199. SPV’s, Side Cars, & The Syndication Surge (Jeremy Neilson)

199. SPV's, Side Cars, & The Syndication Surge (Jeremy Neilson)
Nick Moran Angel List

Jeremy Neilson of Assure joins Nick to discuss SPV’s, Side Cars, & The Syndication Surge. In this episode, we cover:

  • Quick walkthrough of your background
  • Can you give us a brief overview of Assure?
  • What is an SPV Investment in the context of this discussion?
  • Can you walk us through the history of how sidecars and/or angel groups have handled (or mishandled) these syndication style investments in previous decades?
  • Why do you think startups and seekers of capital are increasingly raising through SPVs and targeting syndicate leaders?
  • What are the pros and cons of utilizing an SPV as an LP or individual investors?
  • What are the pros and cons of utilizing an SPV as an institutional investor or syndicate leader like myself?
  • Do the lead investors on these SPVs make money upfront — initiation fees, mgmt fees, broker/transaction fees?
  • Some critics of the SPV model may say that the fees associated with SPVs can also create misalignments between the VC and LP. I haven’t heard this critique myself but what are your thoughts on comments like these and how should the vehicle be structured to avoid misalignment?
  • With the SPV model, you’re providing members with specific rights, such as redemption, voting, and pro-rata rights. Talk about thee member rights and its effect on the associated parties. From the investor’s standpoint, are there any issues or risks associated with providing such rights and what’s your opinion on how it should be handled?
  • What are your thoughts on sidecar investments and how should they be handled correctly? What are some challenges and in what situations do they work best?
  • Do you see fund managers that use SPVs exclusively for pro ratas? What are the advantages here?
  • What are the regulatory risks for sidecar funds?
  • How big should a side car fund be and what’s the appropriate minimum contribution?
  • SPVs are viewed by some VCs as passive investors (non-strategic money) and that the company should have pursued more active investors. An SPV leading the round has the potential to magnify this thinking even further. What’s your opinion here and what advice would you have for those raising capital?
  • There are other platforms offering “SPV as a service”… platforms that you’ve powered on the back-end like AngelList and SeedInvest. Why would lead investors use you over one of the other platforms?
  • At the VC or PE fund-level, you also offer fund administration. What does that entail and how is it different than admin at the SPV-level?

Guest Links:

Key Takeaways:

  1. Large established venture capital funds are an important part of the ecosystem, but in order to increase the access of capital to startups, there needed to be additional pools of capital for startups. Assure provides that back-office engine to make it work. 
  2. SPV stands for “Special Purpose Vehicle” also known as a sidecar fund. It is a legal entity, typically an LLC, set up through registering with the state in order to accomplish a special or single purpose. In venture, it’s primarily used to pool money for investing in a startup.
  3. Prior to Assure, in order to accommodate these syndication style investments, you would need to hire a law firm, accounting firm, tax firm and take on the burden of doing the administration entity maintenance yourself. There was very little optionality to use SPVs unless you were going to raise a very large vehicle.
  4. As an LP or individual investor, the benefits of utilizing an SPV include, the ability to be more selective about deals, negotiation of pro-rata and information rights, access to higher quality investment opportunities at lower minimums and lower fees. 
  5. Some cons to using an SPV as an LP or individual investor could include, having to laboriously sift through deal flow if the syndicate lead is doing deal by deal and dealing with multiple K-1’s. 
  6. As an institutional investor or syndicate leader, the benefits of utilizing an SPV include, increased flexibility to do deals without having to raise a fund, deal by deal carry and networking opportunities, among many others. 
  7. Some cons to using an SPV as an institutional investor or syndicate leader could include, SPV’s are slower in comparison to a VC fund and there are no ongoing fees where typically venture funds would have fees associated with management, admin and due diligence. 
  8. At Assure, they charge a one time fee for approximately 7+ years of work that includes, all the setup, entity maintenance, use of their technology platform as well as post-close activities, distributions, and shutdowns. Jeremy shares that it’s a “cradle to the grave” full package without any additional fees in the future. 
  9. Within the SPV structure, there are 2 sets of rights, the rights with the startup and the rights within the SPV.
  10. It’s important for investors into SPVs to trust that there’s alignment between their interests and that of the syndicate lead, that they’re going to vote in a way that increases the value of the investment. 
  11. Jeremy disagrees with certain critiques implying that syndicate leads using SPVs don’t provide active strategic assistance, as though they only invest to those that they invest in.
  12. The strategic assistance that’s provided by a syndicate lead is based more around the specific person or entity rather than the structure they use.
  13. At Assure, they have a traditional venture capital fund administration service, where they do work for over 160 funds.
  14. The product that Assure provides is similar to others in the marketplace, but what differentiates them is that they’re a one-stop shop, with an extensive knowledge base around all the components of fund administration.