When it comes to investing in early-stage startups, a venture capital fund manager (VCFM) typically pools their investor money into a single entity, known as a ‘fund’. However, there are times when a VCFM may opt to use a special purpose vehicle (SPV), either instead of or in addition to a fund. In this article, we’ll explore why a VCFM should consider using an SPV.
See our articles ‘What is a Special Purpose Vehicle?’ and ‘What is a Fund?’ to learn more about SPVs and funds.
So why would a VCFM use an SPV? Here are 6 key reasons:
1. To showcase investment expertise
For early-stage VCFMs, it can be hard to stand out from the crowd and win over larger institutional investors. One option is to invite these investors to take part in specific deals via SPVs. The investors will witness first-hand the VCFM’s ability to find and close high-quality deals without needing to commit to the entire fund. Positive progress on these deals can help give institutional investors the confidence to invest in the VCFM’s fund.
2. To accommodate a large investor
Sometimes, a VCFM will encounter an investor who wants to invest a significant amount of money in a particular startup, but may not want to invest in the VCFM’s fund. In this case, the VCFM can create an SPV for that investor to invest in that specific startup alongside the fund. This allows the investor to have more control over their investment and more flexibility to exit the investment when they choose.
3. To invest outside thesis
Through their networks, VCFMs often come across attractive deals that may fall partly or entirely outside their fund’s thesis. The investment could be too big, too small, or risk overexposure to a specific industry, region or deal. An SPV can offer a solution by letting the VCFM limit the fund’s exposure to the deal or, if needed, handle the investment entirely outside the fund.
4. To offer co-investments
VCFMs use SPVs to offer co-investment opportunities to others. As mentioned above, this could be to showcase expertise, accommodate a larger investor, or invest outside their thesis. SPVs are also used for any number of other reasons, such as making a strategic co-investment with another VCFM, or structuring a startup’s fundraising round when acting as lead investor.
5. To manage risk
By using an SPV, VCFMs can limit their exposure to a particular investment. If the investment goes south, the losses are contained within the SPV, rather than affecting the entire fund. This is particularly important if a startup is in a risky industry or is pursuing a risky business model.
6. To allow for more flexible investment terms
By using an SPV, VCFMs can negotiate more flexible investment terms with the startup they are investing in. This can be particularly useful if the VCFM is investing in a startup that has unique needs or circumstances that require a customised investment structure.
Conclusion
While there are benefits to using an SPV, there have traditionally been some drawbacks to consider. It used to be time-consuming and expensive to create an SPV. If the SPV was not structured properly, it could create tax or legal issues for the investors. Also, using an SPV could create additional administrative burdens for the VCFM.
Ready to set up a SPV?
At Auptimate, we make it easy for VCFMs to design, launch and operate market-leading SPVs online for a fixed, low price. If you’re ready to start your next SPV, hit the “Launch” button at the top of this page. Or get in touch with us at info@auptimate.com and one of our experts will be more than happy to help.
