Starting a VC fund, syndicate, or investing group is almost entirely about building trust and overcoming inertia. I first realized this in 2019 while starting a micro-fund with my co-founder, Nik.

We initially thought we wanted to raise a traditional fund. Having committed capital on hand meant we’d be able to consistently back the founders we were most excited about, and the ability to take management fees meant that investing could be a viable career path. But successfully raising a fund requires a strong track record — or at the very least, a perceived brand and differentiated strategy.

Fund LPs are typically focused on one thing: returns. As brand new fund managers, we didn’t have returns to show… but we did have something else: the ability to spot great opportunities and a proven approach to vetting investment opportunities. Our challenge was to convince LPs to invest with us, and we found that making a smaller ask opened up many doors.

We shifted our focus to promoting specific companies on a deal-by-deal basis, which allowed us to garner enthusiasm around each deal. We could promote founders, their technology, and their market opportunity — and largely leave ourselves out of the conversation. Instead of asking to be stewards of capital, we were granting access to coveted allocations.

SPVs were the ‘right place, right time’ vehicle for us, allowing us to move quickly and deploy capital. Our conversations with LPs shifted from “let’s have another call in a month” to “I’ve just sent the wire.” This was a meaningful shift in momentum, and led to our ‘aha’ moment. If the pivot to SPV’s helped unlock funding for us, it could also do the same for every other aspiring VC out there.

“Should I raise a fund or start with SPVs?”

If you are even asking this question, it probably makes sense to start with SPVs. Raising a first traditional fund is almost always a longer process than expected, and there are fiduciary responsibilities and legal technicalities in most fund documentation that might take you by surprise.

On the other hand, SPVs come with the following benefits:

• Simple, explainable, tangible

• Create a bias towards action

• SPV LPs feel more in control as they are making the ultimate decision with each investment

• More control leads to more capital to being deployed

• Value-add investors tend to want to be hands-on in supporting portfolio companies

• You can take a “breather” from doing deals without LPs getting frustrated that you are getting a management fee without active deployment

Of course, nothing great is without its downsides. Some additional things to consider if you are exploring SPVs as your investment vehicle of choice:

• You have to ask your LPs “permission” to do a deal

• Getting the deal together can take time

• Certain investors want portfolio theory

• Management fees can be tricky to ask for at first

At the end of the day, there’s no one size fits all solution for new investors. But if you’re looking to dip your toe in the water of venture investing in a way that is more flexible and straightforward, SPVs are probably the right fit for you.

Want to continue the conversation? Give me a shout at david@sydecar.io.