to empower private investors from a wider variety of backgrounds.

Sydecar aims to streamline venture capital transactions through the creation of new standards. As a former securities attorney, I understand that proposals such as the JOBS Act 4.0 and SEC rulemaking are instrumental in supporting the proliferation of compliant venture capital transactions. Clarity in the interpretation and application of sensible legislation enables compliance and much-needed transparency in otherwise opaque and illiquid markets. The JOBS Act 4.0 is a framework that will decrease unnecessary friction among market participants, FINRA, and the SEC, and we are excited to contribute to its adoption. 

Our team is well-versed on the various rules that affect exempt offerings and fundraising by VC market participants today and is available to discuss the impact of the JOBS Act 4.0 and related legislative proposals on your constituents. 

Sincerely,

Nik Talreja

CEO, Sydecar, Inc.

Side letters have become increasingly popular in venture capital over recent years. But despite their recent popularity, they remain a complex and often misunderstood topic. Today, we’re bringing you a guide to side (or should we say, Syde) letters in hopes of continuing to educate and empower new and aspiring venture investors.   

A side letter is essentially a secondary agreement used to create bespoke terms between two parties. Side letters can exist between venture capitalists (including fund managers/GPs and deal leads) and their limited partners (LPs), as well as between startup companies and their VCs.  The primary purpose of a side letter is to give an investor (either a VC or LP) some special or additional rights that are not granted to all of the other investors involved in a transaction. In almost all cases, these additional rights are advantageous to the investor. 

Side Letters for LPs

Side letters between VCs and LPs allow both parties to agree to terms that may not be applicable to all investors, such as preferential treatment on returns or fees. LPs also use side letters to build in flexibility or leniency around defaulting repercussions, transfer rights, liquidity terms or indemnification. They also allow managers to pre-approve terms for LPs when raising new funds.

Side Letters for VCs

Side letters are also used to establish similar agreements between founders and their VCs. In this case, a side letter might be used to grant a lead or significant investor what are referred to as “advanced rights.” This includes pro rata rights, information rights, or right of first refusal. Side letters can also be used when negotiating a provision that may otherwise not be possible within the scope of only one funding round (for example: "The Company has 15 days after giving notice hereunder during which it may provide information relating to any proposed new financing transaction").

Flexibility

The use of side letters has increased in recent years as both VCs and LPs have looked to make their subscription documents more flexible and relevant to individual investors. This flexibility can make venture investing more feasible or attractive to a greater number of investors, especially as it relates to things like lower minimum investments, investment thesis, and fee structures. But establishing and managing side letters can often be a pain for VCs. They create operational burden, require time (and money) spent on legal counsel, and may create additional obligations or restrictions for the manager. 

This begs the question: why not just create flexible agreements to begin with?

At Sydecar, we’re dedicated to creating standards for deal execution that build in flexibility where it really matters. Our product allows you to create signature-ready subscription agreements with variable economics (fees and carry) for each of your LPs without having to create individual side letters. We understand that our customers care more about efficient, reliable, and cost-effective deal execution than about negotiating every little term of an agreement with their LPs. But we also acknowledge the importance of flexibility. Our customers use Sydecar’s variable fees to: 

• Present higher carry to investors who are not part of their existing investor community

• Offer reduced carry to an individual investor who introduced them to a founder 

• Offer reduced carry to fund LPs who chose to come into a sidecar deal

If you’re looking for an easier way to create flexibility for your investors without the hassle of side letters, we’d love to hear from you. Reach out at hello@sydecar.io 

Starting a VC fund, syndicate, or investing group is almost entirely about building trust and overcoming inertia. I first realized this in 2019 while starting a micro-fund with my co-founder, Nik.

We initially thought we wanted to raise a traditional fund. Having committed capital on hand meant we’d be able to consistently back the founders we were most excited about, and the ability to take management fees meant that investing could be a viable career path. But successfully raising a fund requires a strong track record — or at the very least, a perceived brand and differentiated strategy.

Fund LPs are typically focused on one thing: returns. As brand new fund managers, we didn’t have returns to show… but we did have something else: the ability to spot great opportunities and a proven approach to vetting investment opportunities. Our challenge was to convince LPs to invest with us, and we found that making a smaller ask opened up many doors.

We shifted our focus to promoting specific companies on a deal-by-deal basis, which allowed us to garner enthusiasm around each deal. We could promote founders, their technology, and their market opportunity — and largely leave ourselves out of the conversation. Instead of asking to be stewards of capital, we were granting access to coveted allocations.

SPVs were the ‘right place, right time’ vehicle for us, allowing us to move quickly and deploy capital. Our conversations with LPs shifted from “let’s have another call in a month” to “I’ve just sent the wire.” This was a meaningful shift in momentum, and led to our ‘aha’ moment. If the pivot to SPV’s helped unlock funding for us, it could also do the same for every other aspiring VC out there.

“Should I raise a fund or start with SPVs?”

If you are even asking this question, it probably makes sense to start with SPVs. Raising a first traditional fund is almost always a longer process than expected, and there are fiduciary responsibilities and legal technicalities in most fund documentation that might take you by surprise.

On the other hand, SPVs come with the following benefits:

• Simple, explainable, tangible

• Create a bias towards action

• SPV LPs feel more in control as they are making the ultimate decision with each investment

• More control leads to more capital to being deployed

• Value-add investors tend to want to be hands-on in supporting portfolio companies

• You can take a “breather” from doing deals without LPs getting frustrated that you are getting a management fee without active deployment

Of course, nothing great is without its downsides. Some additional things to consider if you are exploring SPVs as your investment vehicle of choice:

• You have to ask your LPs “permission” to do a deal

• Getting the deal together can take time

• Certain investors want portfolio theory

• Management fees can be tricky to ask for at first

At the end of the day, there’s no one size fits all solution for new investors. But if you’re looking to dip your toe in the water of venture investing in a way that is more flexible and straightforward, SPVs are probably the right fit for you.

Want to continue the conversation? Give me a shout at david@sydecar.io.

Nik Milanovic never meant to start a venture fund. When he started his newsletter, This Week in Fintech, in 2019, it was just intended to be an internal email to keep his team at Petal to keep them informed about what was going on in their industry. He knew he had a unique, nuanced perspective on the ways that fintech was evolving, but he never saw it as anything monumental or world-changing. He certainly didn’t anticipate it becoming a full-time job.From the start, Nik has focused on building resources that didn’t previously exist for the people who were asking for them. In 2019, that was a newsletter. In 2020, it was an investment syndicate. And in 2022, it’s a $10 million venture fund. We sat down with Nik to learn about his first angel investment, his tips for creating leverage as a solo capitalist, and his legendary fintech happy hours.

What was your first angel investment? What motivated you to start investing?

My first angel investment was in 2018 into a company called Truebird that was building mechanical coffee machines.

The thing about working in startups is that you end up putting all of your time, energy, and focus into one bet. But I wanted to see what other companies’ stories were like and support other founding teams. There are so many great products out there. It was never really about the money, I just wanted to connect with other people working on cool things.

When did you start investing in fintech?

I started a syndicate to invest in fintech in May 2020 and everything took off from there. At the time, I had just transitioned from leading strategy for Petal to working at Google Pay — I’ve always worked in fintech so I’m kind of biased, but there are so many interesting products being built and so many smart people are flocking to the space to build them. Focusing on fintech gives me the best opportunity to connect with smart entrepreneurs and actually be able to speak their language.

What was your process for finding LPs to join your syndicate?

It was a lot of outreach to people I already knew, asking if they wanted to collaborate on angel investing. We didn’t do much to promote it publicly at first, it was pretty private. But there were a lot of word of mouth referrals, and that’s gotten us to over 150 members now. People were just excited about the companies we were investing in and wanted to tell their friends.

That’s impressive growth. Why do LPs love the community you’ve built?

People like collaborating with each other. Of course, they like meeting the entrepreneurs and getting into buzzy rounds, and they get excited when those rounds get followed-on by larger VCs. But more than that, people like reviewing new concepts and then having collaborative conversations about why products are being built and why now is the right time for them to go to market. Whenever we’re reviewing a new company, it’s a highly collaborative process of putting together questions that will challenge the founders and then sharing notes before making an investment decision. Most people in the community work in fintech, but everyone is coming to the conversation with a different perspective, different experiences, and different skill sets — so the conversations that end up happening are really rewarding.

It sounds like a lot of work managing all those conversations between 150 people. What are your tips and tricks for getting the most value out of your investor network as a solo capitalist?

I’m definitely feeling the brunt of it right now after just announcing the Fintech Fund. My inbox is a nightmare. I don’t have any real hacks, but I try to focus on clear communication and transparency over everything else. I find that the more information I share openly with my community, the more people offer to help out with various tasks, organizing events, and supporting portfolio founders.

Finding the right tech stack to enable that communication and transparency has been a huge unlock. We’re using Slack for communication amongst community members, and then obviously Sydecar. It makes it easy for our syndicate members to see what we’re doing, how we’re investing, and what their participation looks like.

What drove your decision to go from syndicating deals to raising and fund and becoming a full time investor?

This opportunity — to invest in the types of companies that we’re investing in, in the places that we’re investing — is massive and the traditional venture model doesn’t do it justice. At the earliest stage, the support that early stage companies need is about so much more than the dollars. There aren’t a lot of options out there to get the support of a massive fintech community like ours that can give you firsthand advice, help you choose between two vendors, or introduce you to your first product hire. Raising a fund will allow us to bring that value to a greater number of founding teams.

What challenges have you faced in the move from syndicating deals with other angels to raising a fund backed by larger funds and institutional LPs?

It’s a different ball game. The expectations are higher around communications, structuring deals, and showing returns. I’m so appreciative of our early backers — people like Sheel Mohnot, Jake Gibson, Jillian Williams, Sriram Krishnan, Stephany Kirkpatrick, and Mike Dudas — they’ve been phenomenally supportive in making this dream a reality. But it’s definitely a more formalized relationship and so having my ducks in a row on things like compliance, tax, and other back office functions is a non-negotiable.

The Fintech Fund’s website says that you invest in defi — what is your approach to investing in crytpo or defi companies and how does it differ from other fintech investments?

We really want the investments we make out of this fund to be grounded in real use cases that are immediately available. There are a lot of great teams out there building for possible, eventual use cases in newer, unproven fields. The right partners for them are ones that have the right risk-tolerance and are excited to back more speculative concepts. For us, we want to prioritize delivering a good and fast return to our LPs. There is some crypto and web3 in the fund, but for the most part, we’re focused on products that have an immediate use case (and active customers) today.

What does your diligence process look like for that? Are you talking to potential customers or subject matter experts?

The community is instrumental in our diligence process. The beauty of what we’ve built is that we don’t often have to go outside of our own community to find someone who has experience in a certain niche of fintech, or who has been a customer of a competitor product. Getting feedback from people who know a space better than I do is so important — it’s not something that I have an ego about.

What gives your community a competitive edge?

I think our happy hours are what makes us really unique. Organizing events all over the world is exhausting, events don’t often have a super high ROI for fundraising or sourcing deals — at least not directly. But everything we do is about building this community, and we heard from the community that people were really missing in-person connection. There’s a lot of serendipity and nuance in in-person events that can’t be captured online.

This piece was written in collaboration with Winter Mead of Coolwater Capital.

Emerging venture investors are expected to do it all when it comes to building their firm. In addition to the obvious functions of fundraising, deal sourcing, and portfolio support, many new VCs are surprised to find themselves taking on the roles of lawyer, accountant, CFO, marketer, HR, and more.

Say it ain’t so!

At Sydecar, we hope to take some of that burden off of your plate. We’ve turned our years of experience as investors, lawyers, tax professionals, and fund accountants into a product that guides new investors down intentionally built paths, so that you never lack confidence or transparency into the decisions you make.

We built this product because we observed a white space in the market. As emerging fund managers, we sought out a platform that would allow us to highlight our differentiated brand, without compromising on efficiency, credibility, or compliance. And when we couldn’t find one, we built it ourselves. In the process, we consulted with fellow investors and tried out countless tools and services ourselves. So rather than leave you go down that path yourself, we’ve aggregated our findings in the “Emerging VC Toolbox.”

Choosing tools is not a one-size-fits-all exercise. Your investing stack should align with your strategy as an investor, with a few driving considerations:

• Which tools work best for your specific investment strategy and structure

• How pricing can change over time from first-time customer to repeat customer

• How do your founders interact with these tools, and is it a good user experience for them

• How well do the service providers get along

• How well do the software tools integrate e.g. accounting + fund admin, or billing + accounting, etc.

As a new investor building a track record with SPVs, your toolbox may look different from someone who is managing a fund. Today, there are more ways than ever before to participate in private investing: angel investing, syndicating deals, crowdfunding, general solicitation, or raising a traditional GP/LP fund.

These investor types have risen on the back of several market trends, including:

• A new generation of investors who view autonomy and business-building as something more important than a “steady” paycheck

• Founders who want value-added investors, especially at the earliest stages of company growth

• Founders wanting emerging managers on their cap tables because they offer empathy and diversity

• Emerging managers, including solo capitalists, securing competitive allocations versus institutional investors to lead rounds

• Traditional and new LPs investing in emerging managers and becoming more integrated with the investment process, demanding more transparency, and seeking flexibility in what they invest in across VCs’ portfolios

• Disintermediation of the traditional “lead VC” — meaning the traditional role of “lead investors” has transformed into an investor managing networks of scouts, deal partners, and value-add LPs

As new participants flood the venture ecosystem, innovation and new infrastructure is required to support new modes of portfolio and brand-building. Emerging VCs need tools that help them understand and leverage their investors, investments, and networks to optimize their investment strategies. If you are a “solo capitalist” who’s just starting to build your track record, here are the tools you should consider as part of your stack:

Education:

• First Round Angel Track

• Hustle Fund Angel Squad

• On Deck Angels

• Coolwater Angels

Deal Flow:

• Stonks

• Knightley

• Twitter

Research and Diligence

• Pitchbook for data on past deals

• CB Insights for market maps and trend insight

• Aumni for investment analytics

CRM:

• Hubspot

• Airtable

• Streak

Marketing & Brand:

• Notion, Super or Webflow for hosting your website

• Sendgrid for sending group emails and tracking analytics

• Docsend for sharing important documents and tracking views

Investor Relations & Portfolio Support:

• Visible VC for automating portfolio data collection and sharing updates with your LPs

• Google Alerts to set up alerts to stay on top of news about portfolio companies

• Pulley for equity management & 409A valuations

Fund Closing & Admin:

• Passthrough to automate fund closing and contracts

• Standish Fund Management, Vector AIS, or Juniper Square for traditional fund admin

• And last but not least, we’d throw our own hat in the ring for SPVs. We think we do a pretty good job

Given the myriad number of resources, tools, and services available to emerging venture investors, it’s important to have a strategy for building a toolbox that will deliver the most value to you and your unique strategy. We know that the process requires an up-front investment of time and requires ongoing management — as you embark on that journey, please don’t hesitate to reach out to us for guidance. Adopting the tools, programs, and services that are right for your strategy is a heavy lift to start, and an ongoing management exercise. If we can be helpful in guiding you in the right direction, please don’t hesitate to reach out!

To date, RaliCap has deployed capital into 50+ startups, focusing on fintech companies in emerging markets. Through capital allocation and a robust community of fintech operators, RaliCap has enabled the growth of companies that are having a truly life-changing impact in Asia, Africa, and Latin America. But RaliCap’s story is not without its roadblocks. In many ways, RaliCap’s founder Hayden Simmons has turned traditional venture capital on its head in order to support overlooked opportunities with immense potential.

Hayden has spent his career helping fintech companies expand into emerging markets. He saw an opportunity to use his expertise to help support founders who were early in their journeys and began angel investing in 2018. He felt fulfilled by the impact he was able to have, and he even started seeing some healthy markups on his investments before too long.

In 2020, RaliCap VC was born. Hayden, still relatively new to the world of venture capital, was overwhelmed by all of the moving pieces he had to align in order to support the founders he was excited about. He compared notes with some friends, in search of a way to get started that was aligned with his goals for the RaliCap community. But, as he looked for answers to many of his questions, he was disappointed by how difficult it was to get started.

After a year of trial and error, Hayden has finally found the answers to many of those questions — and has come up with new solutions where he couldn’t find any. We asked Hayden to share some of what he’s learned over the past year in hopes that it helps new investors who are just starting on their journeys.

Sydecar (SC): What was your thesis when you were launching RaliCap?

Hayden Simmons (HS): RaliCap is very unique in our structure. We use SPVs to deploy capital and have a very low minimum check size. Since the beginning, it’s never been about maximizing AUM. It’s about building our brand and getting the right people in the community — people with experience in the trenches who can really relate and provide value to founders.

SC: When you started RaliCap, what did you see or anticipate about early-stage investing that others might not have seen?

HS: We learned really early that we didn’t want to do the traditional syndicate model. The traditional model is: you find a deal that you want to do, tell the founder that you’re going to do it, and then go back to the community and try to raise money. And then you have to make sure the raise amount is proportional to the SPV fees.

That’s the old-school way. It's a bad experience for the founder who’s having to wait around, and also for the deal lead who’s responsible for hounding LPs to get their wires in on time. We wanted to do things differently, which is why we're leveraging Sydecar's Fund+ structure. Fund+ allows us to raise committed capital and deploy it on a deal-by-deal basis through SPVs. It's the best of both worlds.

SC: What were some of the challenges you faced when getting RaliCap off the ground?

HS: When you’re just starting off, you don’t even know what questions to ask. There’s no playbook that says “here’s how you get your fund off the ground.” For me, it was a process of constant discovery and feeling like I had no idea what I was doing.

Because of our low check sizes, I learned early on that transaction fees were always going to be a constraint for us. You typically want admin fees to be less than 5–10% of the SPV, which meant that smaller SPVs weren’t feasible with some of the providers we talked to at the beginning.

I also learned how important it is to work with a provider that has your back. At RaliCap, we’re often some of the first money into the companies that we’re backing. We’re enabling their core operations and paying their salaries, so our ability to deploy capital efficiently and on time is crucial. We don’t want to be faced with some last-minute banking issue or communications snafu that keeps us from wiring money to a company.

SC: What makes Rally Cap so special?

HS: We're not running your typical syndicate where we jump on deals and push you to squeeze your pockets. We dislike syndicates for this particular reason: incentives between syndicate leads and syndicate investors are misaligned.

Ralicap's SPV strategy comes as a complement to our overall fund strategy where we offer our LPs (and future LPs) value that we know to be unique. It's literally impossible to get direct access to the deals we share — they happen behind closed doors, are incredibly competitive, and, unless you've got $1B in AUM, you can't access them.

The magic bullet for RaliCap is having committed capital to pull from so that we can seed SPVs and then allow LPs to top up their contributions. It’s not just a community where people are passively looking at deals. The real innovation is making sure that investors have skin in the game so that they are more engaged.

SC: When you talk about LP’s having skin in the game and adding real value, what does that actually look like?

HS: People join RaliCap because they want a hands-on touchpoint with founders. Our LPs can help with deal sourcing because they have existing relationships with amazing founders. They can help with due diligence because they’re actually operating in the market. And they can add a ton of value for companies across business development, hiring, pricing strategy, and performance marketing. We’re super intentional about onboarding new community members to ensure that we’re building the best possible support system for our portfolio.

SC: In 2020, you left your job at Facebook to go full-time on RaliCap. What influenced that decision?

HS: I realized that we were consistently getting into quality deals, that our companies were raising follow-on capital, and that founders were finding value in our community. The thesis proved out quickly. And on the other side, our LPs were telling us they wanted to double down and we started to get bigger funds reaching out saying they want to invest in RaliCap. That really gave me confidence that there was enough interest and traction that I could pay myself to do this full-time.

SC: What is your advice to new deal leads who are looking for an SPV partner?

HS: Being able to outsource a lot of the back office was pretty critical. A lot of my early success was possible because I wasn’t spending hours every week thinking about the backend — subscription docs, regulatory filings, tax documents, wrangling LPs to get checks in on time. That would have been a huge distraction for me.

Given our low AUM, how we allocate money and time is really crucial. Sydecar’s flexible pricing is a good fit since we’re deploying smaller check sizes and have to be mindful of fees.

SC: What shifts do you think we’ll see in venture capital over the next few years?

HS: I don’t have a crystal ball, but what I do know is that our model works. I don’t understand how small generalist funds will survive the changes in VC and am confident that doubling down on fintech is the best bet for us. I look back on our marketing messages from a year ago and at the time I was like “who the hell knows if this will work?” Now I realize we were spot on. This grassroots, decentralized community with no overhead really can outperform traditional venture models.

Today, we’re delighted to announce Sydecar, a frictionless deal execution platform for venture investors. By pioneering a standardized and product-driven approach to private investing, we enable thousands of new investors to identify and back entrepreneurs who are changing the world. Over the past year, we’ve been honored to serve more than 3,000 investors, participating in over 220 deals, leading to $350M+ assets under our administration.

We’re eternally grateful to our investors from Deciens Capital, Pipeline Capital Partners, Anthemis Group, and Hustle Fund VC. These investors have brought us to $8.3M raised to date, with support from angel investors and strategic operators from companies like Brex, Square, Venmo, Plaid, Remitly, Chime, and Allocate.

How did we get here?

As attorneys working in securities law and startup financing, we had a front row seat to both the opportunity and the challenges of investing in private companies. Equipped with this knowledge, we took steps to launch our own venture fund in late 2019. As we did, we looked to friends and peers for guidance. We asked for recommendations and best practices around setting up a bank account, drafting and delivering subscription documents, filing taxes… and everyone seemed to have a different answer. We found that there were no best practices — no standards — for investing in startups. At the outset, every single new venture investor is left to carve a path on their own. Many resourceful investors look to the Internet for guidance — from Twitter, to blogs, to Google search. They’re left to their own devices to determine whether the information they stumble across is credible and compliant.

• “Should I organize a deal under my own name or create an LLC?”

• “What is a registered investment advisor — and do I need to be one?”

• “Do I need to file Form ADV? Is this different from a Form D?”

• “Should I accept the provisions my LPs are asking to add to our subscription documents?”

• “What on earth are Blue Sky Fees?”

Fragmented, inefficient, and costly processes have been accepted as the status quo in venture capital, creating a barrier to entry for many passionate and creative investors. New investors are left to unpack the complexities of legal structures and tax implications, while juggling branding, operations, and investor relations across disparate systems — often with little to no guidance or support. As a result, some of the most promising investment opportunities go unfunded because of the pain associated with deploying capital. Even with the right education and experience, we struggled through every decision. It felt like there was no one looking out for our best interests as we set up our first investment vehicles.

The opportunity in venture capital continues to grow, with value creation increasingly moving towards private markets as companies wait longer and longer to IPO. Historically, only professional venture capitalists have been able to access this value by raising hundreds of millions of dollars from institutional investors and leveraging internal operations teams to support their deal execution.

Today, entrepreneurs realize the value of having former founders and operators on their cap table — individuals who have spent time in the trenches of company building and have gained tremendous expertise and empathy. All of this has led to the rise of new types of capital allocators, including operator-angels, solo capitalists, and emerging fund managers. But these new entrants to VC aren’t staffed with a personal team of lawyers, accountants, and bankers to support their deal execution. In the past, they’ve had to piece together a slew of service providers, consequently compromising on cost, speed, reliability, and compliance. They’ve frequently missed out on deals, stressed over lost wires, and waited on late tax documents as a result. We felt this pain firsthand, and that pain was our call to action.

Meet Sydecar

Sydecar is an onramp to venture capital, starting with an SPV product that allows you to create and onboard investors in minutes. Our intuitive platform guides new investors down industry-trusted paths that make capital formation and allocation effortless. While you’re focused on sourcing deals and building relationships, we’ll handle all of your back-office functions from banking and compliance to contracts, tax, and reporting.

Sydecar sits at the intersection of financial, legal, and technological innovation. Through our standards-driven, product-led approach, we provide access to tools typically housed within financial and legal institutions. By doing so, we remove the headache, cost, and uncertainty of back-office operations while establishing Sydecar as a bedrock for the next iteration of VC investing.

The road ahead

Sydecar is built to support the most exciting transformations in venture investing while reducing friction. Today, our core SPV product allows deal leads to:

• Configure investment vehicles with flexible terms and economics to produce signature-ready deal docs in minutes.

• Showcase opportunities to their network and onboard investors with a few clicks.

• Track interest, commitments, and funding progress in real-time and close in a matter of hours.

• Send deal updates and manage investor communications, while our suite of products handles the rest (from K-1s to distributions, interest transfers and secondaries).

Our SPV product is the first step of a journey towards an ever-expanding platform that seeks to accelerate shifts in private investing. By pioneering market standardization, Sydecar will enable high-quality deals, meaningful relationships, and smart, sustainable progress. In the coming months, we’ll release products that remove regulatory barriers from early stage venture investing, provide unparalleled flexibility to raise committed capital on your own terms, and offer liquidity opportunities with a fraction of the hassle.

Thanks for coming along for the ride! Here’s to a future of better venture investing.

Nik & Dave

P.S. If our mission resonates with you and you’re interested in joining our team or running a deal on Sydecar, please let us know. We’d love to hear from you!

The JOBS Act, originally passed in 2012, is regularly cited as one of the most significant regulation changes in the history of private investing. Now, almost a decade later, Congress is assessing an update to this legislation — referred to as JOBS Act 4.0 — which has huge implications for both emerging and aspiring venture investors.

The 2012 Act notably increased access to private markets, specifically through Regulation Crowdfunding, which allowed private companies to raise money from non-accredited investors, and the addition of Rule 506(c), which allowed general solicitation of fund offerings. While the 2012 Act (Reg CF specifically) gave retail investors the opportunity to invest in startups for the first time, it did little to meaningfully advance opportunities for venture capitalists.

Today, VCs have to navigate a regulatory minefield to ensure compliance with the Investment Company Act, Investment Adviser Act and Broker-Dealer regulation. The current regulatory regime limits VCs in the following ways:

• Only “accredited investors,” representing ~2% of the US population, are permitted to invest in startup companies.

• The majority of VCs abstain from secondary, “fund-of-fund” (FoF), and crypto investments altogether due to the risk of having to register as an investment adviser (RIA). Investors participating in these types of deals must either keep AUM under $150M or become an RIA (which comes with an abundance of restrictions and requirements).

• VC funds are capped at a maximum of 99 or 249 (accredited) investors (depending on how much they raise), or must create a second “parallel” fund structure which is costly and can only accept qualified purchasers.

• If leveraging Rule 506(c) “general solicitation” (noted above), VCs must actively verify the accreditation status of all participating investors.

  
  

  

Overview of JOBS Act 4.0 updates

So, why is this new JOBS Act update so exciting? Well, it addresses all of those material limitations described above — and more. Here’s a summary of the regulatory changes proposed by the JOBS Act 4.0:

• An expanded definition of a qualifying “VC” investment to include secondaries and fund-of-fund investments, meaning that VCs employing these strategies can avoid registering as an RIA.

• A shift in the burden of verifying accreditation under Rule 506(c) “general solicitation” from the fund manager to the individual LPs. This would allow LPs participating in 506(c) deals to self-attest their accredited status (similar to the current 506(b) process), rather than the GP needing to verify for each investor.

• Any American would be able to invest up to 10% of their income in private assets (as opposed to the current requirement of being an accredited investor).

• The investor cap would be increased to 500 LPs for funds under $50M (as opposed to the current cap of 250 investors for a fund <$10M).

Implications for emerging VCs

The updates proposed in the Jobs Act 4.0 are timely given recent shifts in the venture capital landscape. VC is no longer preserved for institutional GPs and LPs. Today, some of the most promising investment opportunities are sourced by new entrants, from solo-capitalists to emerging funds to individual angel investors. At Sydecar, we believe the future of VC — and in many ways, the future of innovation — will be defined by this new generation of capital allocators. Regulation changes, along with proper tooling, is a necessary first step to empower private investors from a wider variety of backgrounds.

Raising via 506(c) is a huge unlock for new entrants to VC, particularly those that do not come from generational wealth or high socio-economic status. It allows anyone who has built an engaged following online, for example, to market their fund publicly rather than having to rely on the closed-door networks that have historically dominated the industry. However, the current requirement to verify accreditation status in a 506(c) fund can be expensive and time-consuming, as it requires manual document verification. If this responsibility is shifted to the investor, 506(c) becomes more viable for emerging fund managers who don’t come from wealth.

The JOBS Act 4.0 also proposes expanding the definition of qualifying VC investments to include secondaries and fund-of-funds. Historically, only direct investments in private companies were considered “qualifying,” while acquiring private equities from founders, startup employees, or other funds was considered “non-qualifying.” Loosening this definition would allow VCs to participate in secondary and FoF investments without limiting the type of investors they can raise from or worrying about becoming an RIA. In addition to allowing more flexibility for VCs, this would also benefit founders and early startup employees by creating opportunities for liquidity.

Permitting all Americans to invest in private companies, regardless of their income or wealth, would help to level the playing field for wealth creation. Over the past several years, venture as an asset class has outperformed public markets — and, as public market stocks look increasingly uncertain, exposure to private assets held over a longer period looks more enticing. At the same time, this would create a greater pool of possible LPs for new fund managers to raise from, which aligns with the current trend of micro-VC funds. Gone are the days where a fund needs to be in the tens of millions to make fundraising cost-effective. Platforms like Sydecar make it possible to pool and deploy funds within hours, and at a fraction of the cost. All of this means that a VC can cost-effectively do smaller deals, comprised of smaller checks, from a wider pool of investors.

Source: Pitchbook

What’s missing?

So what about web3.0? The proposal avoids any explicit reference to crypto/token issuances in the JOBS Act 4.0. That said, in their current form, the proposed changes would allow VCs to invest in tokenized offerings with far more flexibility.

What’s next?

The JOBS Act 4.0 was proposed on April 4, 2022 and still needs to make its way through Congress before being signed into law. The act is widely expected to undergo major changes, so it’s too early to celebrate some of the proposals summarized above. We will be keeping a close eye on this bill and other advancements to the current state of VC regulation, so stay tuned!

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