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How We Invest in Over 100 Startups a Year as a Syndicate and Why Most Funds Can’t

Alex and I primarily operate as Syndicate Leads today as operators of the Calm Ventures and Riverside Ventures syndicates. Collectively we’ve closed well over 600 SPVs over the last few years (far more than even Jason Calacanis (shots fired…)), and even in a down macro market, Calm has closed 120+ SPVs in the last 12 months alone, which is in line with the most active VC funds, and even ahead of many accelerators, which have enormous batch sizes.   

Here are some Calm Ventures investments stats: 

By contrast, these are the most active seed investors in the first half of 2023 according to Crunchbase. We’re pacing with even the most active VCs in the market, including some accelerators.

So how are we able to invest in so many companies whereas funds typically can’t? Candidly there are many reasons including a lot of help from amazing partner funds/groups and syndicates, scouts, founders and others, but syndicates structurally have many unique advantages that allow us to invest in far more companies than the typical fund. Let’s get into it. 

1. “Unlimited” Pools of Capital

With a traditional fund, a pool of capital is raised upfront from LPs (e.g. investors) to be invested into various companies/assets according to the fund's strategy. This is typically a fixed pool of capital of $10m to $1bn+ in venture, but nonetheless is a set or fixed amount.

Having a limited pool of capital forces Fund GPs (General Partners i.e. Fund Managers) to optimize their capital and as by definition of being fixed, dollars invested into one company is capital that can’t now be invested in a different company. While it varies, most Seed funds I come across usually have 20-40 initial entry investments that they plan for of which they invest into over a two to three year period.

In stark contrast, the syndicate process works by first selecting a target company that the syndicate lead GP believes is a good investment and then raising capital from his/her LPs for that specific investment opportunity. There is an unlimited number of opportunities an SPV lead can run as they are not limited by a fixed pool of upfront capital like a fund is, allowing the Syndicate GPs to theoretically invest in as many “good/quality” opportunities as they can find and raise capital for. 

This may sound great, and frankly, it is – but it’s also not as rosy as it appears for Syndicate GPs.

There are very real drawbacks to this syndicate capital allocation model. 

For one, because LPs in SPVs are selectively choosing which companies to invest in, syndicate LPs have more control and influence in investment decision making compared to being a limited partner in a fund, where the Fund GP can have full discretion over investment decisions. This impacts us as we pass on deals that we know our LPs won’t invest in even if we believe it’s a good deal… 

By contrast to Fund GPs, Syndicate GPs are at the whims of their LPs in terms of how much capital they can invest into a company, and often times that amount is unevenly distributed into deals based on signaling like who are the round leads e.g. a16z, Founders Fund, etc. versus investing into a GPs’ “best” investment opportunities. 

Believe it or not, who is leading is often not the best criteria to evaluate a deal - more on that in a future post. But fundamentally, in a fund you are investing in a manager, while in a syndicate, you’re often investing in a mix of a manager + the startup being syndicated, which makes optimizing capital difficult for Syndicate GPs.

2. Portfolio Construction

To piggyback off of our last point because funds have a fixed pool of capital, portfolio construction is extremely important for Fund GPs. Portfolio construction in venture capital refers to how VCs build and manage their overall portfolio of startup investments to aim for strong returns while balancing risk.

As an example – a fund’s portfolio model may be to invest in 25-35 core portfolio companies with 50% of their capital to be deployed into these core investments with the other 50% for follow-on reserves to double/triple/etc. down into their core investment winners. These core investments must be at X stage with an entry ownership requirement of X%, etc. to ensure their model works. 

Portfolio construction creates discipline in capital allocators in a fund, but also creates significant constraints that syndicate GPs do not have – mainly ownership requirements, target criteria requirements, number of core investment, etc. as suggested in the aforementioned example. 

Syndicate leads aren’t optimizing for a single funds returns and are thus not confined by portfolio construction constraints – Syndicate GPs don’t have hard ownership or target industry/stage requirements; we don’t need to optimize a set pool of capital; we don’t have a loosely fixed number of investments that we must make to optimize our fund. Notably there are funds who place an unusually large number of small bets as part of their model like Hustle Fund or Soma Capital, but this is not typical. 

Candidly this is why I believe for most LPs, if you can get into a top 10% VC manager, you should take it over investing in syndicates because there’s a level of rigor that is forced upon VC fund managers that Syndicate GPs do not have by definition of having “unlimited capital.” Conversely, I think LPs can definitely get outlier returns in the syndicate model, but they need to think much more deeply about their own portfolio construction than I’m seeing right now…You can refer to our prior post on LP strategy for some of our insights.  

Essentially in syndicates, parts of the portfolio construction model is moved from the Syndicate GP to the Syndicate LP as each LP is likely constrained by their own pools of capital. This is an EXTREMELY important point that I’ve never seen discussed. 

3. Target Criteria

A target investment criteria refers to the parameters and guidelines set by a venture capital fund to evaluate and screen potential investment opportunities. These elements may include stage (e.g. Seed, Series A, Series B, etc.), industry (e.g. b2b software, consumer, deep tech, biotech, web3), geography (e.g. US, Asia, LatAm, etc.), target investment size (e.g. $100k to $100m+), etc.

Target criteria again by definition limits the types of opportunities that Fund managers can invest in. If a company doesn’t fit their target criteria, they typically won’t be able to invest in the company even if they feel it’s a good investment. 

So imagine you’re a Seed web3 investor – that means there’s likely ~99% of startups that you can’t invest in because you only invest in the seed stage as web3. 

While some Syndicate GPs have loosely defined or hard target criteria, most I see invest across industries, geographies and stages, basically opening up the pool of startups that could be investments from <2% for that web3 seed fund to much closer to 90%+ of available venture backable startups. 

An advantage to this for LPs is their risk is likely more balanced – if you’re a fund focused on web3, there “may” be more upside on the table, but a lot more volatility as if the asset class as a whole doesn’t perform, LPs may underperform just on market. Conversely, Syndicate LPs can invest across industries, which should reduce some of the volatility of their portfolio.  

Over time – myself included – I find syndicate GPs narrow their focus into certain areas, stages and investment types that they feel will best perform, but these target requirements aren’t a requirement like with a fund.

4. NEW LPs

Syndicate Lead GPs have an ever growing list of LPs who join their deals. Every month we get dozens to 100+ LPs join our syndicate. 

While we have some LPs who continue to invest in us since our first deal, in almost every deal we run, we have at least one LP who is investing with us for the first time. By having essentially an evergreen set of LPs, we can often raise money for great investment opportunities even if our older LPs decide to take a break from startup investing or have met their necessary exposure, etc.

By contrast, a fund has a limited number of LPs and once that fund goes through all its closes – it typically won’t allow new LPs to invest into that fund.  

5. Follow-On Investors

I previously worked at a fund where I spent almost my entire time in due diligence processes. We were leading growth rounds, which typically meant my job was a lot of sourcing, a lot of diligence and a relatively small amount of time actually closing and executing transactions.

This makes sense – if you’re the investor that is writing the largest check, setting the terms of the round and valuing the business, among other activities, then spending relatively minimal time deal executing makes sense in the context that these transactions can take many weeks to months to diligence and close.

As you can tell by our name “Last Money In”, Syndicate GPs are typically not leading rounds, nor are we typically doing the normal confirmatory diligence a lead fund would e.g. in depth technical diligence (we are not hiring subject experts to analyze the tech), building our own financial models from scratch, on site visits, matching every bank statements to models to ensure exact consistency, etc.

We are follow-on investors in rounds and almost always fall behind a lead investor. By nature of less confirmatory diligence, we candidly have more bandwidth to invest in more companies. 

6. Stage

When you invest at the earliest stages (pre-seed/seed), an outsized portion of what you’re investing in is people. Yes you're evaluating the market, product, business model, etc., but at this stage there’s not as much business to diligence. This is typically where we  first invest (pre-seed to seed+). 

As you move to a later stage – Series A → Series B → Series C → IPO/buyout, etc., the level of diligence required to evaluate moves up orders of magnitude literally as you shift from evaluating people at the pre-seed to evaluating highly complex businesses at the later stages. And businesses have many more components to diligence – again orders of magnitude more than at the pre-Seed and Seed. As you can see by our stats at the top, we tend to play “early” with a lot of our growth investments coming from companies we’ve previously invested in and know. 

7. Lack of Bureaucracy

I’ll keep this short, but while some funds give their investors near full autonomy, almost all of them have some level of bureaucracy and checks and balances – investment committees, majority partner support, etc. By contrast, many Syndicate GPs are 1-2 people firms (often solo GPs or at least solo decision makers). By being the singular decision maker, Syndicate GPs can move faster as there’s not levels of people to convince of your reasoning. Alternatively, we do need to convince LPs on every deal, which is a process in its own right. 

To Conclude:

By operating with significantly less structural constraints, Syndicate Lead GPs can invest much more frequently into startups. 

We simply don't face the constraints Fund GPs do such as:

1. target criteria requirements

2. ownership requirements

3. capital constraints

4. portfolio model constraints

5. bureaucratic constraints 

6. among others 

It's part of the reason we can invest in 120+ deals a year, while most early stage funds are investing in 15-40 startups over 2 to 3 years. I want to again acknowledge that most Syndicates are not doing 100+ deals a year; we are one of the most active due to some incredible ongoing partners who help with sourcing super high quality deals, among other reasons, but structurally, the SPV model enables us to be this active. 

As mentioned, there are downsides to this model – constraints “can” create discipline around optimizing capital, though I’m candidly not convinced that discipline actually nets to a better outcome. For 1) As of April 2023, “the AngelList platform has generated returns, net of fees, of 26.5% per year for investors (LPs) dating back to 2013.” Off of this data, deals that are syndicated on the platform are in aggregate performing in line with a top quartile fund.  And 2) median DPI (Distributed to Paid-In (DPI);  measures the amount of capital distributed back to investors (LPs) relative to the total money contributed) for VC firms isn’t great, leading me to believe constraints don't necessarily equate to better returns. 

In totality, I think every accredited investor who is interested in VC should at minimum look at syndicates via those on Sydecar, AngelList, Carta and others. I was an LP in SPVs before ever working for a fund and before ever becoming a GP and the learnings you can then leverage to qualify GPs, SPVs, startups become extremely useful for active participants in venture. 

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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