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Our Tiny SPV Could Turn into a $3M+ Carry Check

The Background Story

One of the first startups I ever put together an SPV for, back in 2020, was just valued at over $300M in a growth financing. We invested in the Company when they were valued at $10M and they were NOT a hot company at all. In fact, they had to reduce their round valuation cap just to get their Seed financing done. This is the message I got from their founder during their fundraise.

We also struggled to put together an SPV for the company. I really liked the team and saw the speed and uniqueness of what they were building, but unfortunately LPs weren’t too interested due to lack of clear product fit and lack of co-investor signaling most likely. After a lot of effort, we ultimately managed to scrape together a small $80,000 investment. 

I constantly ask myself whether it's worth it to spend the time and headache for an $80k investment. We have put together now dozens of candidly agonizing small SPVs over the years that I’m always questioning the effort of. Small SPVs are almost always the biggest challenge and a large source of stress - it feels like you have to beg LPs to participate, not to mention there’s a large opportunity cost of that effort and stress. But SPVs like this one are giving me hope that small SPV efforts can actually pay off. 

The Potential Payoff

The Company mentioned at the top, while having a very difficult Seed raise, ended up raising a very hot Series A in 2021 from a tier 1 fund. Of note, a lot of companies raised hot A rounds in 2021 (peak zirp era) that are now worth zero, but not this one. They went on to raise a Series B and recently a Series C at a >$300M valuation. Net of all dilution, this investment is marked up at ~25x and has a path to a multi-billion outcome or a 200+ bagger if the Company can make it to a $3B to $4B valuation at exit, which we believe it can. 

Let’s say it does make it to $3B (<10x from here) and likely almost 200x DPI (DPI = a metric that measures the total capital a venture capital firm has returned to its investors relative to the amount invested). That $80,000 investment could be worth $16,000,000 with the carry component (i.e. the amount distributed to the GP leading the SPV) around $3M on this single deal. A mere $5k LP check will have turned into almost $1M for an LP - the multiples LPs (and GPs) candidly dream of. We had an outstanding 21 LPs in this SPV who invested $1,000 each - in this scenario each of them will have turned $1,000 into ~$160,000. If the company reaches a $6B outcome, we’re likely looking at a near 400x, $30M+ distribution and a near $6M carry check to the GP off of an $80,000 SPV. 

I realize we’re dealing with hypotheticals and some would argue I’m living in fantasy land playing the scenario game but I’d argue the company has already done the much harder part, scaling from an unproven, no product fit $10M valued company → $300M+ today with a ton of momentum behind them and a lot of new capital for this next leg of growth. It’s also worth underscoring, this is a “real markup,” - it’s not a 2022 top of hype cycle fake markup or AI hype markup. 

While we provide some access to these deals via our own syndicates Calm Ventures & Riverside Ventures, we're also curating from across the 50+ venture capitalists we’ve worked with via Deal Sheet to get LPs and subscribers these opportunities beyond just our syndicates. 

So Are Small SPVs Worth It?

While I have had these internal debates with myself and SPV/VC colleagues for years, I think net, it’s possibly worth it to put together small SPVs if you have the right strategy. 

Spending effort putting together a small SPV for a Series C company feels like a difficult task to justify. Even if the Series C company 10x’s net of dilution, your $80k SPV isn’t returning you much carry - maybe $100k-$200k in the best case.

But for the Pre-Seed and Seed rounds, they can turn into multi-million dollar carry distributions on their winners (even without taking pro-rata) as we may have with this one. 

The QSBC Tax Advantage

To compound the benefit, GPs and LPs can take advantage of tax incentives like Qualified Small Business Corporation (QSBC), which refers to a specific type of corporation under U.S. tax law that offers significant tax benefits to investors. 

A QSBC is an active domestic C corporation with gross assets not exceeding $50 million (almost every pre-seed and seed company has <$50m gross assets) at the time the stock is issued. To qualify as QSBC stock, shares must be acquired from the corporation directly and held for a minimum of five years. 

The main tax benefit of QSBC is the potential for a 100% exclusion of capital gains from federal taxes upon the sale of QSBC stock. 

That’s pretty great. Given the tax advantage, a $3M QSBC qualified capital gain will net me the same amount as a salaried employee who makes almost $5M in salaried income. 

So to GPs and LPs who are avoiding the small SPVs…maybe don’t? The small SPVs have been some of our biggest winners because by nature of not having interest, they’re “cheap” so when they work out, there are massive outliers to be had. 

We’ll continue to offer these pre-seed and seed opportunities (as well as later stage ones) via Calm & Riverside and more importantly curate the best from all GPs we can through Deal Sheet. 

Steel Manning Myself

To play the contrarian take, the opportunity cost for spending time on these small SPVs is substantial. There are many other high value tasks I could have spent time on were I to eliminate this small SPV effort, mainly 1) raising for a fund, 2) recruiting LPs for our larger SPVs, 3) creating more partners for higher quality deal flow and more. If none of these small SPVs turn into 200-1,000xers, I will almost certainly say it wasn’t worth it…

If you enjoyed this article, feel free to read our prior adjacent articles on this topic including: 

• We’re Closing $30M+/year in SPVs as a Solo GP, Why Would I Ever Start a Fund?

• Why You Should Discount a Syndicate Lead’s Performance

• 🚀The Biggest VC Markups come BEFORE the “Signal”

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