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🎨 The Art of Running a SPV🖌️

Special Purpose Vehicles (SPVs) can be challenging to put together and a difficult process to manage as the GP is consistently in-between founders and investors, trying to solicit capital from one group (the LPs), while simultaneously trying to commit to a founder to invest. There are a lot of expectations and timelines to manage from both sides.

Let me be crystal clear. While running a SPV is more art than science, there are best practices that GPs should be aware of to run the most efficient process possible. 

Managing Expectations

Communicating with founders while running a SPV is a true art. It’s more complex and dynamic in some ways than a traditional VC who already has their fund capital raised upfront and will ultimately decide on how much to invest (of the existing capital raised). Due to this, it is important as a syndicate lead to inform and educate founders on the SPV process upfront so they understand the flow, the timeline, and the potential low end and high end for an investment, even if those ballpark figures end up being incorrect. Managing expectations is key.

These SPV entities and processes can require rapid deal execution. This is especially true for SPVs who tend to be follow-on investors, soliciting investments after terms are set and a lead VC is in place, putting strict timelines on our processes. As a SPV manager, you need to be agile and adapt to how your fundraising process is going - it’s likely your expectations will be off. This is probably the biggest reason that SPV managers quit.

From fundraising to deal structuring, investor relations to portfolio management, the SPV lead must orchestrate a smooth process to keep the founder (you are investing in) and LPs (you are providing investment opportunities to) happy.

First, let’s dive into the founder side of the house.

The Art of Communicating with Founders when Running an SPV

This section will be structured as a Q&A that touches on the approach I (Alex) use as a syndicate lead in communicating specifically with founders.

What are you supposed to say upfront to the founder when securing the allocation?

Upfront, I typically educate the founder on SPV process and timeline. I explain how I will prepare a deal memo highlighting our investment thesis and overall presenting the investment opportunity - these memo’s can range from <1,000 words to much longer Investment Memo’s for established funds. I explain that this is the main marketing tool that we use to solicit to our LPs to help inform them on the deal opportunity to make a decision to invest or not.

I’d typically ask for about 2 weeks to narrow in on the final investment amount in order to be in a position to sign and wire, but I’ll also note that we can move quicker if needed, but also that it’s helpful for a bit more time if possible. It won’t always be clear on the timeline which is part of the art of staying close, and in touch with the founder as timelines may shift depending on the round itself and other external factors.

Additionally, I’ll let the founders know that there may be some questions that come in from LPs that I might lean on them to provide accurate feedback, so I request they be available to address questions as needed. We typically provide Founders batched questions (perhaps once or twice in a process) as to not continuously bother them. Beyond that, I highlight that I will handle everything related to the SPV, so there is no additional work on their end to round up capital etc. 

I try to make it as easy as possible for the founder to work with us.

How frequently do you communicate with founders during the SPV process?

There is not a simple one-size fits all, but here I’ll share what I view as standard. Please note, some founders may want more or less communication, again, why this is more of an art. 

Typically, when I am securing an allocation, I explain the SPV process. After a few days to a week of sharing the deal with LP’s, I should then have more clarity on where the SPV capital committed, i.e. our investment size, will land. After that week takes place, I then share those updates with the founder and also explain that I will be issuing a closing call and firm up all commitments in the coming week. This means 1 week for initial allocations and another week for final allocations so that I can provide a final number to invest and move to closing/signatures in a total of a 2 week timeframe. It may take an extra few days to get in all final wires, but what founders care more about is the final commitment dollar amount with typically more time on the wire.

As mentioned above, sometimes there are questions that come in from LP’s that I think are best suited for the founder to answer. Each deal is different when it comes to these questions. Some have zero I need to lean on the founder for, and others have multiple.

In recap, I typically will provide 1-2 updates (more or less possible) to the founder from deal launch to closing.

Are there times when you’d check in outside the points above?

Yes, there are typical 2 scenarios when I might check in more than usual with founders during an ongoing SPV process:

1. If the round is very competitive, then I will contact the founder more frequently to provide close to real-time updates to ensure my allocation is included in the round. This is important as you do not want to lose an allocation if the founder is unsure about your ability to put together the SPV and invest in the round. There is a relationship component here as there have been times (rare but happens) when we’ve lost allocation mid SPV process.

2. If the founder is on a tight deadline or similar to above, the round is competitive and they are requesting more updates so they can plan accordingly, then I would communicate more frequently. I think it’s very fair to do this if it’s requested by the founder as they are trying to piece together their round and allocations, and the SPV process is a little less transparent than a traditional fund. In this scenario, we’d agree to some frequency in which I’d relay updates, and then provide them on whatever agreed upon.

What happens if you don’t raise enough to invest?

Ahh, the least fun part of raising SPVs…

Ideally here, you’ve explained the process upfront in a way that highlights no money is guaranteed, so that they realize there is a chance things could potentially go south. Regardless, in the event you are simply not able to raise the necessary capital to complete the SPV, it’s important to inform the founders ASAP. 

I typically try to explain why it was not able to work, and what I got wrong as a syndicate lead and take some of the responsibility, but after putting together hundreds of SPVs, we have a pretty good sense of which deals will perform. After all, you can argue that I wasted some of the founders' time and my own. Founders deserve feedback here and you should provide that as any normal VC would if they decided not to invest after talking up a founder's time. Typically, I’d highlight what I thought was the reason we were not able to raise the capital. And offer the opportunity to stay in touch for the future but unfortunately part ways for now.

I will note, the better you explain the process upfront, the easier these conversations can be if the deal is unable to get done.

Notably, there is another way to get a deal done if you struggle getting traction with your LP-base.

Another avenue to take if the deal is not getting enough traction to invest, and assuming you have more time and have not informed the founder yet, would be to co-syndicate. Co-syndicating is when two or more syndicates team up to run an SPV together, leveraging capital sourced from both of their networks.

This is another way to raise more capital and potentially get the SPV to a position in which you can still invest. You will of course need to give up economics here, but that’s a better alternative to not closing.  There are other benefits to co-syndicating, but for this topic, it can be a great way to tap into a new capital pool assuming the other syndicate lead is interested in exposure to the deal.

What happens if you raise more than the requested allocation?

This is a good situation to be in (especially now) but also can be problematic. Once I get a sense that our allocation might be oversubscribed, I will immediately inform the founder to see if there is wiggle room for us to invest more than originally requested. Depending on the speed in which we got to “oversubscribed”, it may be easy to get more allocation i.e. we moved quickly and therefore not much time has passed to allocate capital to other investors. Also, if you have some significant value-add component to the company, now is the time to flex that! This is why you see Syndicate Leads often soliciting (maybe too much) - we’re candidly trying to manage founder expectations, while also getting in as big a commitment as possible. 

In competitive rounds, there just might not be room to increase our allocation, and unfortunately that is just part of the game. I never want to leave LP money on the table (it gets returned if not all can be invested) but LPs understand this for the most part. 

The best thing you can do here is to try to get a sense from the founder that in the event you raise more than expected, see if there is a high or low likelihood that they will be able to accept the additional capital. You don’t want to over promise here, rather get a pulse on the potential to allocate more capital. 

I will note, it’s common for founders to make it appear that the round is moving quicker than it actually is, so even if they say they “need to know by Friday,” there may be an opportunity to invest beyond that date, but also do not count on that. Every founder wants to close their round quickly and get back to building, and I understand that. 

Disclaimer: every round is different, moves at a different speed, varies on competitiveness, and founders react differently. Relationships matter!

The Art of Communicating with Investors when Running SPV’s

And now on to the other side… Communicating with LPs.

When communicating with LPs, timelines are always changing, allocations are always changing, capital committed to a deal is always changing. In this section we’ll help you navigate this all as a syndicate lead.

How do you drive urgency?

I think it takes some molding and education to understand the general turnaround time of an SPV. It’s typically 1-2 weeks for Riverside but can extend further for a few reasons. Given we have been doing this for years, I think we’ve set expectations and market appropriately given the timelines we face on the founders side, however it can be tougher when you are getting started.

There are a few reasons that urgency is important to explain to LPs assuming these are true and not artificial.

1. Your allocation is filling quickly or has filled → Here you can highlight the speed at which the SPV is filling to more or less inform other prospective LPs that they’d need to move more quickly if they want to get in the round. In this scenario, I am assuming additional allocation is not guaranteed, therefore it’s a nice way to highlight the interest in the deal, and the pace at which it is moving for LPs to make decisions if they want to get in on time. 

2. The round itself is filled or oversubscribed → Here the company has completed a successful raise and is more or less waiting on your SPV to round up. For that reason, it is important to inform LPs of the status of the round as you (regardless of allocation) will likely need to close this up asap in order to inform the company of what the SPV will be committing to the round. In this scenario, the urgency is really being driven by the company and the status of the raise, which is legitimate and should certainly be used to round out the SPV and drive urgency for those on the fence.

How do you communicate if you didn’t raise enough?

Obviously, this is a position that sucks to be in and we try to avoid, however it will happen here and there. The short answer is be honest. Not every deal works out. My recommendation here is to inform the LPs that committed to the deal that there was not enough LP interest unfortunately to proceed with the deal. It is also helpful to highlight why you think there may have not been enough LP interest - it likely has very little to do with the deal quality candidly. Being specific on why you liked it but perhaps why it did not resonate with LPs would be nice to explain, but perhaps, not necessary. 

How do you communicate if you raised more and cannot invest the entire capital pool raised for the SPV?

I would also say, similarly to above, be honest. There are times when you raise more because there is strong LP demand, but you can't squeeze all of the allocation into the round. The company may have allocated you $200k, and you raised $300k. In this scenario, I would do everything I can to have the company accept our larger commitment, but they can’t always do it as explained earlier. Founders have a lot on their plate especially when it comes to managing their cap tables in financings, so we are understanding of that. When this happens, it’s important to highlight to LP’s why ⅔ of their investment is going through and they are being cut down (and refunded) by 1/3.

When it comes to individual investors in syndicates, they typically will understand. Some may not love it, but it happens. 

How do you communicate if you got your allocation revoked?

Here you also want to be honest and transparent. Similar to above, this happens. If it’s your fault as the syndicate lead in the communication with the founder or some error in regards to securing the allocation, that’s unfortunate and ideally something you can learn from and improve on. You should provide those details to LPs if the allocation is lost.

In Summary → Running SPVs are a Balancing Act on Two Fronts

Hopefully, this provided a glimpse into the world of running SPVs. It's not for the faint of heart – it's a constant dance between managing founder expectations, juggling investor timelines, and keeping everyone informed throughout the often-shifting process.

Remember, communication is always key here! Be upfront with founders and LPs about the SPV process, explain potential timeline shifts, and keep them updated on every twist and turn. Transparency and honesty will build trust and understanding, even when things don't go as planned. It doesn’t go as planned for anyone.

Here are some key takeaways to leave you with:

• Founders: Manage their expectations by explaining the SPV process and potential timeframe variations. Be responsive to questions and be prepared to provide additional information if needed.

• Investors/LPs: Understand the dynamic nature of SPVs and the potential for changing timelines and allocations. There are many external reasons or factors; allocation sizes and timelines may change.

• Syndicate Leads: Master the art of juggling expectations and information flow. Be transparent, communicative, and adaptable to ensure a smooth process for everyone involved.

Running an SPV can be incredibly rewarding, offering access to exciting investment opportunities and valuable connections within the startup ecosystem.

Last Money In is Powered by Sydecar

Sydecar is a frictionless deal execution platform for emerging venture investors. We make it easy for anyone to launch SPVs and funds in minutes, with automated banking, compliance, contracts, tax, and reporting so that customers can focus on making deals and building relationships.

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✍️ Written by Zachary and Alex