As an investor, you have many important decisions to make when investing in a startup. One of those decisions is determining how to structure your fund. While there are many ways to structure your fund, one way is through a “special purpose vehicle” or SPV. Although SPVs come in all different forms, their overall intended purpose is to provide LPs an opportunity to collectively invest in a single company.
How are SPVs different from conventional funds?
A traditional fund generally has an overall investing philosophy it adheres to when selecting portfolio companies, while an SPV has a targeted purpose. For example, VC fund Andreessen Horowitz primarily invests in disruptive SaaS companies. However, if they deviate from their investment philosophy and make an investment in hardware technology, an SPV would help them target a single company. Another difference is that traditional funds diversify their investment pool into several companies, while SPVs usually invest in only a single issuer.
Why create an SPV?
SPVs are a shorter-term commitment
Traditional funds are a long term commitment—generally 10 years or more. This requires an experienced base of LPs and GPs that have proven their investing expertise over time. Typically, funds are blind pools because investors don’t know what companies the portfolio includes. LPs that invest in a traditional fund tend to have high expectations since their money remains committed to the fund for an extended period of time.
An SPV can be a good alternative since it’s usually a shorter-term investment and LPs know exactly what the underlying investment is. This mitigates LP expectations around how well the investment performs.
If a fund wants to make an investment in a company that falls outside its normal investing philosophy, it can make the investment through an SPV. Two common limitations a fund may run into are restrictions on follow-on investing and the risk/exposure appetite for a particular company. In this case, using a targeted investment such as an SPV will allow investors to fund a company that may have a higher risk or exposure to a certain industry their other portfolio companies don’t.
Establishing an investing track record for new managers
Establishing rapport as a new fund manager can be challenging. LPs generally won’t want to invest in a traditional fund if the manager doesn’t have extensive prior experience. Investing in an SPV gives a fund manager experience in getting LPs to invest in a single entity and helps establish a better reputation among investors. It can be an excellent learning opportunity that not only gives fund managers experience but also more credibility in the VC industry.
SPVs can also help with secondary transactions. Since more companies have been staying private longer, many long-time investors may be seeking more liquidity. One way to provide that liquidity is by creating an SPV and purchasing shares through events like tender offers or sourcing deals on the secondary market. Providing investors with liquidity simultaneously gives a new LP access to a company that they were previously not able to invest in. Additionally, when funds dissolve, partners and investors may part ways, and an SPV can allow partners to pool investments in a particular entity.
We’re here to help
Carta provides fund administration to help you easily run your fund while we manage your back office. Reach out to our team here to talk about how Carta can help you manage your SPV or fund.
DISCLOSURE: This communication is being sent on behalf of Carta Investor Services, Inc. (“Carta”). This communication is not to be construed as legal, financial or tax advice and is for informational purposes only. This communication is not intended as a recommendation, offer or solicitation for the purchase or sale of any security. Carta does not assume any liability for reliance on the information provided herein.