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Syndicate Leads: Not Quite VCs, Definitely Not Brokers

I hate when people hear what I do and say something like:

 “Oh, so you help startups raise money”. 

Incorrect. We invest into founders/startups. We are not brokers getting compensated to “help startups raise money.”  That being said, there are some similarities syndicate leads have to brokers, despite having very different business models. While we appreciate input, some LPs treat us like brokers asking us to find allocations for companies they're interested in. Don’t get me wrong, we appreciate when our LPs share interesting companies, but we're not bankers or brokers seeking allocations for specific requests. We put together SPVs for high-potential deals that we're eager to invest in ourselves, and that we believe have strong risk/return profiles for our LPs. Carry is our business model, not transaction fees or success fees.

Again, I am not an advisor or banker “helping startups raise”. If a startup needs help raising capital, I am probably not the guy that’s going to be helpful here unless we are investing ourselves in which case we can likely make some useful intro’s, provide deck support or other, but again, this support comes with an investment check which aligns with our business model. 

In this week's post, we are going to compare Syndicate Leads to 1) traditional fund Venture Capitalists  and 2) Brokers to highlight both the similarities and differences of the role. While I believe Syndicate Leads are much more similar to Venture Capitalists (we both invest capital into startups and primarily make money on the return/exit) there are some aspects of the role that can feel similar to an investment banker or broker..

We’ll break it all down below!

Syndicate Similarities to VCs

Playing for the upside/return → Like VC’s, a syndicate's primary role is to identify investment opportunities into the best startups/founders that can drive an outsized return of capital. We spend much of our time networking and sourcing to identify what we feel are the best companies that can become successful and we fundamentally believe in. This is very different from a broker or a banker and I’ll get into this more later. 

Carried interest, not transaction fees → The driver of compensation for syndicate leads comes from carried interest, similarly to venture capitalists, especially emerging VCs. In short, this means a syndicate lead is only making meaningful money if they can drive returns for their Limited Partners. If we invest in companies that do not produce returns, we will not receive any carried interest. This is very different from the broker model or banker model, both of which are heavily incentivised on success fees / transaction fees.

Investing alongside top VCs → We also look to invest alongside top VC’s. I believe this to be true for the vast majority of follow-on venture funds out there as well. Top VC’s add signal (not to be confused with outcomes) and this is crucial for syndicate leads. Many VCs feel a lot more comfortable investing alongside Tier 1 venture funds as well as it provides assurance of a large capital partner, perceived certainty of significant due diligence, including confirmatory diligence, and is therefore key to sourcing/investing for syndicate leads. 

Portfolio Diversification → Syndicate leads focus on building a portfolio. We look to build large portfolios that will have a few breakout companies that drive >80% of the returns. Investing in early-stage venture is very tough and one of the only asset classes where you can be wrong most of the time and still make a ton of money. This is understood and therefore it is important to build a portfolio model that will ideally land a few massive winners that drive the majority of the returns - this involves portfolio construction (burden on the LPs in syndicates) and sourcing (while the burden is on the GP, the LPs in SPVs carry the burden of selecting which ones to invest in). Although the LP base on each deal is different in SPVs unlike traditional venture funds, the approach to build a portfolio and optimize for outsized winners is similar.

Founder Relationships → Focus on building Founder relationships. Venture is a long game and building relationships with portfolio founders matters. Whether it’s to secure pro-rata, help your portfolio company execute, land a new customer, or land a new investor, these relationships matter for the long run. They are not as transactional as other industries.

Sourcing is the life blood of syndicates and also venture funds → This is a non-stop networking game to consistently build new relationships with founders, investors, and other players in the ecosystem. We are both spending an enormous amount of time/effort crafting new relationships to meet the best founders, early in their journey.

Syndicate Differences to VCs

Our capital fundraising efforts come in different forms → Venture capital firms focus their fundraising efforts on limited partners (LPs) seeking professional management of their venture investments in which the fund GP has essentially full discretion over investment decisions. This model allows VCs to raise substantial funds upfront, enabling them to invest in a diverse range of 10 to 60+ companies from a single fund before needing additional capital. 

Syndicate leads conduct capital raising on a deal-by-deal basis. This approach shifts the focus from broad portfolio management to individual investment opportunities, allowing LPs to evaluate each deal on its own merits. Upon closing a deal, the syndicate lead reinitiates the fundraising process for subsequent opportunities, operating on a cyclical, deal-specific model. 

In summary, VC funds focus on LPs for their fund while Syndicate Leads focus on growing the LP base to support the many different deal opportunities they surface to the syndicate. 

Syndicates do not lead rounds → Many VC funds are set up to price a round and lead it. Syndicates (at least 95%+ of them) are not positioned for this and will optimize following onto rounds that are priced and led by institutional VC’s.

Pooled Capital versus raising an SPV every time to invest → As mentioned above, when a VC and a syndicate commit to a deal, the capital is being deployed from a different capital pool. Simply put, the VC is deploying capital from a pooled vehicle they have already raised, albeit with ongoing capital calls. A syndicate starts from no committed capital typically, and shares the opportunity with their LP base to then pool capital into an SPV and invest into the company. This capital is not coming from a fund, it is coming directly from LPs who have the decision to invest or not at a company level.

How a deal gets “done” is different → There are times where a syndicate lead is excited about a given deal and can verbally commit to a deal, however if the capital does not get raised… the deal does not get done. This will happen with syndicate leads, which is different from VC’s. When a VC commits to a deal the capital is already there for them to wire (unless they are raising a fund in parallel to committing, in which they should be transparent). There is not that extra step for the VC to find the capital to invest into the target company as that capital has been raised previously. In short, funds have the capital ready, whereas syndicates will need to secure the capital for every deal.

LP Profiles differ → Typically, the profile of LPs in a fund and a syndicate is significantly different. Most funds will have high-net worth individuals, family offices, endowments, corporations, and other institutional LPs involved in a fund, whereas not often at the deal level. Syndicates typically have high-net worth folks and other accredited investors who invest personally and also have a day job or run their own company. While syndicates may overlap a bit with high-net worth folks who invest in funds, typically outside of that, there really is not any overlap in LPs, as the fund vs. syndicate offering attracts different profiles.

Similarities to Brokers

In the role of Syndicate lead, there is a buyer & seller matching component → While we are sourcing opportunities with high upside to earn money through carried interest, there is a match-making component of getting LPs to commit capital into a deal. Without LPs interest, a deal is not getting done or an investment is not getting made. The match-making piece here is key to be able to raise the necessary capital to invest to optimize carried interest at a future date upon positive outcome.

While the broker business model is different, similarly, they are always trying to match buyers and sellers to transact. Syndicate leads also need to “match” LPs with investment opportunities as this is core to the role, but unlike brokers, our investment opportunities need to produce a positive outcome or we receive nothing. Our reputation depends on it; broker reputations depend on liquidity, reliability and service/experience.

Running a syndicate can feel like running a Marketplace → Managing a syndicate often parallels operating a marketplace, requiring a delicate balance between two key elements: deal flow and investor base. As a syndicate lead, you're constantly scaling both new investment opportunities and your LP network. To keep LPs engaged and active, you need to consistently source high-quality deals for their consideration. This creates a nuanced equilibrium, reminiscent of other marketplace businesses, where providing a positive experience for all parties is crucial. The challenge lies in maintaining proportional growth on both sides – an imbalance in either direction can lead to inefficiencies and dissatisfaction among participants.

Sometimes LPs treat Syndicate Leads as brokers → Maybe once or twice a month, I have either a Deal Sheet customer or a Riverside LP reach out to me to inform me of a company they want to invest in to see if I have access or can find access to this company. I wouldn’t say I have a problem with this (we like good tips!), but at the same time, this is not how running a syndicate works. Of course, I welcome and appreciate the LP feedback but our role is not to track down investments reactive to LPs, rather to source investments we like that we also think will be of interest to our LPs. Regardless of how the deal is sourced, I do have LPs that engage with me in a similar way we engage with brokers.

Differences to Brokers

The compensation model is different → For brokers and bankers, their revenues are built primarily on completing transactions. For Syndicate leads, our income is almost entirely dependent on carry or investment outcome. Brokers are typically taking 2% to 6% on a given transaction, so it’s really about the volume and getting the deal done to receive their cash compensation for connecting the buyer and seller. Syndicate leads might have a small management fee (like VC’s) but the real upside exists in the form of carried interest. If syndicate leads can raise capital from LPs and provide a return of capital, they will be able to capitalize on ~20% of the profit returned to LPs. This is the primary way syndicate leads make money, very different from the broker transaction model.

Different customers → Syndicate leads are typically working with founders directly to invest in their companies and also working with brokers for access to later stage secondary opportunities or bankers for unique primary offerings. Unlike syndicate leads, brokers are typically working with sellers (employees, exiting investors looking to sell all or a portion of their ownership stake). There are times where the brokers are working with the company to facilitate all secondary transactions within the company, but typically the end user is different from syndicate leads (or VC’s).

Conclusion

In conclusion, syndicate leads occupy a unique position in the investment landscape, sharing characteristics with both venture capitalists and brokers while maintaining a distinct identity. Like VCs, we focus on identifying high-potential startups, building founder relationships, and earning carried interest based on investment outcomes. However, our deal-by-deal fundraising model and direct LP engagement sets us apart from funds and appears more similar to brokers. While some aspects of our role may resemble a broker's matchmaking function, syndicate leads are fundamentally investors, not intermediaries. We create value and earn our income through careful deal selection that results in a positive outcome for LPs, keeping incentives aligned with our investor base. 

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

• Defending Your Pro-Rata Rights: How VCs and Angels Can Monetize Growth Rounds and Avoid Leaving Millions on the Table

• Deal Machine or Selective Investor: Which Syndicate Style Wins?

• 💡Venture Capital Should Not Be Democratized Unless...🎓

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