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Last week Deal Sheet subscribers received investment opportunities with co-investors General Catalyst, Lightspeed, Kleiner Perkins, L Catterton, Microsoft (M12) & others.

We Have >6,500 LPs and it’s a Total Vanity Metric

We previously put out an article discussing how we grew our LP base to 6,000+ LPs. If you want to learn how we did that, you can check out that article here. We recently crossed 6,500 LPs and continue to grow 100+ new LPs per month. Today we’re going to go over why the total LP number is actually more of a vanity metric, and double click on what really matters - your quality of LPs, your relationship with your LPs and the quality of opportunities you're bringing them. 

I won’t state either of these two syndicates by name, but I will use two syndicates I’m familiar with to help illustrate our point. One of the largest syndicates I know has almost 10,000 accredited investors in it, and they frequently struggle to raise even small amounts of capital for their deals (20-50k) (in fairness this is common among many large syndicates I know in this market). 

How could that be true - with nearly 10,000 LPs, theoretically, you’d only need <0.5% of your LPs to invest $2,500 in a deal to fill a >$100,000 allocation SPV? Alternatively, I have a close GP friend who can fill multi-million allocations ($1M-$10M+) a year with only a few dozen LPs.  

Let’s get into why this is:

1) LP Burn Out: 

As a GP in this ecosystem now since 2020 (and an LP since 2017) and having been through several cycles all compressed into a four year period, it’s been astonishing to see just how much LP burn out there is. Of the ~6,600 LPs in my syndicate, half of them are no longer active (i.e. haven’t invested in a deal in the last 365 days) - they may come back, but just due to burnout and disinterest, half of our LPs aren’t even participating in our deals (or likely any deals). Only ~2,500 of the ~6,600 LPs in our synidcate have invested in our deals in the last 180 days. If you qualify “active” as invested in a deal in the last 180 days, than ~62% of our LPs are inactive, and this is similar to a lot of the active syndicators who have been around for a few years and tout large LP bases.

2) Quality of Opportunities & Brand:

Over time, GPs build a brand on 1) how good they are at picking opportunities, 2) their thought process, 3) their unique access, 4) their strategy, 5) their cadence and formality around communication, etc.

Some GPs have done well at this - Unpopular Ventures has done a very good job at branding themselves at finding “unpopular” opportunities before they are on the radar of VCs allowing them to get into rounds at extremely competitive prices (think Bitcoin 2014). Another is First Check Ventures, who has branded his syndicate around being the first check into a company when entry valuations are extremely low; theoretically he’s able to mitigate risk through his operating experience (ex-Rappi) and by being a great picker (already has a potential outlier winner with Yummy, though TBD). There are many others I could call out here - Martin Tobias of Incisive Ventures, Ben Zises’s SuperAngel, and so on, and so on.

Notably syndicates have solidified their brands not just by clear messaging but with proven results (e.g. continually picking winners) and transparently communicating their track record, and thought process over time, while also making themselves available to LPs, on some ongoing basis. In other words, they built trust and credibilty.

Unfortunately, many Syndicates fail at brand building. If it’s unclear to LPs how you think about deals, what makes you a credible GP, your thought process, among other factors and/or your failing to provide your LPs with quality opportunities, you're likely failing in this category and that could lead to inactive LPs despite a large LP base to solicit from. 

3) Frequency of Opportunities:

We’ve closed >120 SPVs in the last 12 months and are approaching almost 500 SPVs total completed over the last four years. In January alone we closed 13 SPVs.

That’s a very high frequency admittedly. I genuinely believe if we cut the number of opportunities we syndicated in half, our average SPV size would probably rise 10-30%+, and if we cut it by 80%, perhaps we’d fill 50-150%+ more per deal. It’s a decision we’re thinking through especially in a more difficult syndicate market. The syndicate referenced at the top with ~10k LPs similarly launches probably 50-100+ deals a year - it is exceedingly difficult to persuade LPs to invest in even a small fraction of 100 deals/year and often if you attempt to do that you’ll typically get LPs ignoring your deals or burning out quickly, and you’ll be forced to refresh your base frequently or change strategy. 

4) LP Ownership & Relationship:

If you have thousands of LPs in your syndicate, it’s likely they are not unique or loyal to your syndicate, but rather, may be participating in deals from other syndicates, meaning these LPs are seeing A LOT of deals. There is likely minimal to no loyalty or ownership over these LP relationships.

The other GP who only has a few dozen LPs has worked hard to build strong relationships - they have loyalty to him as a manager and are likely not investing in too many syndicates or at minimum will seriously evaluate every deal he brings to them.

How did you source your LPs - passively or actively? Do you actually have any relationship at all with your LPs or are they all completely passive. Do you offer Calendly’s for 1 on 1, hold office hours, respond to them when they have questions, provide them quarterly/annual updates or other types of communication cadence.

If you fail at this, it’s likely that over time you’ll get minimal engagement from your LPs as there’s no or minimal relationship there.

5) Quality of LP:

Does your LP invest $1,000 into a few SPVs per year or does he/she write $100K-$5M+ checks into 4-10+ deals per year? Most of the LPs in large syndicates who are active are extremely small and infrequent check writers making it difficult to fill a $50k+ allocation even if you have 10-20 LPs (or more investing) - at a $1k check size it just doesn’t move the needle. There’s a really nice aspect of democratizing the access class but from the GP perspective, in a difficult environment it takes a ton of persistence to continually having to raise for SPVs at any meaningful scale. So quality > quantity.  

6) Track Record:

Admittedly, this is something that takes time to build up, but if you can show strong IRR, TVPI, DPI and transparently lay this out on an ongoing basis and/or demonstrate in other ways your a great venture capital investor, I’d expect active LPs to continually invest in your SPVs. 

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Let me state - that if you have incredible deal quality and a track record of success, you’ll likely be able to fill allocations often in spite of lacking some of aforementioned traits. But in this market, that’s exceedingly rare, and even syndicate GPs who have all of these characteristics may still struggle to fill SPVs and/or have cut their SPV investment amounts by 30-90%+. 

On the other hand, and as mentioned, I have a friend GP who runs a closed network syndicate of only a few active LPs (<40), but can fill $1M-$10M+ allocations from his group for deals he runs. How is that? To nail the point home. 

1. He picks extremely high quality LPs, specifically check writers who can invest a lot of capital and into multiple deals per year. Needless to say it is likely 10x+ harder to get a large active check writer to invest in your deals than a passive small retail LP that is joining 10+ other syndicates. 

2. He has built a strong relationship with his LPs, specifically he talks to them continually and has gained trust with them over time by proving that he has a good thought process and can pick winners. And this has been validated over a 24+ month period by getting access to the top deals, several of which have already gone on to raise at huge markups. 

3. He owns the LP relationship - his LPs are not a part of many syndicates. They are uniquely loyal to him because they trust him, his thought process and he shows them quality opportunities. 

4. He gives them facetime. To hit the relationship point home, he doesn’t treat his LPs as transactional or dispensable, but as long-term partners.  

5. He has a distinct brand - he focuses on one sector and one stage exclusively that he has a deep network in, a long track record of success in and has extremely strong expertise in. 

Having had the experience of being an LP for a number of years before being a GP for four years, I believe this framework is valid. Additionally, having seen so much from both sides, I’m hesitant to invest in a GP who didn’t show high integrity, a high quality thought process and/or show high quality access. I’m just very skeptical of what I see now that I know how the sauce is made and having worked with 50+ partners.

There are some incredible GPs and some with low integrity (like every business) - as an LP, it should be somewhat obvious over a period, so if you’re unsure, join their syndicate and take a wait and see approach, observing their behavior and seeing if it aligns for what you’re looking to invest in. 

🌱 If you liked reading this article, check out our past articles that uncover how we grew our syndicate: 

• How We Invest in Over 100 Startups a Year as a Syndicate and Why Most Funds Can’t

• 🚀 How I grew our Syndicate to over 6,000 Limited Partners

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✍️ Written by Zachary and Alex