Seven Tips for SPV Success
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Unlocking the ability to assemble an investor syndicate for speed, efficiency, capital access, and streamlined management with the popularized use of SPVs (special purpose vehicles) has been game-changing in the venture industry. SPV has become a lexicalized acronym with most fund managers likely participating in them as common practice.
We asked this community, “What are your burning questions on SPVs?” In response, we created this SPV Blueprint as a guide to contact providers and outline considerations to help you along the way.
1. Perspectives
While SPVs can be used for everything from purchasing farmland to investing in films and real estate, we will limit the scope of this discussion to the following:
If you are an aspiring fund manager without a robust track record from a traditional fund, SPVs can aid in establishing your deal access and building a track record of demonstrated success for potential LPs (limited partners)
If you are a fund manager with a small main fund, SPVs allow you to take advantage of pro rata rights in portfolio companies that are larger than your dry powder
If you are a fund manager currently fundraising for a main fund, SPVs can streamline capital raising with the collection of smaller checks from multiple LPs during a fundraising round or warehouse investments you intend to contribute to your main fund
If you are an Angel LP investing in a fund, SPVs can be helpful to coalesce additional checks from other Angel LPs and assist the fund manager in driving toward a close
If you are an investor participating in a startup round of financing, SPVs can allow you to move early and fast, maintain pro-rata beyond reserves, and create additional upside exposure in well-performing startups for your fund’s LPs
If you are a startup raising a round of financing, SPVs can help close additional capital and reduce the number of investors to manage on your cap table
2. Purpose
The primary purpose of an SPV is to provide a flexible investment vehicle that allows investors to pool their capital together while limiting their liability and managing their exposure to risk. SPVs allow for investing that would otherwise be inaccessible due to minimum investment requirements or limited opportunities for individual investors. By pooling resources together, investors can access a wider range of deals, gain flexibility, and potentially achieve higher returns.
3. When to Do or Not Do an SPV?
There are many reasons to put together an SPV that lead to success and other reasons why SPVs can become a burden.
An SPV is generally reasonable when:
You are investing in companies from your portfolio that are part of a main fund where you are subject to investment restrictions on investing more from the main fund, e.g., no more than 10% in any given fund. Or when your dry powder is not sufficient for you to invest your desired amount
You are a fund manager already seeing a strong lead in the next fundraising round of a portfolio company; this allows you to approach LPs with messaging of strong company traction and clear terms
You are a fund manager looking to use the SPV as a method of showing advocacy for the company and “voting with your dollars”
You need supportive and quiet money to “fill in” a round where needed (this is often seen with hardware and deeptech companies)
You can raise the SPV capital quickly and easily, within weeks
An SPV can become onerous and complicated when:
Your fund is doing deals opportunistically that are not a fit for your fund’s investment thesis, which can become muddy
Your fund has deal documents that prohibit you from doing fund work outside of fund
You are using the SPV capital as “cannot raise elsewhere” money out of desperation
Your funds have different structures
Your SPV capital raise will be prolonged over multiple months
4. Logistics
The coordination of executing an SPV can be detailed, where you must synchronize multiple stakeholders. Be sure to remember the following as the SPV creator:
Ask for a brief prep call with the decision maker to ensure you are in agreement of the SPV taking place and that the SPV will receive an allocation in the company’s financing
Ensure that you do all the rest of the work, leaving no extra burden for the founder (if a startup SPV) or the fund manager (if a fund of funds SPV)
Offer the SPV to LPs of the fund in which the company is invested through *first*; prioritize LPs from the fund who invested originally, and, then after, you can offer the SPV to other LPs outside of the invested fund
5. Fees and Legal for an SPV
An SPV is a legal entity holding a specific asset or series of assets on behalf of a group of investors, and thus, you must consider applicable fees, structuring, legal, and accounting.
Management Fee & Carry:
Generally, four or more LPs and at least $100k+ of capital commitments is the breaking point where you would want to coalesce participants into an SPV
Fees should be structured on an individual basis per SPV
Consider simplifying your SPV fees to uncomplicate structuring, for example a flat fee of $100k for a larger SPV that covers operational costs across legal, management, and accounting over the lifetime of the SPV; this could look like a payment ratio per investment, e.g., if 10% of round then 10% of flat fee
A large majority of fund managers structure SPVs with a one-time, upfront fee of 2%-5% rather than having annual management fees; while some fund managers structure SPVs with side letters of “0% and 5%” (management fee and carry) for potential “VIP” participants
Allow for carry in later rounds of the same company to vary with each new SPV; for example, the first SPV in a company may be 20% carry, and then, as the company matures through later SPVs, the carry decreases, e.g., SPV carry for the fourth SPV drops down to 10% or 5%, thus creating a staircase down of carry to show goodwill to LPs and build rapport
Legal & Accounting Work Upfront:
Consider using an SPV provider for smaller SPVs to lower your legal, administrative, and ongoing costs. In some cases, unless your SPV has $500k+ of committed capital, using an SPV provider may be the only financially viable option
Consider using a simplified form of your fund I docs as a starting point template for the first fund I SPV; legally, it is easier for your LPs to oblige, as they would have already signed that document with you, and then you can spend much less time and money on the SPV legal and accounting thereafter
Some SPV providers have turn-key solutions to include legal work, such as security filings and investment adviser compliance, while others do not; be sure to understand this in advance to better assess the involvement needed
If relationally driven, have your core legal team working on SPV docs; do not take the onus upon yourself
Be aware that SPV docs are not full fund formation docs
6. Deal Allocation and Information Rights
Before you begin fundraising for an SPV from LPs, confirm the deal allocation available to you with each SPV opportunity and clarify information rights with the underlying founder or fund manager. Consider the following:
Determine the size of your SPV using the same principles as a fund, e.g., set a low target to exceed rather than overpromise and under-deliver
Work with the underlying founder or fund manager to help source LPs
Find out how much is being raised in total
Understand the investing appetite of interested funds and LPs — have all of the company's previous SPVs been oversubscribed?
You may wish to ask the decision maker for more allocation and then later reduce the amount or meet in the middle, as you may not have straight pro-rata
General sizing for early-stage SPVs is $1m-$6m
Be aware of the differing needs of the type of companies in which you are investing, e.g., deeptech company rounds are very different than software company rounds
Know if you will receive coinvestment rights alongside an SPV investment, e.g., if the main fund is going to come in for the pro-rata and fill in
Manage deal allocation between your main fund and your SPV, e.g. if the main fund can be no more than 10%; you want to fill allocation on companies you are most bullish about
If setting up an SPV, this should be a company with which you want to go the distance
Be aware of and avoid potential conflicts of interest for your fund and SPV investing strategies
Once per year, additionally update LPs on SPVs, as you already update LPs quarterly; share the narrative around performance, mark-ups, and capital statement updates
SPV information to the fund manager is often fairly limited, sensitive to founders, and protecting their financials
7. SPV Providers
There are a handful of SPV providers and platforms commonly used for SPV formation and management. These SPV providers range from full service to investor onboarding to dashboards. The costs range from approximately $8k-$12k for initial setup in year 1, with additional recurring annual costs ranging from $1k-12k depending upon provider, fees for supplemental services, and frequency of reporting. Note that on average, the expected lifetime of an SPV investing in a company may be approximately ~7 years, while an SPV investing in a fund may stretch well beyond 7-10+ years — keep this in mind while assessing your potential costs. We have created an SPV Blueprint for your benefit with details on the most commonly used SPV providers, considerations, and contacts.
Understanding your investing perspective and motivations can help you select the best SPV provider and streamline logistics during the process:
You can use the templated legal docs from an SPV provider, if needed, however, if you are a fund manager, you can repurpose the legal docs from your fund and customize for your SPV with minimal changes as mentioned above (your LPs might expect and prefer this). Use your own legal counsel for custom docs
Some SPV providers can double as a documentation portal if needed
Examine whether the SPV provider supplies accounting or legal; some fund managers prefer to use personal relationship fund administrators as their SPV providers instead
Some auditing groups do not like the use of SPV providers due to a gap in traditional methods, leading to the rejection of statements coming from newer SPV providers
Some SPV providers can help you market to fill in rounds as needed; be aware that these SPV providers may take a cut of proceeds or have access to your data
SPV providers may use your list of investors and pitch other funds to your investors (most have a right to do so)
Though the SPV investment structure has been around for many years, SPVs gained notoriety in the 2000s as a popular structuring choice with Enron, Bear Stearns, and Lehman Brothers, acting as a bankruptcy remote, and again during the subprime mortgage crisis. Fast forward a decade to the 2010s, and SPVs were used more successfully for investments in Facebook (now Meta) and Twitter prior to their IPOs. Now, SPVs are ubiquitous in startup rounds, as well as an instrument for fund of funds participation in emerging manager capital raising. While your first SPV can be daunting with the sheer amount of research and decision making, it is an extremely turn-key process after the initial experience. We hope this information helps you utilize SPVs for maximum economic benefit and impact with your investing.
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Sincere appreciation to Danielle Strachman of 1517 Fund, Vishal Maini of Mythos Ventures, Erica Wenger of Park Ranger Capital, and Jim Jensen of Wilson Sonsini, who contributed along with Shea Tate-Di Donna and Kaego Ogbechie Rust, authors of The Venture Fund Blueprint.
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Disclaimer: The providers, companies, examples, products, and services shared represent only a subset of available options and are based solely on internal fund manager conversations. These options are intended to be a general framework, not an exhaustive catalog, and should not be viewed as legal or tax advice, endorsements, recommendations, approvals, or rankings. We encourage you to do additional research into each category to find the resources that best fit your specific needs.
