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We’ve Canceled 187 Venture Capital SPVs! Here’s Why

Looking at my fund administrators stats, we’ve canceled 187 SPVs! This number even shocked me when I looked at it. Of note, the vast, vast, vast majority of these SPVs were never launched to our LPs - they could have been allocations we were working on but couldn’t secure fully, or we decided at some point during our pre-launch diligence that we didn’t feel comfortable moving forward, or a number of other reasons.

But for the 10 to 20 SPVs that we canceled after we launched to our LPs, what happened? In this article, we’re going to uncover the most common reason SPVs get canceled after they’re launched.

1. The SPV didn’t raise enough

This is likely the number one reason SPV GP’s cancel deals. And this has become increasingly true in this more difficult fundraising market. 

Syndicate leads typically host their deals on fund admin platforms like Sydecar, AngelList and Carta. On AngelList as one example it costs GPs a minimum of $8,000 in fees per SPV. Usually syndicate leads pass on those fees to the LPs and those fees are capped at 10% (typically) - meaning you need to raise at least $80,000 in an SPV to avoid charging LPs more than 10% (e.g. 10% x $80,000 = $8,000 that go towards SPV fees).  

If your SPV is $1M, then great, that $8,000 in fund admin fees only works out to 0.8% per dollar invested ($8k/$1m = 0.8%), but if your SPV is only $50k, then those fund admin funds fees work out to 16% per dollar invested ($8,000 in fees / $50,000 raised = 16%) and no LP wants to pay 16% of their investment in fund administration fees. 

If you can’t raise enough to cover fund admin costs you have three options primarily 1) charge your LPs more to cover the excess fees - many LPs will likely cancel their investment in this scenario, 2) cover the excess fees yourself (e.g. for the $30k SPV, the LPs pay $3k or 10% and the GP pays the $5k out of pocket to cover the $8k fund admin fee, 3) ask the company to cover the excess fees (some will, some won’t), or 4) cancel the SPV, which is the worst option for LPs and for the fund admin. 

Notably, some fund admin platforms have lower minimums to facilitate smaller SPVs; Sydecar's pricing starts at $4.5k as one example, making even a $45k SPV doable. Additionally, some GPs perform their fund admin in-house and thus don’t have as strict minimums to get deals done as a result.

2. The round fell through 

Rounds fall through all the time. A company signs a term sheet to lead the round and perhaps the company couldn’t raise enough additional capital to hit the minimum the term sheet stipulated to close the investment. Or perhaps during confirmatory diligence, the Lead VC who issued the term sheet found something that concerned them or even perhaps fraudulent that reduced their conviction enough to pull the term sheet. 

In the 2023/2024 market, I’ve seen this a large number of times. The most frequent I’ve seen is that a company tries to put an insider round together with a few insiders willing to anchor the round with a commitment (can be small), but unfortunately the company can’t get enough new capital to close it. There was another company that had a lead term sheet issued that was contingent on a c-suite member joining full time who ended up deciding not to and the round fell apart, as did our SPV as a result. 

There are many reasons rounds fall through, and when they do we have to cancel our commitment and the SPV. 

3. Information leaks 

I think I speak for every syndicate lead when I say that this is far and away the most frustrating reason we have to cancel a deal. Needless to say, we are dealing with extremely sensitive information that simply can not leak. Almost every LP is respectful and honors this, maintaining confidentiality, but from time to time, someone doesn’t. 

A few scenarios that have actually happened: 

• An LP posted on LinkedIn that he was investing in Company A after he committed to an SPV for the deal - unfortunately the deal wasn’t closed and the company was furious and pulled the allocation 

• An LP reached out to the founder asking to directly invest after seeing an SPV for the deal - the allocation was pulled 

• A VC forwards sensitive deal information to the founder with no context giving the perception the SPV is public, which its not 

All of these scenarios are avoidable and unnecessary and thankfully it rarely happens these days if you run a tight ship. But when it does - it hurts and those LPs are immediately banned and every GP is notified of the LPs bad behavior.

4. Our conviction was reduced 

Usually our conviction gets reduced because of some behavior from the founder during our SPV process or because of a new piece of financial information, fraud, really bad press or reference we hear that concerns us. 

During one SPV process, I had a founder sending me extremely inappropriate texts in the middle of the night, and not just once, but multiple times. We pulled out of the round and unsurprisingly so did the Lead VC who issued the term sheet. 

For another fundraise, the Company’s main product went live in market and was absolutely pummeled by horrible reviews - we canceled our SPV as a result. As it turns out, the round later fell apart. 

Sometimes we’re misled and we only later find this out in a reference or confirmatory diligence - if it's irreparable, we’ll cancel the SPV. 

5. We lost allocation 

From time to time, we’ll be given an allocation in a round that towards close we’ll get cut out of. This could happen because the founder over allocated the round, aggressive VCs with ownership targets were pushing for as much allocation as they could get, squeezing others out, among other reasons. 

This almost happened recently. We committed early to a Series A round and weeks later were told that multiple large VCs came in with ownership targets that they required to invest, leaving very minimal space for other VCs, including us. Thankfully we worked this out with the founder and were able to maintain nearly our entire allocation. 

6. The transaction was ROFR’d 

This applies to secondary transactions only. Secondary transactions are the buying and selling of pre-existing investor commitments. This is in contrast to primary transactions in which the company is issuing and selling new shares. In a secondary transaction proceeds go to the seller (an investor, an employee, a founder); in a primary transaction the proceeds of the sale go directly to the company. 

A ROFR in the secondary market refers to a "Right of First Refusal." This is a contractual right that gives a specific party the option to enter a business transaction before anyone else, should the owner decide to sell. So if I raise a syndicate to buy shares of Co XYZ for $1/share, an existing investor may have a ROFR in place and the opportunity to buy the shares I’m looking to purchase, cutting me out of the transaction. 

This has happened to many people I know. A friend GP was doing a Series B secondary for a hot web3 company that was closing alongside the primary Series B fundraise. One of the investors came in and acquired the block, cutting them out of the transaction. Thankfully, in this case, the founder was sympathetic and gave them a piece of the primary allocation, but this is not usually the case. 

The secondary markets have become more efficient with high activity, so usually educated GPs are aware if there’s a high chance of ROFR, but it happens and when it does, GPs are forced to cancel the SPV. 

7. The transaction was blocked 

This also occurs in secondary transactions only. Many private companies have policies or contractual agreements that limit or prohibit secondary sales of their shares without company approval. It’s also possible that some share classes may have transfer restrictions that limit when and to whom they can be sold. This all means, if you’re an SPV buying shares, a company, depending on their policies and contracts, can block the transaction, leaving both the seller and buyer out to dry. 

A few recent actual examples of this occurring: 

• A multi-billion dollar private startup is allowing preferred shareholder (typically investor shares) transactions to go through, but blocking all common shareholder (typically founder and employee) transactions. In the case of common holders, if they try to sell common shares, the company will simply block the transaction, preventing it from going through. To get around this some employees may engage in forward agreements - an agreement between two parties to buy or sell a specific asset at a predetermined price on a future date, usually a liquidity event, but these come with added risks for the buyer. 

• Another multi-billion company is blocking all transactions unless approved otherwise - the exception approval could be to buyers who are strategics or a buyer who is an existing investor. Companies may do this to prevent unwanted people from their cap tables or make it so that the only way a new investor can invest in the company is via a primary financing, creating more favorable fundraising dynamics when the company goes out to raise. 

In this market, it is becoming easier to get past blocked transactions with unique structures such as engaging in forward contracts or buying out LP interest stakes. It makes the process more complex with additional risks, but has also become more common. 

8. Phantom SPVs

This was never a problem until 2023 from my experience, but candidly some bad actors have entered the SPV space in which they’ll raise for a company that they hope to secure an allocation for but do not yet have an allocation for. If they’re unable to secure an allocation, they’ll cancel the SPV despite marketing the deal. 

This tends to be a big problem in double layer SPVs for hotly contested rounds, where some GPs go out to market for “hot rounds,” taking LP capital that could have gone to SPVs that actually have allocation and then cancel because the GP couldn’t secure the deal. This is bad for GPs and LPs - LPs now miss out on the deal, while GPs that actually secured allocation missed out on LP capital. LPs - do not invest in double layer SPVs unless the GP is extremely high integrity with a long track record of success. 

Of note - phantom allocations may not be due to the GP, but actually due to the broker. Some brokers are great (like Forge) and some are extremely shady and unethical (’ll refrain from naming names, but in these scenarios they’ll tell a GP they have an allocation secured and straight up lie. Many horror stories here).

Wrapping Up

In conclusion, while SPV cancellations can be frustrating for both GPs and LPs, they are sometimes necessary due to various factors beyond the syndicate lead's control. The most common reasons include insufficient funds raised, rounds falling through, information leaks, reduced conviction, conflicts of interest, and ROFRs in secondary transactions. Understanding these potential pitfalls can help GPs better manage expectations and mitigate risks when launching SPVs. For LPs, this knowledge underscores the importance of maintaining confidentiality and being prepared for the possibility that not all investment opportunities will come to fruition and that’s okay – every major VC firm has had transactions fall through, it’s uncommon but it happens. 

If you enjoyed this article, feel free to check out our prior articles on GP experiences: 

• Why You Should Discount a Syndicate Lead’s Performance

• How Influencers Can Legally Raise Capital in Public

• Venture Capital SPVs - a Decade of Delayed Gratification

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