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

I invested in my first private startup in 2017 – it was a secondary opportunity for Airbnb that I got access to through one of the major secondary markets platforms Forge (fka Equidate). It was a $100,000 investment, which was the size of my post-tax banking bonus that year.

At the time, I was just finishing up my third year working for an investment bank in San Francisco, and had caught the venture bug. I had accumulated a small bit of wealth and wanted to deploy it into the best of breed names in the startup space and at what I hoped were attractive prices.

Through the recommendation of a friend in early 2018, I got involved in VC syndicates on the LP side, joining well over a dozen syndicates over the course of that year including several who have gone on to become Partners at top tier venture funds such as Bryan Rosenblatt’s Riverside Ventures (now Craft Ventures Partner), Joey Krug’s AK Ventures (now Founders Fund Partner), Sundeep Ahuja’s Duro Ventures (now Climate Capital Founder/GP) and David Weisburd’s Flight (now Co-Head of VC at 10x Capital), among others.

This first year I put almost a quarter million in capital to work (I got a bit lucky investing in crypto in 2017) across 20 startups including several that have already been distributed such as Voyager Digital and Weave and several that have gone to zero. While most of these rounds were primary financings, my largest investment was a secondary investment in Coinbase via a Forward structure agreement. I was trying to get my hands on Coinbase shares for over six months, so when the time came to buy shares, I jumped.

While my paper IRR would be considered “great” I know that number is very to be determined with a lot of artificial markups, but also a ton of power law still to take force on the winners. But irrespective of where my IRR lands, it is abundantly clear I made a ton of mistakes. Now six years into putting personal capital work into venture across hundreds of investments, there’s a ton of learnings I wish I knew as an LP back six years ago that could have saved me a ton of money and likely led to a lot better returns.

I could write a whole book on this, but for the sake of brevity, I’m going to list 10 here:

1. Take it Slow

There’s a set of mistakes that almost every new investor in venture capital SPVs makes, and this is one of them. With now 6,000+ LPs in my syndicate, I can tell you I’ve seen it time and time again. And time again. And time again…

That mistake is investing too much capital, into too many deals and doing so too quickly. There is so much burn out in the SPV VC space, partially because LPs (myself included) don’t have a plan when they start to invest in startups.

Before you make your first investment, put together a plan on how much capital you intend to put to work over the next three years, what your approx. investing cadence will be per year and what your standard check will be as an absolute baseline – this will help you avoid over investing early.

I tend to believe new LPs in this ecosystem are better off doing nothing for the first 100 deals they see to avoid the inevitable FOMO from investing in the startup ecosystem. Admittedly it’s a rush for many when they first start, but we believe starting slow and having a plan for how you intend to invest will help you avoid this.

2. GPs are Positioning

Syndicate VCs are part investors and part investment bankers (not actually bankers… but we are positioning) in that yes we are sourcing, evaluating and diligencing and performing the other responsibilities of a VC, but we’re also marketing/positioning our investments as we’re trying to raise capital for our investments on a deal by deal basis.

The information in these memo’s should be 100% accurate, but we’re also trying to raise money and with that we are continuously positioning our memo’s and marketing materials.

As an LP still in other VC syndicates, I try to look past the hyperbole and evaluate the deal on its merits, understanding there is incomplete information and focus on industries I’m more competent in and in investments that match my target criteria.

I’d also say in general invest in VC GPs that you trust where you can. Which GPs have built a track record of investing in high quality businesses? You can and should join other emerging syndicates, but it’s okay to weight those GPs with the more validated experience.

3. Tier1 VCs Invest in a Sh** Ton of Deals

The first time I saw an Andreesen Horowitz, USV, Sequoia, etc. led round, I couldn’t believe I had the opportunity to invest alongside them. Let me tell you, you will see a ton of those.

We’re putting together a fundraising deck right now and we have over 100 co-investments collectively across a16z, Founders Fund, 8VC, Khosla, FJ Labs, QED, Greycroft, Bessemer and First Round Capital with at least 10 investments with almost all of them and at least one of those VCs with over 20 co-investments.

Andreessen Horowitz’s Crunchbase profile has them listed at over 1,400 investments. This is all to say, Tier 1 VCs make a lot of investments and just because you see one doesn’t mean you should bet the farm on it. I’m not saying tier 1 funds aren’t strong signals, but rather that you will see many tier1 led deals if you dive into the SPV ecosystem so don’t overinvest on this signal alone.

4. Have a Plan

This goes to an earlier point, but it is so important that I want to give it its own bullet.

Please have a plan when you start to invest in startups via SPVs or otherwise.

Create a plan in excel or word on how much you intend to invest over the course of three years, what your standard check will be, what your approx. target criteria will be, what your approx. investment cadence will be, etc. Some of these can be loose criteria, but at minimum put a plan pen to paper so you don’t over concentrate your investments and/or over deploy capital.

5. Diversify

This advice applies specifically to LPs in SPVs.

I’m an advocate of concentration for some in public markets and an advocate for GPs who want to concentrate if they are running the fund and a full due diligence process. But if you're investing in early stage startups via SPVs, I think concentration is generally a bad strategy and the data supports this.

We wrote a whole post on this in our blog post “LP Strategy – Why You Should Take an Index Approach to Startup Investing” but in short the data suggests that concentration in pre-seed and seed investing isn’t optimal for LPs in SPVs – only a select few investments will drive almost all your returns and that often requires “enough” bets ensure exposure to them.

6. TVPI is Not DPI (in other words, your markup may not turn into distributions)

Markups are markups – they are not distributions. They are generally a leading signal, but the data is all skewed given 0% interest rates led to a lot of companies to raise at exorbitant valuations and many of which have never been marked down by those companies, the VC syndicate managers (or VCs otherwise).

What this means for you is be skeptical of TVPI and of markups that came during 2021/2022 in general. I see managers showcase their TVPI’s and IRRs that are being driven by markups from 2021/2022 and for companies I know are worth a small fraction of what they’re promoting it to be. It doesn’t mean those investments won’t surpass those markups and that those funds won’t do extremely well, but it does mean that you shouldn’t take that information for face value.

7. Deal Structure

We’re going to put a whole post together on all different types of deal structure, but in general have a strong understanding of the different types of fundraising structures before you start syndicating (e.g. SAFEs, equity, Notes, etc.) - when are they used and what they mean. Venture Deals is a good way to get a basic understanding of this and I encourage every new startup investor in SPVs to read it.

I made the mistake of investing into a Coinbase forward contract without fully understanding the risks that came with it – thankfully the entire distribution came, but with some upside left on the table as it took a lot of time to get those shares delivered.

Additionally, very early in my personal investing career I bought common stock for a company that I had minimal information on and that I didn’t have the cap table of or in depth knowledge of the preference stack. Thankfully the Company IPO’d and all shares converted to common, but it could have ended badly…

When I first invested as an LP in other syndicates, I didn’t understand structure well enough, so at minimum have a strong understanding of Preferred Equity, Common, SAFEs, SAFT, Convertible Notes,. Warrants, Pay to Play, Liquidation Preference and every other term in Venture Deals.

8. Prices Go Up and Down

In public equities, prices go up and down and we don’t bat an eye or disregard an investment altogether because it may be down 50% from its high.

To take an extreme example, Amazon lost 93% of its value during the dot com bubble. That investment today would be up over 100x.

While in venture, it is true that many of the best companies tend to raise at flat or higher valuations at each round, it is definitely not always the case, and in a market that overvalued companies 10 fold+ because of 0% interest rates, expect many great companies to raise down rounds, and that’s okay.

While it’s fair to view this as a potentially negative signal, I encourage you not to completely ignore these opportunities as down rounds for great companies may end up being some of your best ones.

Most famously, Facebook raised a down round after it raised $240 million from Microsoft in 2007. At that time, Facebook was valued at $15 billion. However, less than two years after that raise, Facebook raised $200 million at a reported $10 billion valuation – with hindsight that was obviously a BUYING opportunity with Facebook’s market cap now over $800 billion.

9. VC SPV Investments are Illiquid

As a rough average, successful startups typically take 7-10 years to go from launch to IPO. Whatever capital is invested, expect it to be locked up for at least that long. So if you need liquidity or have intentions to use that money to pay for your child’s education, buy a house and/or any other high priority need, don’t overinvest as that money will be tied up for many years irrespective of the outcome.

10. VC Requires Reps

Like any job, VC requires reps both as an LP and as a GP. And candidly the longer you’re actively engaged in the space the better you’ll get. You’ll develop pattern recognition, smarter analysis, improved processes and likely see better deal flow over time. Again, another reminder to start slow if you enter this ecosystem.

Candidly, we could put together 100 examples here and will continue to add to this list in future posts, but hopefully this provides some framework to help you in your startup investing journey!

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✍️ Written by Zachary and Alex