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Stop Investing in Startups Until You Read This

I got a letter from an LP a few weeks back notifying me he over invested in startups, putting him in a difficult spot financially and he wanted to understand his options. This is tough to hear - startups are notoriously risky and highly illiquid, meaning extreme levels of caution is needed when you invest in them, and candidly a very clear internal plan around strategy and capital deployment. 

It’s part of the reason why I’m wary of democratizing access to venture further than it already is without some sort of test requirement. This is probably controversial but while I believe accreditation should be accessible to everyone (e.g. nix the net worth / income requirements), you shouldn’t be able to become an accredited investor without passing an exam that tests on a basic understanding of venture, terms, risk, portfolio strategy among other topics or some equivalence of this. I think it’s the first step to genuinely protect investors in a productive way, while also opening the private markets to everyone. 

We discuss this often, but to underscore - as LPs in SPVs, you are your own portfolio manager, so a much higher level of rigor, understanding and financial discipline is required when investing in one off SPVs versus investing in a GP’s fund - in the latter case, the GP is doing all of the capital management, diligence, strategy, etc. for you. As an LP in SPVs, the LP is taking on this burden. 

So for the LP in this difficult liquidity situation - what are his options? 

Immediate Options for Liquidity

Secondary Market Sale

• Attempt to sell SPV positions on secondary markets

• Likely to face significant discounts (potentially 30-70% depending on company quality and market conditions)

• Will likely require approval from the SPV manager 

• Best suited for more mature companies with clearer paths to exit 

Candidly some fund admins won’t support LP sales within an SPV and even if they do, finding one to buy out a small stake with minimal transparency on how the business is performing is an extremely difficult task. Many LPs are investing $1k-$25k a deal, so finding a home for a $10k stake in a Series A business or a $250k stake spread across 15 pre-seed to Series C companies is extremely difficult. If you own a $1m+ position in say a SpaceX SPV, well that’s a different story - it’s a name with high market demand and you could likely get near fair market value and trade out of the position. 

Direct Sale to Other LPs

• Approach other LPs in the same SPV who might be interested in increasing their position 

• May get better pricing than broader secondary markets due to existing familiarity

• May require less paperwork than secondary market sale

• Still likely to face meaningful discounts 

• Will require SPV lead support and fund admin to facilitate 

This path is also very difficult as most LPs in SPVs do not know one another, so you’d need the GP of the SPV to help facilitate this, which he/she may not be able or willing to do and/or the fund admin would not support even if they did. 

Structured Solutions

• Work with specialty finance firms or secondary/alternative fund to buyout your portfolio 

• Can provide near-term liquidity albeit you’d likely be selling a large discount to NAV

• Usually expensive as a result of this 

• Best for portfolios with some mature companies or some winners coming out of it 

This is the most common solution I’ve seen executed. There are some firms that will evaluate your entire portfolio of positions in SPVs and buy them out, although as mentioned if you go down this path, you are likely selling at a large discount to NAV. 

Ultimately the above situation is one you never want to have to go down, which brings us to - who shouldn’t invest in startups?

• If you're living paycheck to paycheck - full stop

• If you can't afford to lose every dollar you invest - full stop

• If you can only afford to do 1-2 deals a year (remember: 90% startup failure rate, so building a portfolio is highly important)

• If you need liquidity in the next 5-7 years

• If you don’t understand the basics around VC

If you can’t afford to invest in startups don’t invest in startups. That’s a hard line. 

If you’re barely making it with high overhead and a family that’s reliant on you, I would not invest in startups at all. Odds are you’ll lose all of your money. You need capital to be able to make enough bets to make the traditional startup math work. If you are barely making it already and start deploying into startups, you’ll probably only be able to invest in 1 or 2 deals a year - with 90% of startups failing, that's a recipe for disaster. 

It's a bit ironic - while I'm generally pro-experience > academia, venture SPVs is one of those spaces that I genuinely believe you will be much better off as an LP if you do the work understanding the fundamentals of VC, portfolio strategy, terms and deal structure, etc. before you get started. Some good basic resources are Venture Deals by Brad Feld, Angel by Jason Calacanis, among others. 

What you should consider before you ever invest into a startup 

Have a pre-investment checklist: 

• Calculate your true risk capital (not your hopeful number)

• Cap venture exposure at 5% of your portfolio 

• Consider follow-on reserve strategy (will be strategy dependent) 

Portfolio Strategy

• Define your check sizes (be realistic and firm)

• Set your criteria focus (this can change over time)

• Plan your target deal velocity

• Create your follow-on strategy before you need it

Basic Education 

• Read "Venture Deals" by Brad Feld and Jason Mendel

• Study "Angel" by Jason Calacanis

• Become a substantial consumer of venture content (20VC, SaaStr blog, JohnGannon, etc.) 

• Join angel groups for deal flow and learning

• Build relationships with experienced investors who can help you avoid missteps. 

To Conclude

Venture investing, particularly through SPVs, requires significantly more discipline, education, and financial preparation than many realize. While the democratization of venture capital has opened up exciting opportunities for individual investors, it's crucial to approach this asset class with extreme caution and proper preparation. 

If you can't afford to lose your investment entirely or lack the capital to build a properly diversified portfolio, venture investing isn't for you. Success in this space demands not just capital, but a deep understanding of portfolio construction, deal eval, and risk management. Before deploying a single dollar, take the time to educate yourself, build your network, see hundreds of deals, and most importantly, honestly assess whether you have the financial stability to weather the inherent illiquidity and high failure rates in venture investing. 

The path to becoming a successful venture investor isn't just about having capital or seeing good deals (that’s the easy part to be honest) – it's about having the right knowledge, discipline, and long-term strategy to deploy that capital wisely.

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

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

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

• Syndicate Leads: Not Quite VCs, Definitely Not Brokers

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