What is an SPV?

Fund managers (also known as general partners or "GPs") raise venture capital funds to invest in multiple startups over the course of several years. By investing into such a fund, investors (also known as limited partners or “LPs”) get exposure to a basket of different companies. Essentially, an LP’s investment is spread over several companies. These companies make up the “portfolio” of the fund.

But what if LPs only wanted to invest in one specific company? What if a GP doesn’t have a fund at the time they come across a promising investment opportunity?

That is where SPVs come in. Every year, GPs raise thousands of SPVs on AngelList. Each of these SPVs invests into a startup.

In this post, we’ll explain the basics of SPVs: What they are, how they work, and why they’re used in venture.

SPV Defined

SPVs have many use cases in finance, including loan securitization and real estate investing. In venture, SPVs are used to pool money from a group of investors to then invest that money into a single company.

The main difference between an SPV and a fund is that an SPV makes a single investment into just one company, whereas a fund makes several investments into multiple companies.

Some GPs use SPVs to fill pro rata allocations when their fund doesn’t have enough capital left to deploy. Other GPs use SPVs to invest in companies that may fall outside their fund’s usual investment philosophy—allowing LPs to self-select if they want to participate in the investment.

For new GPs, raising SPVs can be a way to build an investment track record. By raising an SPV, they can approach LPs with a specific investment opportunity rather than just pitching a somewhat theoretical investment philosophy (called an “investment thesis”). That in turn can help them build a network of LPs that may later be interested in investing in a fund.

For LPs, investing alongside a GP on a deal-by-deal basis allows them to get to know the GP and their investment philosophy in practice. It also allows LPs to pick companies they’re interested in investing in.

How SPVs Work

SPVs are typically formed as limited liability companies (LLCs) or limited partnerships. In either case, SPVs are so-called “pass-through vehicles”—they're owned by their members and pass through income (or losses) to those members in proportion to each member’s ownership.

When an LP invests in an SPV they become a “member” of the SPV. In return for their capital, LPs receive “membership interest” in the SPV. That interest is usually expressed as a percentage. For example, an LP who invests $10k into an SPV that ends up raising a total of $100k will receive 10% membership interest in the SPV.

Once an SPV has finished raising capital, it makes a single investment in a startup, sending a single wire to the company. The SPV will appear as a single entry on the company’s cap table.

Put another way, the LP is an investor in the SPV (not in the underlying portfolio company), and the SPV is an investor in the company.

Since SPVs are pass-through vehicles, income received by the SPV is passed through to its members. Coming back to our example, if the SPV receives $10M as proceeds in connection with an acquisition, then our LP who has 10% membership interest will receive $1M, subject to carried interest.

Like traditional venture funds, SPVs can charge carried interest and management fees. But unlike funds, all capital is usually called upfront, instead of multiple times throughout the life of the fund (a feature called “capital calls”). Keep in mind that no two SPVs are the same. GPs can structure an SPV to include unique waterfall provisions, hurdle rates, redemption rights, distribution timings, and more.

Depending on how much capital the SPV raises, there are limits to how many investors can invest in the SPV. For SPVs raising $12M or less, the SEC permits a maximum of 250 accredited investors. For SPVs raising over $12M, the limit is 100 investors.

Why Do Investors Use SPVs?

SPVs offer LPs:

• Access. Because SPVs allow individuals to pool capital, LPs can invest as low as $1k. Direct investments often have higher minimums.
• Options: LPs select funds based on the GP and their investment thesis—but they don’t have a say in the specific investments the GP makes. With an SPV, everyone knows what the investment is, meaning no LP has to be part of an investment they’re not interested in.

SPVs offer GPs:

• Ability to follow-on. GPs often create SPVs to follow-on to earlier investments when their fund doesn’t have enough capital left to deploy. This allows investors to double-down on companies.
• Networking opportunities. AngelList GPs often create Syndicates that allow them to easily spin up SPVs and invite LPs on a deal-by-deal basis. LPs have the option of subscribing to these Syndicates to see the GP’s dealflow, and then choose the investments they want to be a part of. This allows GPs to build a network of LPs bit by bit.

SPVs offer founders:

• Simplicity. Founders like SPVs because it allows them to accept capital from a group of investors without having to add each one individually to their cap table. Fewer investors on the cap table means less administrative work and the ability to keep sensitive information to a smaller group of people.

Risks Associated With SPVs

Any early-stage venture investment comes with a certain level of risk. Here are some risks that SPV investors should be aware of:

• Lack of diversification. SPVs invest into a single company. If that company fails, investors in the SPVs may not see any return on their capital. LPs on AngelList can diversify by investing in a variety of SPVs.
• No voting rights. With the SPV being the official shareholder on the company’s cap table, LPs inside the SPV do not have voting or information rights that direct shareholders sometimes have. LPs need to trust the GP to represent their interests.
• Preferential treatment. SPVs provide LPs access to dealflow—but that dealflow may not be evenly shared with LPs. Sometimes GPs only open up an SPV to a specific group of LPs they know and trust. This means new LPs may not be able to see all deals.
• Fees. Investments in SPVs may be subject to carry and management fees. Many LPs view this as the cost of being able to get access to great deals.

SPVs on AngelList

AngelList allows GPs to set up SPVs to invest in startups. We handle all the heavy lifting, including entity formation, fund maintenance, financial and tax reporting, compliance, distributions, and more. We also help GPs connect to LPs to raise capital.

AngelList also enables startups to set up and run Roll Up Vehicles, which are founder-led SPVs. Learn more about Roll Up Vehicles here.

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To learn more about SPVs on AngelList, visit our website.