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Failed 20x Follow-on → SPVs Follow-On Dilemma

The SPV model is full of unique operational challenges that I believe are important to point out. In today’s blog post, we share a specific one that highlights a major missed opportunity… In hindsight.

The (Real) Scenario

Consider this scenario… 

Your syndicate identifies a promising seed-stage startup and invests in their ~$2 million seed round through an SPV, and alongside a widely considered tier 1 fund. Post-seed investment, the company executes on everything they planned and raises a Series A at approximately 3.5x  the valuation just ~12 months later. Fast forward to today, and that same company has achieved unicorn status, representing a 20x markup from the Series A price point (and much higher markup from seed) in a remarkably short timeframe.

This should be a celebration of an obvious breakout portfolio company finding their stride and building what feels like a fast-growing, high-upside business. While that is 100% true, instead, it highlights one of the challenging aspects of syndicate investing: the execution gap between identifying winners and actually participating in their continued success/raises.

The Allocation Paradox

Okay, so let’s look closer at this.

We invested into the seed round and about a year later were given an allocation to participate in the ongoing series A round. As mentioned, the company was performing well, the valuation felt reasonable at ~3.5x the seed valuation, and the fundamentals supported continued growth. Yet, despite having the opportunity, the syndicate couldn't execute on the SPV investment.

The challenge wasn't access or deal quality, we were already investors with a company relationship—it was lack of new LP buy in. Limited Partners  who had enthusiastically backed the seed round couldn't be rallied to support the follow-on investment and other LPs in the syndicate did not seem to either have the interest to invest in this series A or were unable to move in the timeline needed here. In hindsight, a big missed opportunity…

This disconnect between opportunity and execution is particularly painful in syndicate investing, where success depends not just on sourcing great deals but also on maintaining LP engagement/interest across multiple funding cycles.

The Unique Challenges of Syndicate Follow-Ons

While we’re very excited to be investors in the example above, we can’t help but realize the missed series A follow-on opportunity  via our syndicate. Below are some of the wider challenges syndicates face in doing follow-on investing via SPVs.

Traditional VC funds face their own follow-on challenges, but they operate with committed capital and centralized decision-making. Syndicates, by contrast, must re-market their investor base for each new opportunity, creating several structural hurdles:

1. Commitment Fatigue: LPs who were excited about the initial investment may have deployed capital elsewhere or simply lost enthusiasm for continued participation. The enthusiasm of the original investment thesis may have worn off, making it harder to generate the same level of excitement for follow-on rounds. Individual investor decision making is very different when it comes to follow on and many folks might not care as much about needing to follow on in VC.

2. Signaling Sensitivity: In our case, the Series A was led by a good fund, but perhaps not a tier-1 brand name that would increasingly validate the investment to LPs. Syndicate investors often place significant importance on brand recognition when evaluating follow-on opportunities. Despite the company execution and markup, this series A still did not have the tier 1 brand leading the round leading to weaker signal than what it could have been.

3. Timing Misalignment: The gap between funding rounds can be problematic. LPs may have changed their investment priorities, faced liquidity constraints, or simply moved on to other opportunities. The momentum that drove the initial investment may have dissipated. Again, individual investment decision making is very different from institutional LPs and everyone has different things happening in their life that lead to very different priorities. 

4. Due Diligence Burden: Each follow-on round requires fresh due diligence and LP communication. Syndicate leads must repeatedly educate and convince their LP base, creating operational overhead that can slow decision-making. Keep in mind, when investing pro-rata, it is likely the majority of the SPV capital comes from new LPs, so in many ways this is treated like a net new investment…even though you're already an investor on the cap table. 

The Cost of SPV Failure

Going to keep this section short-and-not-so-sweet.

The financial impact of missing follow-on opportunities, like in this case, is severe. In this deal example, the ~20x markup from the Series A valuation represents millions in foregone returns for the syndicate's LPs. There were likely a few folks who had committed small checks here but got the capital returned because the SPV did not pan out, a big miss for those who wanted to invest obviously, and me, the GP. 

A case for Venture Funds over SPVs 

While I personally like running SPVs at scale, I think it is safe to say my take here is not the norm. Below, is 1 of many strong cases for going with a venture fund over deal-by-deal SPVs.

Having a venture fund with committed capital provides significant advantages over the SPV model, primarily through speed and certainty of execution. When opportunities or follow-on’s arise, fund managers can move quickly without the time-consuming process of raising capital from LPs for each individual deal. This speed advantage is particularly crucial in competitive funding rounds where timing can make the difference between securing allocation and missing out entirely. The fund model also eliminates the risk of LP fatigue or changing market conditions that might prevent an SPV from reaching its target size, ensuring that investment decisions are based purely on merit rather than fundraising constraints.

Broader Implications on Syndicates

The syndicate model has unlocked tremendous value creation opportunities for individual investors, but it comes with operational challenges. At the end of the day, if you cannot raise the necessary capital to proceed with an SPV, and you end up missing out on a 20x+ opportunity, that is going to sting as a syndicate lead. Especially when we are talking about a follow on opportunity where you already have a relationship with the company. In a world where the biggest returns often come from doubling down on winners, the ability to follow-on (for breakout winners) may be the defining characteristic of successful syndicate operators.

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

• Why Syndicate Leads Don’t Survive 

• The Syndicate LP Churn Problem 

• What Really Drives Investment Interest in SPVs

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