When you invest in a portfolio company through a syndicate, you are technically investing in a Special Purpose Vehicle (SPV) that is investing in the portfolio company. You are not investing directly in the portfolio company.
There are a few major noteworthy differences between investing through an SPV and investing directly in a portfolio company:
When you invest through a syndicate, you do not have direct ownership in the portfolio company. Instead, you hold ownership in a single-asset SPV, along with other members of the syndicate who chose to invest. For example, if you are investing in an equity round, you are not directly purchasing shares in the portfolio company.
Leads get carry for their syndicated investments. This allows them to leverage their deal flow by earning up to 15% carry on the allocation being shared with backing investors. Learn more about the economics of syndicates.
Portfolio companies typically seek larger investments than LPs wish to make on their own. When they invest through syndicates, investors can make smaller investments, because their investments are combined with the investments of other syndicate members. For example, a portfolio may require $100k investments as a minimum. Because the syndicate agrees to $100k, it is allowed to participate - but the $100k may be made up of 100 LPs' $1k contributions.
When LPs join syndicates, they get access to leads' deals and benefit from their experience in picking and managing investments. These deals will be typically hard to access for someone who hasn’t spent considerable time building deal flow.
Capital for the Startup:
Startups get more capital with a single cap-table entry (for the SPV) rather than multiple cap-table entries (for multiple LPs).