As a venture manager’s ecosystem expands, they often hit a pivotal milestone: launching a traditional, multi-million dollar VC fund while continuing to spin up deal-by-deal SPVs for their syndicate.
On paper, this is the ultimate VC stack. The VC fund anchors the round, and the SPV cleans up the remaining allocation. But behind the scenes, running these dual tracks introduces severe fiduciary tensions and structural blind spots that can easily lead to LP friction, as SyndiCat is just discovering.
1. The Allocation Dilemma: Who Gets the “Good” Allocation?
The most acute conflict of interest occurs when a breakout portfolio company opens up a hot, highly competitive follow-on round with limited allocation space.
- Rights of the VC Fund: As the manager, your primary fiduciary duty is to the LPs of your core fund. They paid management fees and committed blind capital expecting priority on the best deals.
- Expectations of SPV LPs: Meanwhile, your SPV LPs are looking to you for access. If you cut the SPV’s allocation to maximize your fund’s concentration, your syndicate feels cheated.
- The Solution: To establish a firm, quantitative allocation policy before raising capital. A common approach is a pro-rata split based on the capital base, or prioritizing the VC Fund up to its maximum concentration limit before overflowing the excess allocation to the SPV.
2. The Pricing and Terms Friction
When a VC Fund and an SPV invest in the same company at different times, the GP can find themselves negotiating against their own investors. Take a situation when the GP is creating an SPV to fund a follow-on round where their VC Fund invested. In this situation, to protect the VC Fund’s equity from dilution, the GP wants the bridge note’s valuation cap to be as high as possible. But to protect the SPV investors, the GP wants the cap to be as low as possible. You are effectively sitting on both sides of the negotiating table.
3. The Structural “Cherry-Picking” Accusation
If your VC Fund performs poorly while a standalone SPV hits a 50x home run, your VC Fund LPs will look closely at your allocation history.
- The Risk: LPs may accuse the GP of “cherry-picking”, deliberately steering the highest-conviction, lowest-risk allocations to deal-by-deal SPVs (where the GP might command a higher carry or faster liquidity) while dumping the riskier, unproven deals into the VC Fund.
- The Defense: Total transparency and contemporaneous documentation. Every allocation decision must be backed by written investment committee notes explaining why a specific vehicle took a specific check size.
Final Word
Ultimately, successfully managing the dual track of VC funds and SPVs isn’t about avoiding complexity – it’s about building trust. By establishing clear, pre-defined allocation policies, maintaining total transparency, and documenting every decision with rigor, you can navigate these fiduciary tensions.
Prioritizing integrity over short-term gains is the only way to ensure long-term stability and continued support from both your institutional and your SPV LPs.
If you are looking for more information, you are welcome to browse Propel(x) SPVs page. If you want to discuss starting your own SPV…
Cheers!
