It’s no secret that venture capital is being disrupted, in large part due to the influx of new entrants.  The bull market of the past decade, punctuated by massive tech exits, low interest rates, and stimulus checks, has made it viable for more individuals to invest in startups. This disruption has also been enabled by developments in investing infrastructure and technology. New structures for investing, including syndicates, investment clubs, and DAOs, have made it possible for individuals to build a diversified portfolio of venture investments via checks as low as $1k. Simultaneously, the technology supporting these investments has driven down transaction costs. Finally, there are more great companies being started than ever before, in large part due to the reduction in costs required to start a company. 

Venture investing has been on fire for the past several years. Records have been broken (and then broken again): more first-time funds have been launched, more SPVs have been created, and more dollars have been deployed into startups than ever before. The increasing participation in venture capital is good. VC has outperformed any other asset class over the past several years, and those returns shouldn’t be gate kept by a select few. Greater diversity amongst capital allocators will lead to higher levels of both innovation and representation. Individuals from under-estimated groups and non-traditional backgrounds have had an easier time (though not always an easy time) raising capital to invest. With so much liquidity in the market, and so many eyes turning towards VC, it’s been easy to be optimistic. 

But now we’re in a bear market. Wallets are tightening and due diligence is becoming more rigid. VCs who had an easy time raising millions of dollars last year are now wringing their hands with anxiety, asking: “Is the fun over?”

For some, yes. Emerging VCs who haven’t yet demonstrated success (via returns or markups) will have a harder time raising fresh capital to deploy. First time fund managers who plowed through their first fund in a 12 or 18 months will be thinking about raising fund II. Typically, this means talking to institutional investors, many of whom are pulling back, and who have higher expectations regardless of the macro-economic environment. Some fund managers will turn to SPVs to keep up their investing momentum without the burden of raising millions of dollars for a fund.

What about syndicate leads? During the bull market, every syndicate deal was oversubscribed, timelines were compressed, and money was thrown at deals with little to no diligence. Syndicate investors weren’t given the time to build relationships with the people they were entrusting with their money. Because of the compressed timelines, investors felt the pressure to make investment decisions before they had an opportunity to truly understand a syndicate lead’s approach and investment philosophy. The tradition of a “GP commit” – where a deal or syndicate lead is expected to contribute a meaningful amount of capital into their own investments – was often thrown out the window. In many cases, gaining an allocation into a “hot” deal was enough to gain the trust of hundreds of LPs. Relationship building was deprioritized while everyone had money signs in their eyes.

There’s an ongoing debate on VC Twitter about whether or not early-stage investing is (or should be) heavily impacted by the impending recession. While many investors are pausing due to uncertainty, others argue that a downturn is the prime opportunity to increase investment volume. Prices are more reasonable, slower timelines allow for true due diligence, and founders are more disciplined and determined. Regardless of where you stand on this topic, the data is clear: syndicate volume and pace have dropped significantly over the past several months. This is for the best, since the pace and valuations of the past few years were unsustainable. As wallets tighten, there’s more competition to capture the attention of LPs. And as investing pace slows, LPs will have the time to think twice before making an investment decision. They’ll be more inclined to allocate their capital to syndicate leads they understand and trust.

Capital allocators who spent the past few years using FOMO to drive activity, neglecting due diligence, and straying from their investment thesis did so at the expense of building trust and sustaining relationships with their investor community. On the other hand, those who stayed honest, diligent, and focused have earned the trust of their investor base. They took their time on investment decisions and gave community members a chance to hear directly from founders, ask questions, and voice their opinions. They brought in subject matter experts to vet opportunities and spark fruitful conversations. They syndicated deals based on genuine interest from their community, rather than following the hype. They might have even missed out on deals. But through it all, they built a community.

Communities are built on trust and conviction, which take time to develop. They are also built on shared interest and common understanding. The original form of a VC community, before the rise of syndicates, was angel groups. Angel groups commonly form around specific geographies and, before the pandemic, typically met in person on a regular basis. This structure and cadence allowed for that trust and shared understanding to develop over time.  Today, there are syndicates that form around business school classes or coworkers, but the vast majority are made of people who have only ever interacted on the internet. The relationships between syndicate leads and their investors are often brokered through marketplaces, making them feel impersonal and transactional. These relationships often lack the sense of responsibility, aligned incentives, and discipline that exists in a true community.

A year ago, we laughed at investors who missed deals because they took too long to poll their investors, or because they were too disciplined. Today, the tables have turned. The diligent fund managers still have capital on hand to deploy. The diligent syndicate leads have built a community built on trust, and can leverage that to maintain their investing activity. They can raise capital to do deals and take advantage of reasonable entry prices. 

So, if there’s anything we’ve learned from the past few years, it’s that, if you’re building a syndicate in a bear market, don’t neglect your community.