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Deal Machine or Selective Investor: Which Syndicate Style Wins?  

The VC syndicate playbook is still evolving given how little history there is for syndicate leads. We’ve seen different strategies evolve in just the past 5 years of which the macro environment has played a very significant role in. 

We’ve discussed this previously, but up until Q1 2022, money was flowing and SPV’s were filling/closing at a rapid pace. The vast majority of companies were fundraising at a faster pace too, which allowed for more opportunities for capital to be invested in the private markets. That timeframe allowed many syndicate leads to scale at a pace most did not expect. As one example, my Last Money In Co-Founder Zach started Calm Ventures in 2020 and scaled it to ~$100M AUM in its first two years. By comparison, most emerging VC managers start with $5m to $30m test funds that typically deploy over 3 years. 

But 2022 hit, and fundraising fell off a cliff. So did syndicates. Now, as we look back just ~2 years from this, it’s clear many syndicates have found their footing or their style of syndicate to run…or left the ecosystem, but we will not be talking about that subset in this post. 

There are many different types of Syndicate leads in the venture capital ecosystem today with different strategies and focus. In this post, we will compare two general syndicate operator styles.

1. those that are hyperactive and syndicate 30+ deals a year and 

2. those that I would consider to be more concentrated and syndicate under <8 deals per year.

While Zach and I fall into the more active syndicate lead category, we’ll provide a side by side comparison on the Pros and Cons to both types of syndicates. Before we jump into it, I just want to say I don’t think there is a right or wrong here, it really depends on how the Syndicate lead wants to operate and it’s important for LPs to know which syndicate they are backing. If you believe in the approach that you need as many quality pre-seed to seed shots on goal to hit the outlier (e.g. the 200 to 500x+) then the high volume approach would be considered the better strategy; if you believe that concentration leads to outlier returns then concentration may be the best strategy.  

Deal Machine 

Pros:

More Deals for LPs to Evaluate

This one is quite obvious. When you are an LP in a syndicate that is hyperactive, you are going to get more deals to review/diligence and explore investing in or passing. After all, sourcing is the lifeblood of a syndicate, critical to a traditional venture fund, and also critical to individual angels. You need to be able to see tons of deals to narrow in on the few that are the right fit for you to invest in.

As an LP in a hyperactive syndicate, you are going to get to see a lot of deals and I imagine you will pass on the majority of these deals, however  passing on tons of deals is a good thing (more on this later). Remember, the alternative is not seeing the deals at all and missing out on those data points, trends in VC, startups etc. 

Generally speaking, the more deals you have to evaluate, the more deals will fit your investment thesis and therefore be able to deploy capital into, and build a portfolio. If you don’t want to see more quality deals, then perhaps it's best to back a fund or set of funds (versus a syndicate) to get venture exposure. 

Great way for LPs to Build a Portfolio

If you are actively looking to build a portfolio versus going very deep into just a few deals, backing hyperactive syndicates will likely play a key role in supporting building your portfolio. Again, the obvious is more quality deal flow/opportunities will lead to more actual investments.

When I was getting started as an angel I leveraged this as well. In 2017-2018, I backed Jason Calacanis’ syndicate.  I was extremely motivated to build a portfolio to:

• Diversify smaller personal checks across different Series A or earlier stage companies

• Be able to start to point to a true portfolio versus 2-3 companies I’d invested in at the time

• Ramp up the number of quality investments opportunities to learn from and have more deals to compare

• It felt like a good angel investor foundation to build off of… which is exactly what I did

Passing on tons of deals is still helpful & educational

Another value prop that comes from the hyperactive deal leads is the many deals LPs get the opportunity to pass on. Get the opportunity to pass on?!?! That’s right. Getting the opportunity to pass on tons of deals is so educational for new and existing LPs.

Why?

Because there is a lot to learn from every single SPV investment opportunity. 

Things like what is the valuation compared to traction. How does this founder's background resonate with me? Who are the co-investors in this round and what percentage of the company are they taking? What does this market look like? What’s the pitch on the market growing over the next 5-10-20 years? Why is the syndicate lead specifically interested in investing in this deal?

Additionally, to see what a good deal and a good founder looks like, you have to see what a bad deal and a bad founder looks like. I could keep going but I think I've made my point. You cannot know what a good deal looks like until you’ve passed on 100+ deals. Without enough to compare, there just is not enough to reference to be a good, experienced angel investor.

I made this mistake myself early on in meeting founders that wowed me. Nothing against some of them, but I just had not had a large enough representation to actually know where they fit in and compare to a wider data set. Hyperactive syndicate leads really help ramp up deal flow to make sense of this all and have a foundation of deals to compare. 

Cons:

Deal Volume can be Overwhelming

Almost every LP in our syndicate has another full-time role. Being an LP in a syndicate is not a day job. This means reviewing and evaluating so many deals from syndicates can become a time suck. I can understand this can be overwhelming for someone who does SPV investing on the side and I've heard this from many LPs as well that struggle to keep up or are looking for some filter to spend time in the right areas. 

If you are going to invest in a deal, you want to read the full memo, review the deck, and also want to diligence. With so many deals, this can make it really tough to stay on top of all the deals and create a subpar experience for the LP/angel.

Need to diversify without investing too much, too soon

Not only have I seen this many times, but I’ve been guilty of this myself. While we know being an early-stage angel investor requires diversifying your personal capital into 20 to 50+ deals (at least it does if you are serious about angel investing), you can also get too excited too quickly. If your deal flow really ramps up via multiple syndicates you are in, I can see it being tempting to invest more personal capital than you originally budgeted.

This is a bad idea. The returns take 7-10+ years if you are investing at an early stage here. Quick, large exits are extremely rare, so you should not expect to see a return of your capital here for many years. Let me state that again. You should not expect to see a return on capital for 7-10+ years, and furthermore your losers will go to zero before your winners distribute, which can make holding disheartening in the interim.  

I’ve seen too many angels in my syndicate and in general deploy too quickly in 1-5 years and then sit on the sideline and tell me they are waiting for capital to be returned to get back in the game. Of course, this current market is not helpful to anyone in the ecosystem, but regardless, backing a high-volume syndicate is not a good idea if you do not have self control to allocate according to your plan. 

Lack of Concentration

For syndicate leads, doing 30+ deals a year, you can certainly make the argument they are not concentrated (unlike a syndicate doing 6 or fewer deals per year). I think there are nuances for syndicate leads, but the reality is, you are correct. These syndicate leads (me included) are not as concentrated in our portfolio approach and part of that is due to our belief that we need outlier exposure and 6 shots a year does not provide that I personally wouldn’t back a pre-seed fund that only takes 18 shots over the lifetime of its fund because the data suggests you’re setting yourself up for disaster - only 2% of venture backed companies become unicorns, so 18 shots leaves no room for error and a heck of a lot of luck needed… 

Smaller GP Commitments

Most of my future earnings is via carried interest, definitely not cash as a syndicate lead. If I am doing 50+ deals a year, I have limited capital to personally deploy into these deals. It could be an argument that if I am only investing $1k to $5k into a deal, that I am not bullish on the deal. I would argue against this given how much personal capital I will still deploy across a year. I refer you to our article “Does the General Partner's Lead Commitment into an SPV Actually Signal Anything?” which goes into this in a lot more detail, but in short, I don’t recommend you correlate GP check size with conviction or likelihood of high returns. 

Concentrated Syndicate Lead

Pros:

Higher confidence in deals being syndicated (they run fewer)

When you back a syndicate lead doing fewer, concentrated bets, you can assume when you do see a deal they put forward to the LP base… It’s a deal they are very excited about. They do not do many deals, therefore there must be something they really are enthusiastic about with the given deal (or, their deal flow could be weak…).

I’m generalizing here, but you can assume they got to know the founder and company really well. As an LP, this will be valuable knowing the lead does not do many deals.

Easier to allocate time as an LP to Review Deals 

As an LP in these syndicates, it will be way easier to spend time evaluating ~5 deals a year than 30+. If you are busy and do not want to frequently spend time diligencing and reading deal memo’s, being an LP in a concentrated syndicate will provide a good experience only requiring you to put in the LP work here and there. 

Stronger hypothesis on the investment

This is a personal take, but having seen syndicate leads of all types, I think generally, you will see  stronger conviction (whether right or wrong) from syndicate leads who do fewer deals. There is a higher likelihood that the syndicate lead has spent more time with founders and getting to know the company. There is also a higher likelihood of them having a stronger hypothesis on why the founder, market, product, traction is in a great position to grow over the next decade. Alternatively, and as mentioned, the syndicate GP also may just have worse deal flow and less opportunities at their disposal, which I candidly believe is the case for many. 

Higher likelihood of not over allocating too quickly

As mentioned, I’ve seen so many LPs enter this ecosystem, invest personal capital too quickly, and then quickly head to the sidelines. When backing a syndicate lead who is more concentrated in their deal volume, this is definitely going to be helpful as it relates to the pace of capital deployment. Of course, this does not solve for the check size from LP maybe going too big with fewer deals,  but the volume will not allow for fomo of many deals, which could lead to more deals and/or more capital than planned.

(Maybe) Larger personal capital commits

Typically, GPs who do fewer deals, have the ability to invest more personal capital into these deals. I can understand as an LP, it is nice to see a larger GP commit to put their money where their mouth is. If you are an LP who is more focused on why the syndicate lead is running the deal than the deal details, this will be nice to see them write larger checks highlighting their personal skin in the game on a given deal. 

The alternative, a GP putting in $1k into a deal, is not going to add “signal” to an LP on the GP commit regardless of the outcome/quality of the deal/company. 

Cons:

Fewer Deals

As an LP, there is going to be less action. Fewer deals to review, to invest in etc. While concentrated and likely thoughtful, there just wont be as many opportunities to participate in as an LP.

Tougher to Build a Portfolio

With fewer deals coming through to LP’s, it will be more challenging for them to build a portfolio an optimize chances for those big 100x-type winners. As highlighted previously, it is crucial build a portfolio for early-stage venture to optimize chances for big winners because you will have many deals going to zero. In a concentrated syndicate model, it is going to be tougher to identify more companies to lean into and invest in given the fewer opportunities that will make their way to you as an LP.

Lack of Education for Beginners

For LPs getting started and eager to learn in parallel to building a portfolio, concentrated syndicated will not allow for a much educational info given the lack of deals being syndicated. To truly learn venture, it is going to take a lot of deal sourcing and memo details to start to make sense of it all. Being in a concentrated-style syndicate does not allow LPs to ramp up on the learning/educational side as quickly as other syndicates.

Summary

Syndicate volume isn't about right or wrong—it's about deal flow and strategy. LPs should understand the stark difference between backing a syndicate doing 50+ deals yearly versus one doing just 3. Both approaches can yield great outcomes and poor outcomes and there shouldn’t be inherent bias against one or the other.

It will be interesting to see how the deal volume evolves over the next decade.

If you enjoyed this article, feel free to view our prior articles sharing the LP/GP experience: 

• Does the General Partner's Lead Commitment into an SPV Actually Signal Anything?

• 🧠From LP to GP → 10 Valuable Learnings for Success as an LP in VC Syndicates

• 🎓How being an LP in VC Syndicates Landed me my First VC Position

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✍️ Written by Zachary and Alex