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Navigating SPV Failures: A Syndicate Lead's Insider Guide

One of the most challenging aspects of leading a syndicate is managing failed deals after capital has been raised. Having to return funds and explain deal terminations to limited partners who were already committed creates an awkward dynamic that can strain relationships and trust. This delicate situation requires careful communication to maintain credibility while being transparent about why promising opportunities sometimes fall through.

As a syndicate lead, I've experienced deal dropouts multiple times over the years. These situations are unique to our role and always feel personal. Some dropouts were my fault—stemming from communication gaps or strategic missteps that I could have prevented. Others happened due to factors beyond my control, like investors changing their minds or unexpected market shifts. This reality is an inherent part of syndicate leadership - by sharing my experiences, I hope to help other syndicate leads understand that these setbacks are normal, not personal failures.

In this post we’ll explore:

1. Why deals fail

2. The most common reasons for deals failing 

3. The importance of communication & transparency from GPs here to LPs who will be getting capital returned

So, let’s first tackle the main reasons why deals fail.

Cannot Raise Enough Capital 

Capital shortfall is one of the most common reasons SPVs fail to close. Companies often set a specific minimum investment threshold that syndicate leads must meet. When this target isn't reached, the SPV does not proceed. While the syndicate lead bears primary responsibility for this outcome, it reflects the inherent uncertainty of deal-making.

The challenge lies in the unpredictability of capital commitment. Despite best efforts—leveraging personal networks, understanding investor appetite, and meticulously screening potential participants—syndicate leads cannot precisely forecast final investment levels. Each SPV presents a unique fundraising landscape, requiring adaptive strategies and realistic expectations. Successful syndicate leads recognize this volatility as a core aspect of their role. They continuously refine their approach and manage expectations with founders along the way - this is critical. 

Assembling an SPV becomes challenging when capital raising looks improbable, a scenario most prevalent at pre-seed and seed stages. My recent experience illustrates this complexity: I struggled to raise a Series A SPV for a portfolio company we had previously backed twice. Ironically, eight months later, that same company secured funding at a 6x valuation from a tier-1 venture capital firm. The fundamental challenge is predicting potential before the signal exists. Without clear market signals, attracting capital remains difficult, regardless of a company's underlying fundamentals or future trajectory. 

Founder cannot/does not accept capital 

This one should be avoidable but at the same time things happen between the timeline of 1) securing an allocation and 2) ready to wire and close. Some rounds move very quickly and in a few rare scenarios, I have been given an allocation that later got revoked because either there was tons of demand in a round (after our allocation) and a larger VC came in and needed certain ownership to make the deal work or the founder changed their mind. 

Of these two scenarios, the one where a larger (or important) fund coming in with specific ownership criteria is more acceptable (although both scenarios are founders going back on their word). While this rarely happens, I am more sympathetic to the scenario where a value-add VC comes in and needs their ownership target met. A founder changing their mind or not being forthcoming is extremely frustrating but also maybe a sign this is not a person/team you want to back. This too rarely ever happens (I can’t even recall the last time it happened), but I think it really emphasizes the importance of communication in securing an allocation and explaining the process/timeline to signing and wiring capital. 

By moving too quickly or not communicating clearly with the founder, this heightens the likelihood of something going round when it comes time to close. 

Another rare example → I did have a CEO (not founder) who provided us an allocation in a round but when it came time to close the board did not allow him to take our money. It’s odd for a seed stage co to have a CEO who is not the founder. It’s even more odd to have a board that has control of who invests at a seed stage company. While frustrating, this company and their odd structure may present more challenges ahead. 

Information leak which results in the loss of allocation 

This one is unique to syndicate leads as we need to secure allocations and share details on the investment opportunity and why we are enthusiastic to invest. A traditional VC won't have a “leak”. Once they decide to invest and agree on terms, money gets moved from the fund to the portfolio company. Syndicates are different.

While we have improved drastically over the years, there are times where information leaks resulting in the loss of an allocation. This is one of the worst things an LP can do and also one of the worst parts of being a syndicate lead in my opinion. 

When you have a bad apple LP who shares information, it is a bad look on you as a SPV lead, and understandably, founders can get upset and revoke the allocation. It is important to explain your process to founders upfront to eliminate any potential surprises.

Double layer complications 

Double-layer SPVs represent a complex investment structure where two sequential Special Purpose Vehicles are created—one SPV investing directly into another SPV that sits on the company's cap table. This multi-layered approach significantly increases the probability of deal failure, introducing compounded risk at each investment stage.

The failure mechanisms that can derail a standard SPV are amplified in this structure. If either the first-layer (underlying) SPV or the second-layer (direct investment) SPV fails, the entire investment collapses. This creates a fragile investment chain where one weak link can terminate the entire transaction.

In my experience, these complexities become painfully evident. I once managed a large SPV raised from 40-50 limited partners, poised to invest in an underlying SPV with a scheduled closing. When pricing unexpectedly shifted, we faced critical decision points:

1. Initiate an opt-out process, transparently sharing new pricing and allowing LPs to recommit or withdraw

2. Abandon the transaction due to pricing changes

3. Explore alternative investment partners offering more favorable terms

Unfortunately, I’d say this is part of the game if you are doing double layers to invest in the most sought after private companies. When transactions change or do not get done, this can provide LPs with a subpar experience which can be very difficult to explain. 

Change in terms, which leads to opt-outs 

Anytime there is any negative change in terms from what was originally marketed, we need to update all committed LPs and inform them of 1) the change in terms and 2) why this happened. Sometimes this is due to a mistake made by the syndicate lead like we thought we contractually had pro-rata rights and didn’t, or what was initially a priced preferred equity round was later changed to a SAFE. 

Most of the time an opt-out happens (at least for my deals) because we are doing a secondary and the price in the market has changed/jumped from when we secured the allocation to when we submitted the investment (or were going to submit).

As an example, we recently launched a vehicle to buy direct secondary preferred shares. 2 days after we launched, the press hit that the company was raising a new primary round at a 2x markup to where our seller was willing to transact prior to the news. Anytime this happens, the price per share is going to rise in the secondary markets, which will lead to us securing new pricing and providing an opt-out to LPs. 

These secondary markets are very dynamic and news can drop at any time positively or negatively affecting a company which leads to a change in price in the market. When this happens (which I wish happened less often) we need to issue an opt-out to LPs to explain the new pricing and give them an opportunity to proceed as planned or opt-out and sit out on the given deal. 

Sometimes when this happens, the amount of capital drops and therefore we are unable to complete the transaction as originally planned. I will say it's infrequent that an opt-out leads to a deal not getting done, but it has happened and could be a reason for a failed SPV in the future. 

Importance of communication from GPs

It’s harder for GPs to relay bad news than good news to no surprise. Anytime you have a failed deal, you know that LPs are not going to be happy and might be upset. I’ve dealt with this many times and have received all types of feedback. The best thing a GP can do here is be transparent and timely. 

Sometimes the process of losing an allocation can be short and sweet while others it's delayed. If a founder is doing a primary round and informs you it's now oversubscribed and needs to cut you out, that’s a short and sweet update to LPs that is best to relay as soon as this information is confirmed so that LPs can access their capital.

Other times, more frequently on secondary transactions, the process can be drawn out. Secondary transactions do not have specific timelines like primary rounds therefore, companies that trade are essentially always trading or open for business. There have been times where we submitted a trade to buy common shares but learned the company is not allowing common shareholders to sell, therefore we had to go back out to find a preferred holder which can add a month or so to the timeline here. Luckily in this recent scenario, we were able to transact but other times this is an example of a delay that can add months to the timeline of a secondary transaction. There’s also ROFR rights (which can be dynamic on pricing) and periods that alone can add 1 month to any transaction.

The point here is that transparency is the best update a GP can provide to LPs. Again, not all updates are good and positive but I think LPs (for the most part) understand how tricky some of these allocations can be and therefore are understanding but only if you keep them afloat with what is taking place behind the scenes. 

If you enjoyed this topic, feel free to view our prior articles on adjacent conversations 

• SPV Marketing: Why Being Aggressive Isn't Always a Choice

• 💡Stop Investing in Startups Until You Read This

• Startup Stock Options: When Companies Block Employee Sales

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