🤔 Does the General Partner’s Lead Commitment into an SPV actually Signal Anything?

In the venture capital (VC) syndicate ecosystem, the short answer is not nearly as much as you think and potentially not at all. And worse, it is an incredibly misleading figure on a comparative basis.

Why?

💸Let’s quickly define some terms:

• To recap, a General Partner (GP) is a fund manager

• Lead Commitment or GP Commitment refers to how much money the GP is investing into the deal he/she is syndicating. This is also referred to as "skin in the game” with GPs typically required to invest a lead commitment of $1,000 minimum into every SPV they lead

• A SPV is a fundraising structure that allows VCs to collectively invest in a single company

• Syndicate is a large group of investors that join together to invest in a large transaction and make up the SPV

Okay – so let’s get into it. Does the amount a GP invests into a deal matter? Specifically, should LPs put any signaling weight into how much GPs are investing in the deals they syndicate.

📚Let’s start with a few examples.

I run a venture capital firm Calm Ventures. As part of the “skin in the game” requirement, the Calm GPs typically invest a $1,000 lead commitment check (the minimum to meet the skin in the game requirement) into every SPV we run. The assumption from our LPs and likely other investors is that investing the minimum lead dollar commitment amount equates to minimal conviction, but that is not necessarily the case.

As of today, we at Calm have closed 98 SPVs in the last 12 months. At a $1,000 lead check per investment that’s a ~$100k personal outlay to just meet the minimum lead commitment requirement. In our previous post we put together a deep dive discussing the GP economics around syndicates, which you can read here, but to recap, there is very little money coming in for syndicate GPs in the short term, as we collect little to no management fees and our carry (e.g. profit share) is almost completely received on the backend (5+ years out) as our investments need to be realized via an M&A event or IPO for us to actually receive our profit share.

This is all to say, that even though we’re investing the minimum $1,000 lead “skin in the game” investment, given all, this low lead commitment should not be confused with any signaling around our conviction in an investment as $100k/year is a meaningful outlay. To invest more per deal is simply not financially responsible for us right now. I realize that’s hard to believe given the carry we receive on the backend, but yes, for many of us, investing $100,000/yr is significant, and to hit the point home, our income is on the backend many, many years later….

🤔But then how are some GPs investing $10k, $20k, $50k, $200k into deals? They MUST have more conviction, no?

This is where the confusion comes in. I do not have a fund on the side. Our Lead Commitment comes out of the Calm GPs pockets personally.

Syndicate GPs with dedicated traditional venture capital funds and/or rolling venture funds (a rolling fund is an open venture capital fund, in which each quarterly investment period, a new fund is offered) typically invest their lead GP commitment out of their fund. In fact if a SPV meets the GP’s fund’s thesis, they are usually required to invest in these deals out of their fund – this can be mandated to ensure GPs are investing in their best deals that fit their funds thesis out of fund capital. So if it’s not obvious, that large $20,000, $50,000, $200,000+ lead commitment is rarely the GP’s personal capital. It is usually just fund capital i.e. capital they raised from other investors at a prior date.

Like venture syndicate GPs, venture capital fund GPs are typically required to provide a GP commitment for their venture fund – like the GP commitment for a syndicate, this is the amount of capital a General Partner invests in his own fund. But even in this case, this is typically only ~1% of their fund size and in a number of cases, that GP commitment is actually coming out of the management fees they receive. Yeah that’s right… Unlike syndicates, Venture Funds almost always collect management fees and those are typically 2% a year for 10 years. Yes, that money goes to operating a fund e.g. legal, salary of employees, compliance, travel, etc., but there’s usually some left over to pay off the GP’s 1% fund commitment.

💡 “X GP will satisfy their GP commitment in part by waiving X% of management fees otherwise owed to them by the fund. The remainder of the commitment will be contributed in cash.”

🔍 Time to read the fine print. That’s copied language from an actual fund… and this is happening all the time in the SPV ecosystem.

So the next time you see a $10,000 lead GP commitment from a syndicate, it’s possible that GP’s personal skin in the game is actually just $100 (~1% GP commitment x $10,000). And again, to hit the point home, that $100 GP commitment may very well be coming out of his/her’s management fees!

So now our $1,000 personal lead GP commitment may not look so bad from a signaling perspective.

🔍Let me make it clear, I don’t believe there’s any deception or wrongdoing from GPs who invest their lead SPV check out of a fund – in fact, they’re doing what they’re supposed to do…deploying their funds' capital into the best deals! I’m ONLY discussing the nuances of a lead GP check so that LPs can make sense of the signaling around the lead commitment dollar amount in the context of Venture SPVs. That’s it. Nothing more.

Sometimes a GP will invest $20,000 to $200,000+ into each of his/her SPVs personally. This GP is likely wealthy, even by accreditation standards, but in any case I do believe that some positive signaling weight should be attributed to those deals. I rarely come across GPs who are investing $20,000+ personally as their lead GP commitments and who are also running 25+ SPVs a year. The combination of being extremely selective and putting meaningful personal capital into each deal ($20k-$200k+/deal) does deserve some positive signalling around their conviction.

⚖️BUT there’s more nuance to this…

While the dollar amount of a GP commitment of one syndicate compared against another doesn’t provide much signaling on its own per the aforementioned explanation, the GP commitment DOES MATTER in the context of comparing a single GPs commitments to his/her own other lead GP commitments. Okay, that is a bit of word vomit, so let’s use an example.

If Fund X is investing $1k into every deal to satisfy the GP commitment, and then suddenly invests $10k as a lead commitment (or 10x Fund X’s standard lead commitment), that is likley a signal that Fund X has more conviction in that investment, assuming all else equal e.g. Fund X continues to invest its standard $1k into every deal thereafter.

Ultimately, GPs are stewards of capital. They also should have the best context on the quality of the investment as they are the one’s syndicating and conducting the diligence. So when a GP suddenly invests 10x their typical GP commitment – I would consider that a higher conviction investment. Some GPs will explicitly call out in their deal memo that they are investing an outsized lead commitment to get LPs more interested in the deal and raise more capital, though some do not as they may not want it to appear like their other deals with their standard lead commitment are less compelling. If it’s not clear in their memo why the GP is investing an outsized amount, feel free to ask them.

 📝 So to summarize:  

• We do feel (generally) that LPs should not weigh a GPs conviction or deal signaling by comparing the size of one GPs lead dollar commitments with a different GP’s lead dollar commitments. In most cases, it’s more or less irrelevant.

• This is partially because it’s not obvious where that GP commitment is coming from. Is it their personal capital or is it coming out of a fund. If it is fund capital, what’s the GPs commitment to the fund and how is that commitment being funded (directly out of management fees?). Time to read the fine print!

• For the smaller lead personal GP commitments (e.g. $1k/SPV), while it’s the minimum amount to qualify for the skin in the game commitment, it may actually be a large amount for GPs as many of us run many SPVs a year (over 100 in some cases) and with no management fees typically. So even that outlay at the minimum dollar amount is significant and it’s not financially responsible or perhaps possible to personally invest more.

• However, there are a number of GPs who run SPVs both selectively (<10 per year) and put a high dollar amount of their personal capital to work in each investment ($20,000-$200,000+). Even if those GPs may be more well off, I do believe there is some positive signaling there.

• The highest signaling scenario is when an active GP decides to invest an outsized commitment into one of his/her deals. In other words, if Fund X invests $1k into every deal to satisfy the GP commitment, and then suddenly invest $10k into a deal or 10x its standard lead check, an LP should consider that a higher conviction investment, all else equal.

• Now should you trust the GPs judgment to begin with – well that’s a great question, and it begs the question, should LPs even try to read into a GP’s Lead Commitment signaling? That’s a much longer conversation for a different day, but in the meantime I would personally love to see the data from the fund admin platforms that compare GP dollar commitment with investment performance. I’m open to being proven wrong, and if we get that data, we will share it in a follow-up. 

💭 To round out this post and ensure this article doesn’t feel self-serving, as yes, I am that syndicate GP who writes the $1,000 minimum into my deals - we, in general, believe syndicate GPs who run ~100 deals a year are on average spending less time on a given single investment than a syndicate GP who runs only 5-10 SPVs a year. I’m pointing this out because perhaps if I only put together SPVs for my 10 highest conviction investments a year, we could put a personal commitment of $20k into each deal and maybe that would lead to better outcomes for LPs. Do I think we have some of the best deal flow across the board even at ~100 deals/year, I think we do. But there is something to say about the GP who invests in a couple deals a year and spends an enormous amount of time with those businesses, very likely more than we do on average given our volume. But truthfully that’s a conversation for another post.

That’s all for this week. We’ll be back in your inbox next Wednesday on our next topic. Thanks for tuning in!

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✍️ Written by Zachary and Alex