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😡 Syndicate GPs – Worst Practices & Concerns

We discuss a lot of the benefits of the Syndicate ecosystem, but as with every industry, there are parts of this industry that could be a lot better. As the phrase goes, people who live in glass houses shouldn't throw stones, and so of course, I will not be calling out anyone, but more so discussing the worst practices I see that lead to potential poor outcomes and poor experiences for LPs.

• For new GPs, please take note that you do not want to fall into this category.

• For LPs, vet the Syndicates you join as ultimately both GPs/LPs must take ownership of their participation in this ecosystem. 

I’ve been wanting to write this article for a while, but after an LP reached out a couple weeks ago with their extreme frustrations with absent GPs and a lack of a voice, we wanted to put something out to help this ecosystem evolve.

Tourist GPs

This is one of the worst offenders I see. 

Tourist GPs refers to GPs who are incredibly active in this ecosystem for a year or so and then disappear entirely. We saw a lot of that in the 2021 bull market to today – a lot of new GPs emerged who wanted to syndicate because candidly it wasn’t that hard to raise in 2021 if you had compelling deal flow, but now that we are in a much different venture climate, in which raising capital is extremely difficult, many of those GPs have left.

Let me state – it’s okay to leave VC to pursue other opportunities and understandable to take a step back from putting together SPVs and this includes if you can’t raise for deals - that’s not entirely what I’m referring to.

I’m referring to the GPs who raised many millions in SPVs and have ghosted the ecosystem and their LPs specifically, they aren’t evaluating follow-on rounds for their LPs (pay to plays, down-rounds, up-rounds, etc.), they aren’t answering questions from their LPs (completely ghosted), and have more or less disappeared.

This isn’t too common but it definitely happens far more than it should. 

Why is this bad?

While there’s an expectation that GPs will continue to manage their investments post-SPV and at minimum respond to LP emails once a deal has closed (that’s a low bar), disappearing is uniquely bad in this climate because now no one is protecting LP rights or ownership. 

What do I mean by that - there were a lot of pay to play rounds in 2022/2023 that came from the 2021 exuberance. Pay-to-play (p2p) provisions incentivize investors to participate in a new fundraising round either by negatively impacting investors who opt not to participate or rewarding investors who choose to participate.

Pay to play penalties can be extremely severe – if you opt not to participate in a pay to play round, it’s possible your investment will get diluted to nearly nothing depending on the penalty of that round. So if a GP isn’t evaluating those future opportunities for LPs, those SPVs are likely worth much less than you think or potentially worthless. If a Company ends up going to zero, maybe that works out okay, but if a Company raises a p2p and then goes on to be worth a fortune, that is a very messy situation for everyone….

On the other hand, let’s say a company that GP put together an SPV for ended up performing well and the Company’s raising an extension round, bridge round or up round – with an absent GP, there is no one looking out for your ownership as new equity capital raised = more dilution. Dilution is part of venture capital, but you want a GP who is evaluating the future rounds and looking out for your ownership in the SPV model especially. 

Misstating Facts

­­I actually believe GPs in this ecosystem rarely intentionally misstate facts. However, what is fairly common is positioning the materials to include traction metrics that meet the narrative the GP is trying to tell e.g. maybe revenues will be stated in the memo, but it’s possible the margins on that revenue are extremely low or part of that revenue is completely pass through (e.g. GMV) or something else. This is technically not lying but something LPs should look out for. 

If there’s anything I’ve seen over the past four years of syndicating is that venture is a long-term game - LPs appreciate trust and will work with you more if you're transparent about the opportunities you're syndicating. 

Lack of Communication

This unfortunately happens a fair amount. On a number of occasions, I’ve actually had LPs from other syndicates reach out to me to try to get in touch with other GPs. There’s few circumstances that justify not responding to LPs who have invested capital with you - even if you’ve left the ecosystem. Usually LPs just want updates on what’s happening with an investment and a GP should be available to at minimum respond to these requests. If you’re a GP (new or old), take note. 

If a Company goes public, is acquired, goes bankrupt, merges - even if you don’t have all the details, LPs actually appreciate an update on what you do know even if you’re still getting all the facts. 

Phantom Allocations

While still rare, increasingly I’m seeing GPs go to their SPV LPs stating that they have an allocation in a company they do not. Often these allocations are in highly competitive rounds that they hope to get into and are trying to front other GPs in the market by going to market even before an allocation is secured. Fund admin platform should outright ban this behavior unless there’s not full clear disclosures on the deal page that state the allocation is not secured. 

Information Rights

Information rights in venture capital are rights that allow investors to receive updates on a company's financial performance and access to the company's facilities and personnel. These rights are customary in VC deals, but may only be given to major shareholders. 

LPs want information rights on deals that they invest in. Some GPs provide information rights on every deal, some don’t provide any. From an LP point of view, do not assume you will get information rights - some GPs advertise whether they do/don’t offer them and I think at minimum this is a good practice for transparency to LPs. 

Why wouldn’t a GP offer their LPs the same information they receive? 

Unfortunately many syndicates are large - we have now almost 7,000 accredited investors in our syndicate with each investment typically having 10-100 LPs and in some cases >200 LPs in a single SPV. At this level of scale, things can and have leaked and we’ve taken the position to protect company confidentiality to not broadly distribute updates; however some GPs do. 

We have experienced leaks over the year from earlier updates and it put us in an extremely bad light. There’s one LP as an example who posted his investment and some company info on his LinkedIn before it was publicly announced - the founder got light of this and nixed the syndicate entirely. So this is the dilemma GPs in SPVs face and why some may not offer information rights - it only takes one bad apple to nix the entire deal or our future participation in a deal. 

So if I were a GP - I’d make clear to LPs what their information rights are - if it’s none, state it, if it’s full information rights state it. I think a lot of LPs' frustrations on this could be solved with more transparency and expectation setting on what each GPs policy is on information rights. 

What LPs Don’t See (the alternative POV):

This is the flipside that many LPs don’t see that GPs use to justify their action. I’m not saying this right, I’m just presenting the alternative point of view. 

LPs in the full-time SPV ecosystem I play in typically do not want to pay management fees. The justification from the GP side is no management fees = limited/no ongoing service i.e. if you want me to provide ongoing service beyond managing the SPV then GPs feel we should be compensated for that. 

The reality is running SPVs is a sweat equity job for many years. Many companies will die and many years pass before a GP will likely see any meaningful income for all the work he/she is putting in - in many circumstances GPs can be putting in years of effort before seeing a single dollar in return because of the lack of management fees. 

I personally am of the view that this ecosystem should make management fees the norm as it will allow many GPs to operate full time and provide full service to LPs. Again - this is not a justification of bad actors, but providing a POV on the GP perspective. 

So to Conclude:

New GPs: Treat your LP base as a community and play long-term games. That means: 

• Communicate: Answer LP questions, provide quarterly/annual updates, LP office hours, etc.

• Transparency: Don’t deceive in your marketing materials or lie about facts - this is a non-starter; have a position on what LPs should expect from you moving forward e.g. information rights

• Availability: Do not disappear - if you take capital, be available to evaluate future rounds (both good and bad) 

• Community: I didn’t discuss this as it’s fine not to build community groups, but some have Slack groups (or other communities) for LPs who opt in who want a closer relationship  

LPs: You are stewards of your capital. Select GPs wisely and get familiar with GP policies. That means: 

• Diligence: You are responsible for vetting the GPs you ultimately decide to invest in 

• Policy: Understand each GPs policy on things that are important to you e.g. information rights. Don’t default expect full rights and full service. 

• Fees: Realize that if you don’t pay fees I believe you’re more likely to be getting less service. That's not right or fair, but if a GP is not making income you’re likely not going to get full service. Per the above, vet to ensure what each GP policy is on the things that are important to you

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✍️ Written by Zachary and Alex