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🚀The Biggest VC Markups come BEFORE the “Signal”

As I look back at our 300+ company portfolio, almost all of the largest markups were companies we invested in before the Tier 1 or “prolific” named VC joined the cap table.

While I wouldn’t say that investing alongside Tier 1 VCs is too late (notably Zach invested in an SPV alongside Accel that is currently marked up almost 200x), generally our largest markups currently stem from companies we invested in before it became evident, and before larger, more prominent funds had made their investments.

Many syndicate leads I’ve spoken to, often find this challenging or problematic as signal is a very important aspect of running a SPV. LPs want to get into deals alongside the best VCs and into competitive rounds that fill up quickly and/or where a syndicate lead has access to the “last money” in the round. It’s not a terrible strategy for LPs either, as VC signal does have a place, but my personal opinion is that many of the truly big markups to be had are finding companies before they attract VC attention. 

To highlight some real portfolio examples, Zach and I have included some blinded, yet real data from a few portfolio companies to shed a little more color on the types of rounds we invested in that have now been heavily marked up, mostly from tier 1 venture capitalists i.e. before there was external investor signal.

5 Portfolio Examples:

Company 1: Raised at a valuation 62.5x from where we originally invested

We invested in this company on a $2M Seed raise via SAFE. They had very early revenue, I’d say about $10k/month. We were investing alongside Precursor, Bolt, and Alpaca. I think highly of these funds but they don’t have the signal of a traditional bluechip fund.

This deal did not have much other signal. It had ambitious founders with an intriguing product vision that resonated strongly with me.

Notably, the company raised capital from Tier 1 firms including NEA in their follow-on rounds and is now marked up 62.5x versus the original valuation we invested at. You could have still made money when NEA made their investment, but it would have only been an extremely small fraction of our markup as a meaningful portion of risk was taken off the table by the time NEA came in and that was reflected in the valuation. 

Company 2: Raised at a valuation 100x from where we originally invested

We invested in this company when it was conceptual with a founder who I thought had fantastic product experience in running a product agency building mobile apps for other companies. 

The founder was extremely passionate about solving a problem in the hospitality industry and sold me on that. The product idea went through some pivots but ended up becoming a better (in my opinion) fintech product than social one. 

We invested alongside some angels and Sweet Capital, who again, has done great deals but does not provide substantial signal to LPs to get involved in a deal. The company later did a proper Seed round with some reputable Seed funds and later raised two more rounds led by Tiger Global. Amex Ventures joined later too. Our investment from the Pre-Seed is marked up 100x from their latest capital raised.  

Company 3: 12x MOIC in < 2 years

We invested in this company on a $1.5M Seed SAFE. There ended up being no named co-investors in the round when we closed and the company had to reduce the valuation just to get the round done. 

The Company had early traction, but couldn’t get a large round together due to a lack of strong enough perceived product fit. From our view, the Company didn't have the scale and was operating in a competitive space, but had super engaged power users who were extremely passionate about the product (and I was one of them along with many who lived on the edge of tech). 

Within 24 months, the company more than validated their concept and ended up raising a Series A from Signal Fire and is now marked up 12x (MOIC) in less than two years. 

Company 4: 22x return in < 3 years

We invested in a DTC health & wellness brand that was doing sub $100k annual revenue and raised their first round of capital at a $2.5m valuation. It was a very small round of $200k and there were a few angels in the round and certainly no notable investors.

This was a 22x return for LPs net carry.

Company 5: Raised at 8x valuation from where we invested & Profitable with minimal dilution  

I will note this is not your typical venture deal. We invested in this company when they were doing about $3M in revenue. They were not on the typical VC trajectory in terms of round sizes and valuations and therefore the round was primarily angels. There might have been family offices but far from any notable institutional capital.

Over the past 3 years, this company has grown to about $200M in annual revenue with minimal dilution along the way as they scaled profitably without a need for outside capital. Again, this was not the traditional VC type funding path nor the level of dilution early-investors would typically take. 

In short, the company is on a fantastic trajectory, is profitable, and if you looked at the cap table, you would not see any VC signaling.  

In summary, and as you can see above, the majority of the biggest markups in our portfolio have come from companies we invested in before there was the VC signal that many of us like to see when we invest.

If you look at other newly minted unicorns around the startup ecosystem, you’ll see a similar trend 

• BILT just reached a $3B valuation; the company raised its Pre-Seed from Kairos 

• Zepto recently reached a unicorn valuation; the company raised its Seed from Contrary

• Eleven Labs recently reached a unicorn valuation; the company raised its Pre-Seed from Credo Ventures

• And many dozens of others 

i.e. the best markups today generally become before a16z comes into the company…  

And separate from all of our personal and public anecdotes, generally the data does support this. While I’m extrapolating a bit, smaller funds (typically not blue chip funds and/or unknown to many SPV LPs) are expected to perform better than larger funds, and blue chip funds (e.g. a16z, Sequoia, Insight, etc.) are by nature very the larger funds (typically $1b+ these days).  

What makes these deals challenging for Syndicate Leads?

1. High-Risk: 

Early stage deals are much riskier than later-stage, post product-market fit startups from an overall business standpoint. These are companies that are typically led by problem-driven founders who see a gap in the market and are either pre-launch or with minimal traction (e.g. strong product fit may still be to-be-determined). This is arguably when the business is the riskiest to invest in, and that is reflected in the valuation and entry price for those investors. So while on an absolute basis, risk is the highest on these investments (e.g. these companies are more likely to fail versus later stage), adjusted for risk/return, these are some of the best deals to be had in the market. Clearly, the business case at this stage is not obvious and therefore higher risk, and a lower valuation due to no or limited traction. 

LPs like when a tier 1 like Sequoia, Index or NEA is investing because they feel that these firms have access to the best performing companies, have done extensive due diligence and heavily buy into the problem or the founder tackling this problem, etc.

Without that VC signal what does the syndicate lead have here? They have their conviction in the founder, their thesis, among other less tangible beliefs, which unfortunately carry less weight than tier 1 VC’s in the eyes of many LPs in SPVs. Notably, VCs who build a track record have a much easier time convincing LPs of their investment absent bluechip funds.  

2. Lack of VC Signal as Tier 1’s need bigger check sizes at later stage rounds: 

The big brand, tier 1 VC’s are investing at this stage but their investment sizes are typically insignificant in these rounds versus Series A and later stage (in general). These Pre-Seed and Seed rounds are not all that meaningful to these large “blue chip” VC’s versus after they’ve got some more significant traction and can write $10M-$25M+ checks and take a board seat when leading a Series A or later stage rounds. 

Many of the higher signaling VCs today (e.g. Sequoia, Andreessen, NEA, General Catalyst etc.) tend to be optimizing for leading and/or writing large investments into later stage rounds, which kind of touches on the point of the lack of signal that generally takes place at Seed. In my opinion, there are great seed-focused funds that don’t lead at series A or later stage (I list some of them later here) but these Seed funds are not considered blue chip by most casual LPs, who make up much of the syndication market.

For the most part, these deals are easier to get into as the business case is not obvious yet. At Seed, the traction does not yet speak for itself and I am generally not seeing seed deals get massively oversubscribed or moving as quickly as they had previously. 

Even VC-signal to other VCs feels weaker in this market. Tier 2 or 3 funds don’t care that Tier 1 funds are leading a Seed. It just doesn’t carry the weight it perhaps used to. We’ve all invested alongside tier 1’s and seen these companies fail often. It’s part of the VC model. 

What’s the solution for Syndicate Leads when VC signal lacks?

There are no ideal short term solutions, which is why I often see syndicate leads frustrated when they have a company that they are ecstatic about, yet the lack of co-investor signal turns off LP interest and the deal struggles to get done. I think the SPV leads’ thesis and conviction really needs to come through in the deal memo when its pre-product market fit and there are not signaling co-investors in the round. Of course, deal memos are always important, but when you are explaining why you are bullish on a deal/founder without the co-investor signal, it’s increasingly important to really break down why you think this is going to become a breakout company. 

Some things you can do today to help your case to LPs: 

• Include a video Q&A with the founder; bringing some tangibility to the deal page can get LPs more excited despite a lack of VC signaling 

• Build a track record - over time if you’ve built a portfolio of picking unicorns at the earliest stages, LPs will treat you as a high signaling investor and be more likely to overlook the lack of other signaling

• Bring top angels and firms into the round - a lot of notable VCs have scout funds and there are a lot of high signaling angel investors; if you really believe in a company, secure your allocation and try to fill out the round by introducing the company to more higher signaling angels/scout firms, which should in turn make it easier to fill your allocation

I’ve seen many syndicate leads setup microfunds and rolling funds as a way to deploy more capital into the non-obvious early investment opportunities. This is a great solution as the capital is already there to deploy and you are not looking for LP dollars/approval. The issue is not all syndicate leads can or want to raise a traditional fund or a rolling fund.

Missed the boat? Maybe not.

*Investing in private securities involves a high level of risk.  

If there’s one takeaway from today’s newsletter, it’s that early stage investing is hard, and missing the next big thing feels more likely than not.  

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In Summary / My message to LPs

I think the general, and obvious point here is that Seed is riskier on an absolute basis, but if you get into the right deal, you can potentially make 2x to 10x greater return than the Tier 1 investors at Series A.

The reality is, my personal best markups today are almost all deals that did not have signal when I initially invested. Yes, they were riskier. And yes, there were pivots to get to where they are now, but they are some of the best positioned companies in my portfolio, and it’s a good thing I didn’t focus on VC-signal too much when initially investing.

My Take  →  I think there is signal at Seed in co-investors BUT it does not carry the weight it would or should at post-PMF/later stage rounds. In fact, there are many great Seed-focused funds who drive signal but don’t have the brand presence like these larger funds that are also leading Series A and later stage deals. For syndicate leads, it can be tough to explain this in a deal memo. We are not in PR (although it feels like it sometimes…). I do not want to explain why the Seed fund leading a given round should be considered a high signaling Seed fund. 

Sure, I can highlight their portfolio companies which I do think are meaningful, but let’s be real…every fund has a few great portfolio companies to point to. You need to really specialize in investing at Seed to know which of the smaller seed funds derive signal.

Below are a few funds I personally know and think highly of that are likely not large enough and do not invest later-stage to be considered blue chip:

• Afore Capital

• Eniac Ventures

• 1984 Ventures

• Resolute Ventures

• 645 Ventures

• Alleycorp

• Slow Ventures

• Operator Partners

• ANIMO Ventures

• Better Tomorrow Ventures

• Precursor Ventures

• Looking Glass VC

• Haystack

• First Round Capital

• SaaStr

• Flybridge

• 2048 Ventures

• Twelve Below

• And SO many others

*As I am based in NYC, this might bias towards NYC funds. 

**I am also likely biased as I know people as many of these funds.

If you liked reading this article, check out Last Money In’s other posts on LP strategies: 

• 📊LP Strategy – Why You Should Take an Index Approach to Startup Investing

• 📈How Investing in Bridge Rounds Landed Us Multiple 10x+ Returns

Congrats to Sydecar…

…who just announced the launch of their Capital Extension Program with MDSV, which lets emerging managers & syndicates apply to receive up to $5m in follow-on capital for breakout companies.

Read the full Press Release Here!

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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