Say you’re a seed fund and one of your breakout deals makes it to Series B. You have a good relationship with the founders but you can’t invest because it falls outside your fund’s thesis.
Enter the SPV — or special purpose vehicle — a legal entity that allows you to pool capital to invest in a specific opportunity. Here’s what they are and how they work.
What are special purpose vehicles?
Patrick Ryan, cofounder and COO of Odin, an investment platform that facilitates SPVs, says generally when you talk about SPVs for startups, you’re referring to “an entity that’s designed to make a single investment into a single company” — which then turns into a single line on a cap table.
How do they work?
Levent Altunel, cofounder of investment platform Bunch, another platform that facilitates SPVs, says there are different ways of making SPVs work, but there’s a typical process that most SPVs that invest in startups follow.
“Generally, the way we do it is we create a traditional legal entity structure — the equivalent in the UK would be a limited company, for example, or a limited partnership that needs to have some sort of shareholders agreement or limited partnership agreement,” Altunel says.
“Then this needs to be signed by all the people. You discuss things like how much everybody invests; they agree on the management fee if there is one, or any type of advanced profit, carried interest that people may receive from this opportunity.”
SPVs often “sort of act like a mini VC”, says Ryan. So if you’re an angel investor, for example, and have $20k to invest in a startup and five friends who also have $20k to invest, you can pool your capital together — increasing negotiating power and representation on the cap table.
“Broadly what you’re doing is creating a set of legal agreements between the investors in the entity and the deal sponsor, if there is one, about what assets or asset they will be buying, and the terms of that purchase, and then things like how governance of that entity will work — so who controls voting rights.
“On platforms like Odin, that all happens digitally and we go away and set up the entity and you’re able to invest via the platform — we collect up all the money and then invest it in the company.”
Different countries have different rules on who can invest in SPVs. Bunch, which operates in Germany and the Netherlands, limits its unregulated SPV (for angels) to 20 and its regulated SPV (for fund managers) to 149.
There are also limits around wealth. For example, Odin is “limited to self-certified, sophisticated and high-net-worth investors” — meaning they have previously invested in an unlisted company (including via a crowdfunding platform, for example), or they earn more than $100k a year.
After a while, around five or ten years after the initial investment, Altunel says you then hopefully receive some profit. He says most of the admin is at the start (and this is what platforms like Bunch handle).
“For us, the SPVs that we set up, you have to set up a bank account, you have to get a tax registration number, you have to register with a transparency registry, lots of different kinds of things that typically people who invest into a special opportunity don’t want to deal with. So that’s the pain we take away.”
Are they common in Europe?
Ryan says SPVs are becoming more common in Europe and that Odin has done around 500 since launching in September 2021 — “well over” 50% of those in the last 12 months.
Beth Carter, head of growth at careers site Flexa and an angel investor, agrees, adding that popularity has increased due to the emergence of investing platforms (like Odin, in which she is an investor) and by people “taking more of an interest in alternative investments, like startups”.
SPVs vs venture funds — the key differences
Ryan says the core difference between an SPV and a venture fund is that a venture capital fund is generally formed to make a series of investments and is managed by a fund manager, which means the manager has full discretionary decision-making power over what the fund invests in.
Whereas with an SPV, “you know what you’re investing in, so the discretionary decision-making power actually sits with the individual”, he says. You find the co-investors yourself and the companies in which you want to invest, and the platforms are just the vehicles through which to do a deal.
Altunel adds there’s also a difference in commitment and process.
“In a venture fund, there’s typically a commitment that you give over a more extended time period,” he says. “Whereas with an SPV, I know the target upfront: I know I’m going to invest into company X and I can choose how much I want to invest and 99% of the capital is paid upfront. So I don’t have these big commitments that I need to keep in mind and manage my cashflow for.”
Types of special purpose vehicles
There are three main categories: SPVs used by angels, SPVs used by VCs and SPVs used by limited partners (LPs) — the people who invest in VC funds.
“LPs can range from a person like myself or a person like you to institutional investors like Ontario Teachers’ Pension Plan, so it’s a very broad range,” says Altunel.
Why do VCs use SPVs?
For Altunel, VCs use SPVs because they allow them to participate in opportunities beyond their fund, using their own money outside the fund, either because their fund is overallocated or because it doesn’t have the mandate to invest in certain opportunities.
“We have more opportunities than we have funds essentially, so you need to find a different way of investing into these opportunities and this typically happens when companies grow, and you have special access to these opportunities, but you may not be able to invest,” he says.
Ryan agrees: “Quite often they’ll use SPVs in situations where they can’t invest [money from] their fund. For example, if you’re a seed fund, you’ve deployed all your money and then one of your breakout deals makes it to Series B or Series C, you’ll still have pro-rata rights to maintain your percentage equity stake in that business generally. You also have access to the deal via a good relationship with the founders.”
He adds that the benefits to VCs (and to anyone) are “about simplifying governance and then being able to charge carried interest and fees”. (By putting lots of shareholders inside an SPV you turn lots of votes into one vote.)
Altunel also points to economic benefits for VCs: “The interesting piece of SPVs is that they receive the economic benefits like carried interest, management fee etc. based on one specific investment, so it doesn’t dilute.”
“The downside, of course, is they pay single opportunity economic benefits, so carried interest will be paid on this opportunity, not what all the other opportunities do,” he adds.
Why do LPs use SPVs?
LPs might also turn to SPVs to invest directly in specific opportunities.
“LPs that typically invest into funds, they’re not company pickers per se,” says Altunel. “But with increasing expertise on the LP side, they start saying 'okay I do this approach where I invest into funds and then I cherry pick the best [startup] opportunities and invest via SPVs’.”
“It might be that also some LPs from that fund want to continue doubling down on the breakout investment,” adds Ryan.
Why do angels use SPVs?
There are also a few motivations for groups of angels to use SPVs. They might be organised by a syndicate lead or they might just come together to join forces — increasing their negotiating power and representation on the cap table in the process.
“If you’re a smaller ticket angel wanting to get in on large rounds, you might be faced with minimum cheque sizes that you can’t meet alone,” says Carter. “Clubbing together with other angels within an SPV can get around this and means you can access deals you’d have been otherwise excluded from.
“It’s also a great way for new angels to be guided through their first investments by a more experienced angel leading the SPV,” she adds.
Is an SPV the same as an angel syndicate?
An angel syndicate is a group of investors who invest together — and they may or may not do that via an SPV.
“The syndicate is the group of individuals and the SPV is the legal structure that they use to invest, in some cases,” Ryan says (in other cases, angel syndicates may all invest directly on the cap table).
Carter agrees: “An SPV is a way for angels to run syndicates, or to be part of one. It’s a legal structure that means multiple angels can invest ‘as one’.”
Altunel says angel syndicates and SPVs have different levels of regulatory frameworks, ie. an SPV made up of fund managers would typically be registered with a local regulator. He says this allows investors to market opportunities more broadly. “If you don’t do it in a regulated environment, you can’t go to hundreds of people and tell them about this opportunity.”
He adds that professionalism can change depending on the size of the SPV and LP type. “So if, for example, you, me and two other friends invest, we would probably go for a very basic simple solution, hopefully quite cheap,” he says.
“We all invest $20k and then we have an $80k SPV, so the costs for this SPV have to be quite low because otherwise, we’d be paying everything in fees. Whereas when you have a $10m SPV, which also happens, you don’t mind if you pay $50-100k in fees, because relative to the investment, it doesn’t matter.”
Altunel adds that this is why there’s different providers of SPVs in the market.
“In the UK there’s a couple of players that offer one-off fees upfront, super cheap,” he says. “Then the other end of the market is these old school law firms that set it up with perhaps an administrator to do the manual work. And then we [Bunch] position ourselves somewhere in the middle.”
What are the down sides?
For Carter, the main down sides associated with SPVs aren’t about the legal structure or the method of investing, but the connection with the company you’re investing in.
“The ‘core’ relationship will be between the nominated angel running the SPV and the founders, so if you’re one of many angels investing as part of an SPV, it’s possible you won’t have a direct relationship with the founders at all,” she says.
“For some angels, this isn’t a problem, but for active angels and operator angels like myself, this takes a lot away from the opportunity. When I have invested via an SPV I've made it a priority to build a relationship with the founders — simple things like replying to investor updates make a huge difference.”
There’s also cost. Odin currently makes money by charging fees for the legal admin and deal structuring to the people raising money via its platform. Founders pay a fixed fee of $2,500. Angel syndicates and VCs pay a fixed fee of $2,000 plus 1.95% of funds raised, capped at $10k.
And there’s time. “You basically have to try and collect capital for each opportunity again so it’s almost like a little fundraise for every opportunity that you have to go through,” says Altunel.
What are the benefits for founders?
For founders, SPVs can help keep your cap table clean — and add additional investors more easily.
“From the perspective of a founder, if you are looking at rolling up your investors into an SPV, it’s about keeping a clean cap table. It also allows you to collect money from multiple investors for a round before the round is finalised,” he says.
“Essentially, the final legals for your round can only be finalised once everyone who is going to invest in the round has signed them, so it’s much easier to add additional investors to an SPV,” Altunel continues. “So it allows you to raise with a rolling close more easily.”
