Splitting The Deal
Syndicating an early stage investment is a time honored practice in the venture capital business. It was extremely common in the VC business in the early 80s when I started.
I assume syndicating was a common practice in the early days of the institutional VC business because fund sizes were small, risk was high, and splitting the deal among multiple firms was a good way to manage those things.
Over the years syndication has become less common among large venture capital firms as fund sizes have grown and portfolio diversification can happen in a single fund to manage the early stage risk.
In the angel market (and to a lesser extent seed market), syndication is alive and well and remains very common.
But in the institutional VC market, it is pretty common to see one firm lead and take all of the Series A, another firm to lead and take all of the non-pro-rata amounts of the Series B, and the same in the Series C and Series D. Syndicates are still built but they are built round by round versus in the round itself.
I was thinking about this today and it occurred to me that the three best VC investments I have made in the last ten years, which are also the three best VC investments I have made in my career, were all syndicated in the first VC round, which was a Series A in all three cases.
In each one, I negotiated for a $4-5mm round that bought between 20-25% of the business, and I then offered between 33% and 50% of the amount I had negotiated for to another firm.
In each case, USV could have taken the entire round. We had sufficient capital to do that. But in each case, I wanted some company in the investment and, honestly, I wanted to lay off some risk too.
In each of these three situations, the $1.5-2mm that we “laid off” to others was or is worth hundreds of millions or more and yet I don’t regret the decision in the least.
These syndicate investors each stepped up at critical times and did things for the companies that I could not do and they earned every penny of the returns they got.
So, I am a firm believer in splitting the deal, even when the economics (another word for ownership) suggest that there is no room for others.
My personal track record tells me that splitting the deal works. It helps you step up to something that has a lot of risk but also a lot of upside and it brings other people who can add value into the situation early on.
At a time when we are seeing venture funds get bigger and bigger, I am convinced that the hallmarks of old school early stage investing; small fund sizes, small rounds, and syndicates remain best practices and we continue to do that at USV.