- Last Money In - Newsletter on Venture Capital Syndicates
- Posts
- Should VC Scouts be Spending Time w/Syndicate Leads?
Should VC Scouts be Spending Time w/Syndicate Leads?
a newsletter about VC syndicates
Alex Pattis & Zachary Ginsburg
July 31, 2024
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.
Fill out our unique form to get to the top of the line here.
Should VC Scouts be Spending Time w/Syndicate Leads?
As a syndicate lead, I’ve substantially leaned into working with VC scouts (as has Zach) the past 3-4 years. It's been a great, and a differentiated way to gain unique access to deal flow. Many of my most exciting portfolio companies have come from various “VC scouts”. While this has become increasingly core to my sourcing strategy, it’s equally been beneficial to the scouts who are capitalizing on a large portion of the carried interest for their support in sourcing and diligence.
And for the record, we keep using the term “scout” but this really applies to anyone who truly has unique access to startups/founders. This post is for you. We’d love to work with you :)
I’m going to make the case that most venture capital scouts should spend less time scouting for venture funds and more time (or focus) scouting for venture capital syndicates. If you are scouting deals because you want to invest, capitalize on carried interest, and do more deals, scouting is the way to go, and working with syndicate leads will likely lead to more deal activity. The exception to this post is if you are scouting for venture funds that hope you to join. In that case, syndicate leads will not be as helpful.
In this post, I will break down key differences between syndicates and venture funds as it relates to upside for venture scouts or anyone who has strong deal flow and wants to capitalize on it. We’ll cover:
How scouting has evolved over the recent years in the syndicate ecosystem
How Zach and I frequently work with scouts
How the carry works and can be more attractive when scouting for syndicate leads
The general enthusiasm of syndicates to work with scouts
Incentives for scouts
How this applies to junior VC’s who are looking for more deal activity
And more!
How scouting has evolved in syndicates
Over the last 3-4 years (especially 2020-2021), I believe syndicate leads learned that they were in a unique position to invest in more companies than a traditional venture fund - they weren’t limited by typical fund constraints (limited capital, limited thesis, limited stage, etc.) and we’re taking advantage. While we manage less capital than large funds, we have more LP’s with diverse interest in startups and arguably superior carry economics. Many syndicates have over a thousand LP’s, and these LP bases can support many deals being done, raising over $80k as a ballpark minimum and upwards of $10M+ at the high end.
As the “high volume lead” became more normalized, it became increasingly important for syndicate leads to navigate ways to access more high-quality deals. Generally speaking, the LP interest was there and it was truly across the spectrum of deal types. Some LPs wanted early stage consumer deals, others wanted late stage, post-PMF B2B/enterprise businesses, and they have the ability to pick and choose where they allocated capital.
Working with scouts or individuals who had unique access to founders/startups quickly became a great way to help in sourcing efforts to syndicate high quality and higher volume deals. I think it is fair to say that most of the active syndicate leads have leaned into this scout model and actively try to align with individuals that have strong founder access. My partner Zach might be one of the best I’ve seen at this as this is probably at the center of his scouring strategy. This is unlike a traditional venture fund, because they cannot be dishing out the amount of carry that syndicate leads can.
To underscore how core this is to our sourcing strategy, Zach and I have worked with over 50 scouts and other syndicates to date. Sometimes these scouts also run a syndicate, in which in this case, we’d co-syndicate, but many times they are simply connecting us to the founder and sharing why they are bullish on the team/company and we take it from there.We also probably have the most aggressive scout carry offering up to 50% carry to scouts for the right access/diligence support.
Another item to note about carry sharing with syndicates versus funds → It’s easier/cleaner for syndicate leads to share carry at a deal level versus a fund level. At the deal level, if I share ⅓ of the carry with a scout who helps source and diligence, they will have upside on that specific deal and isn’t impacted by negative performance of my other deals.
With VC fund scouts, you’re typically receiving carry on that deal only after stipulations of the fund e.g. that fund has to return back minimum 1x capital and if it doesn’t, sorry no scout carry for you even if your deal 50x’s for them. Not to mention VC scout carry has gotten so bad in general only providing scouts 1-10% of the carry often versus syndicates that are typically providing 20-50%. Given the constraints around funds, it’s also extremely difficult to get them to move on a deal as they may only have 30 shots out of a fund. Conversely we’re taking 30 shots a quarter…
Deal-By-Deal Carry (for scouts) >>>
A few weeks back, my partner Zach wrote a piece titled “💡5 VC Syndicate Learnings After Closing 500 SPVs”. One of his headlines was “The GP Carry Economics are Really Superior” which directly applies to scouts here as well. Below are a few key reasons the deal-by-deal carry for scouts can be superior to a traditional venture fund model:
It means the time to actually receive carry income can be extremely quickly. In the event of an exit, you will immediately see upside in that deal regardless of how the syndicates overall performance is going i.e. you can return capital immediately to those LPs versus a traditional fund if you returned only ~10% of capital back, you would not be seeing a dollar in carry from that sale. This applies to scouts obviously as well who have scot carry in a deal.
Around 50% of traditional funds return <1x DPI. Meaning half of GPs aren’t seeing a dollar in carry from their funds. As a scout/SPV lead, you can have a <1x overall performance of a syndicate lead/scout in SPVs and still receive an enormous amount of carry distributions if you sourced a winner.
In short, it’s all upside for scouts. Worst case, the company goes to 0 and the scout does not lose anything, but if it hits big, the scout can collect big $$$ in carry without having to do anything beyond the sourcing & diligence support (typically).
We (Syndicate Leads) Want You!
As mentioned above, syndicate leads working with scouts is now very common. This is not some new, innovative way to source deals. Rather, it’s embedded in most syndicate leads strategies. No SPV lead will be caught off guard if you reach out and ask to scout deals for some portion of the carry.
As a syndicate lead, you are essentially always figuring out how to:
Invest in the best deals/founders to generate a return at an exit/IPO/early secondary
Bring the highest quality deals to your LP-base
Grow AUM with high quality deals that LPs are excited to participate in
Scouts can help with all 3 points above. And again, as a syndicate lead, it is so easy to share carry with scouts who are helping bring great deals to your attention, and facilitating an intro to enable you to secure an allocation for your LPs. These syndicate leads do not have a finite amount of capital in a fund (unlike a traditional fund), so if it meets the bar/criteria for that syndicate lead, they are going to be eager to syndicate the deal. In other words, there’s a higher likelihood of a syndicate lead to say “yes” to a deal you source than a fund, assuming it’s an active syndicate lead.
If you’re interested in being a scout for us, please fill out this form: https://forms.gle/7JrjVj7y5F9rQJLH8
So, what does that mean to a scout?
It means you might be able to scout more deals and capitalize on more carry by working with syndicate leads than traditional venture funds. This is not always going to be the case as the scout model differs quite a bit by fund, but I can assure you that at the very least, syndicates will offer:
A higher percentage of carry for a deal you source
Be able to say “yes” to more deals than a traditional fund
Junior VC’s → We Want You too!
I guess this depends on the fund as we wouldn’t want anyone junior at a fund to share deals with us (for carry) if that was against the rules or unethical. But if not, syndicate leads can be a great “partner” for VCs early in their career.
Why?
Someone junior at a fund is likely not getting much, if any carry on the fund or deals they source. They are early in their career and actively building out their sourcing channels. They also likely struggle to get the fund to buy in/invest into deals they source. That’s okay. That’s just how it goes with junior VC’s. I hear a lot of frustration generally about the inability to get deals done, or the volume of deals they’d want to get sourcing credit for etc. By sourcing deals for syndicates, this can provide a nice way to make use of some of the deal flow that you've already put the work into meeting the founders and getting to know the business.
Many syndicate leads would be enthusiastic about partnering with these VC’s to help with deal flow. Not only will the junior VC’s be able to capitalize on carry (if their fund allows) but it’s also a nice way to source more deals and build the resume even if you are sourcing as a scout for a syndicate instead of a VC at your current fund. There is a story to be told at least for whatever or wherever these VC’s go in their career.
If I were a junior VC interested in doing this, here are a few things I’d consider:
I’d always prioritize my fund first. Period. This is where you are building your career/VC foundation so that is easily the top priority.
If the fund passes, I would think about having a syndicate network to share the deal with
If it’s not competitive to loop in a syndicate for them to explore investing (in parallel to your fund), I would do so to support 1) getting carry and 2) getting sourcing credit for my VC resume.
If the fund passes or it's not competitive, and I can add value to the founder (assuming I want to support them) by an introduction to a syndicate lead interested to invest, then that’s a nice, easy way to add value to both the founder and the syndicate lead, regardless of economics.
Lastly, it’s a nice way to build your deal flow via syndicates as well for deals they might be doing that fit your funds mandate.
DISCLAIMER #1: Some funds, typically larger ones, do not allow team members to receive carry elsewhere for sourcing. We would never suggest doing anything that breaks the fund rules or is unethical in any way.
DISCLAIMER #2: Some deals fail. So in addition to sourcing the syndicate has to actually run a good process on their end to get to the part where you receive carry.
If you enjoyed this article, feel free to view our prior articles related to VC scouting:
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.
If you enjoyed this post, please share on LinkedIn, X (fka Twitter), Meta and elsewhere. It goes a long way to support us!
We’ll be back in your inbox next Wednesday on our next topic. Thanks for tuning in!
Questions? Comments? Feedback? We welcome all, and would love to hear from you!
