RUVs eliminate fundraising intermediaries

Employee Led SPVs Post Mortem: Part 2

  • Founders use syndicate leads and fund managers to raise capital. These intermediaries charge either 2/20 or 0/20. An employee can act as a syndicate lead. If founders do not need intermediaries, there is no place for the employee as a syndicate lead. The new Roll-Up Vehicle (RUV) is a no-carry SPV that the startup leads. It eliminates the need for intermediaries. I have invested in third-party SPVs and RUVs across multiple platforms. I have also observed deal flow across many syndicates and fund managers. I am confident that within 1 year, most founders will use RUVs to fundraise.

  • Two things that make RUVs even more attractive than raising from intermediaries.

    • The startup can generally solicit investment into the RUV

    • The company can allow secondary trading of RUV interests which may work without affecting 409a valuations.

  • Benefits

    • CEO

      • Only coordinate one wire from fund admin and one new entity on the company’s cap table.

      • Can justify higher valuation/cap due to no carry, significantly reducing dilution over multiple fundraises.

      • Direct communication with end investors

      • Regulatory overhead is the same as traditional Reg D 506b offerings. RUVs are currently only open to accredited investors.

      • The low cost of RUVs ($~10k) and admin ease can enable CEOs to raise as often as every quarter.

      • Raising in smaller batches can reduce dilution. As a result, there is less likelihood of over-raising.

      • The CEO can leverage their personal audience/community, especially if they build public as an Embedded Entrepreneur. They can also use the company's Go-To-Market infrastructure for marketing the offering.

      • If secondary trading is workable without onerous restrictions re holding periods, etc.

    • Investors (LPs)

      • No carry paid to fund manager or syndicate lead

      • Can communicate directly with the CEO for questions, diligence, investor updates, etc.

      • Investing retirement account assets (using AltoIRA) into a RUV is simple. Once onboarded with an SPV admin, an investor can invest in many deals with no hassle.

      • Performance calculations are much more straightforward. No investor fees or carry means paid-in capital is equal to invested capital. Gross and net performance metrics like TVPI, IRR, etc., are now the same since the startups cover the SPV formation fees.

      • General solicitation makes it easy to find startups raising through RUV, eliminating the deal-flow value add of intermediaries.

      • Secondary trading can be costless and straightforward because the SPV interests are a 1-1 representation of the underlying shares.

    • Fund administration platforms

      • CEOs can start a deal without having to wait on a syndicate lead or fund manager. Faster deal velocity translates into more admin revenue.

      • Can earn capital introduction revenue by surfacing RUVs to onboarded investors

      • Can reduce SPV prices while maintaining margins due to not having to manage

        • Carry assignment agreements

        • Pro-rata admin costs for each investor.

        • A relationship with a syndicate lead or fund manager for each deal

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