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Are VCs the New Bankers?

In the last 1-2 years, a significant shift has occurred in the venture capital landscape. VC syndicates are increasingly taking on roles traditionally held by investment bankers, creating a new paradigm for capital formation in the startup ecosystem. This evolution merits exploration as it fundamentally changes how companies raise money and how investors participate in deals.

Venture capital firms are no longer just deploying their own capital. Instead, they're increasingly acting as capital formation hubs, syndicating large portions of their allocations to other investors. This transformation mirrors the traditional investment banking model, where banks underwrite deals and distribute securities to their network of investors.

A few high profile examples 

• Anthropic: Menlo Ventures syndicated a large part of the previous funding round, distributing access to their deal.

• Figure: Align and Parkway have embraced the pseudo banker role, syndicating their allocation alongside other VC syndicates and brokers – a move aligned with their ex-Stifel banker partner's background.

• Apptronik: Capital Factory & partners syndicated out a significant portion of the round, with partners earning carry and management fees while helping the company raise capital quickly.

And syndication at scale is arguably more lucrative than the traditional investment banking model. Whereas bankers typically get a success fee that’s based on how much capital is raised, syndicators take both management fees (typically 10% all in) and carry (typically 10-20% of the profits). The kicker is that bankers take their fees from issuers, while VCs are taking their fees from the LPs. This is a big deal for VCs, who now can monetize their positions in a much more meaningful way, and potentially good for companies in that they don’t have to pay banker fees, which can amount to hundreds of millions of dollars for large raises. There are downsides of course, which we will get into…

Why This Shift Matters

Benefits for Companies

• Access to Retail Capital: Retail investors are often less price-sensitive than traditional VCs, potentially leading to higher valuations for their shares.

• Speed of Capital Formation: Syndicates can mobilize capital quickly through their networks than through traditional fundraising approaches. Bankers have regulatory tape that VCs don’t always have as many are not brokers. 

• Reduced Negotiation Complexity: Working primarily with a lead who then syndicates reduces the number of direct negotiations needed.

• Save on Fees: Bankers charge a success fee to the issuer on capital raised, while syndicators charge LPs and not the issuer typically. 

Potential Negative Consequences for Companies 

• Perception of Quality: Excessive syndication can cheapen a company's brand. Top-tier companies historically secured funding from a select group of prestigious VCs. When a round is heavily syndicated to retail and smaller investors, it may signal that traditional VCs weren't willing to take larger positions.

• Future Fundraising Complications & Pricing Issues in Subsequent Rounds: The price insensitivity of retail investors can create artificially high valuations that traditional VCs won't match in future rounds, leading to future down rounds or fundraising difficulties.

• Limited Dry Powder: Syndicate participants typically lack reserves for follow-on investments, unlike established VCs who plan for multiple rounds.

• Fair Weather Capital: Retail and syndicate investors may lack the commitment to support companies through difficult periods, potentially disappearing when market conditions deteriorate.

• Expect an Active Secondary Market: Retail is typically less permanent capital, so expect an active secondary market.

Benefits for the Lead VCs Syndicating

• Enhanced Economics: By charging carry and management fees on syndicated capital, VCs can increase their returns beyond what their fund size would normally allow. VCs can now double dip with fund investments & very large SPVs.

• Expanded Deal Access: The ability to syndicate allows VCs to participate in a broader set of deals outside of their fund constraints. 

• Reputation Building: Successfully syndicating high-profile deals enhances a VC's market position and attracts more deal flow. 

Potential Downsides for VCs 

• Potential Breach of Duty: VCs have a fiduciary responsibility to maximize returns for their LPs. When they take small fund positions and syndicate the rest, they're potentially denying their LPs exposure to the best deals. 

• Cannibalization of Fund Economics: When VCs earn carry on syndicated capital rather than deploying fund capital, they may be competing with their own funds, creating a potential conflict of interest. 

• Distorted Decision-Making: The incentive to earn syndication fees might lead VCs to prioritize deals that are easier to syndicate rather than those with the best long-term potential.

• Lesser Diligence: Competition to syndicate might incentivize shortcuts in due diligence to move quickly. 

Benefits for Syndicate Participants (LPs)

• Access to Deals: Smaller investors gain access to high-quality deals they wouldn't otherwise see, albeit sometimes at expensive prices.

• Reduced Due Diligence Burden: They can rely partially on the lead investor's due diligence.

• Portfolio Diversification: Investors can spread smaller amounts across more deals.

Downsides for Syndicate Participates (LPs) 

• Premium Pricing: Syndicate participants may enter at higher valuations than true fair market value as VCs. 

• Unfavorable Terms: Syndicate participants rarely receive pro-rata rights, information rights, or other investor protections that lead VCs secure.

• Limited Information Access: Syndicate participants receive significantly less information than lead investors - often just basic pitch materials rather than detailed financials or board updates.

The New Capital Formation Landscape

In all, the shift represents a fundamental restructuring of the venture capital ecosystem. 

Traditional boundaries between investment banking and venture capital are blurring, creating a more fluid capital formation process. The emergence of platforms like Deal Sheet, Sydecar, AngelList and others have further democratized access to startup investments, allowing individuals to participate in syndicates with relatively small check sizes. This has created a new class of micro-LPs who can follow lead investors into deals. I expect this trend to continue. Large brand-name VCs will likely face no consequences from LPs for extracting more value for themselves, so they'll continue doing so. Meanwhile, retail investors and syndicate participants will gladly pay fees and carry for access, especially as private markets have become the primary way to invest in promising companies before they mature.

If you enjoyed this article feel free to view our prior articles on adjacent topics 

• Bridge Rounds; A VC’s Dream or Nightmare?

• The Challenges of Relying on Public Comparables for Valuing Your Startup

• Why Revenue ≠ Revenue! How to See Past the Blanket Revenue Multiples Put on Companies

Last Money in is Powered by Sydecar

Sydecar empowers syndicate leads to manage their investments more effectively. Organize, manage, and engage your investor network effortlessly with Sydecar’s management and communication tools. Their platform also automates banking, compliance, contracts, tax, and reporting, freeing up syndicate leads to focus on securing deals and strengthening investor relations. Elevate your syndicate operations with Sydecar.

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✍️ Written by Zachary and Alex