When getting into venture capital, a common dilemma arises: should you set up a traditional fund or use Special Purpose Vehicles (SPVs)? This choice is more than paperwork and legal structures. It greatly affects your investment strategy, your relationships with limited partners, and your long-term success in venture capital.
This question is now more important due to changes in the market and what investors want. Let’s explore both options. This will help you find the best path ahead, whether you’re starting fresh or improving your current strategy.
The Fundamentals: Understanding Your Options
When entering the venture capital world, you essentially have two primary vehicles at your disposal. Each serves distinct purposes and comes with its own set of advantages and challenges.
Traditional venture capital funds gather money from several limited partners (LPs). These LPs trust you, the general partner (GP), to make investment choices. You’ll typically deploy this capital across numerous startups over a 10-year lifecycle. The fund structure creates a portfolio approach where wins can offset losses, providing diversification benefits to your investors.
In contrast, SPVs are legal entities created for a specific investment opportunity—typically a single company. They allow you to gather investors around one particular deal rather than committing to a broader investment thesis. Think of an SPV as a one-off project versus the fund’s ongoing business.
I recently spoke with a first-time manager who put it perfectly: “A fund is like opening a restaurant, while an SPV is like hosting a dinner party.” Both feed people, but the scale, commitment, and operational approach differ dramatically.
The Case for Traditional Funds: Stability and Scale
Traditional venture funds have several key benefits. They appeal especially to experienced managers or those with solid investment ideas.
First, funds provide genuine diversification. Investing in many companies, usually 20-30 for early-stage funds, helps build a strong portfolio. This way, top performers can make up for any losses. This method matches the power law distribution seen in venture returns. Usually, a few investments bring in most of the profits.
Funds earn steady income from management fees, usually 2% each year of the money promised. This builds a sustainable business model. You can create a team, manage expenses, and focus on creating value instead of always fundraising.
“When I raised my first fund, the management fees allowed me to hire an associate and a part-time CFO,” a mid-career GP told me. “That operational bandwidth was crucial for finding good deals and helping our portfolio companies.”
Funds also allow you to build an institutional brand and reputation. With committed capital, you show steady investment discipline. This builds a track record that grows more valuable with each fund cycle. This track record serves as your most powerful fundraising tool for subsequent funds.
Moreover, the larger check sizes that funds can deploy often secure better deal terms and governance rights. This provides more influence over portfolio company decisions and potentially better economic outcomes.
The Challenges of Fund Structures
Traditional funds have advantages, but they also pose big challenges, especially for new people in venture capital.
The fundraising process for a first fund is notoriously difficult without a proven track record. Many institutional LPs want proof of past investment success. This creates a chicken-and-egg problem for new managers. This process can take 12-18 months of continuous effort with no guarantee of success.
Regulatory requirements add another layer of complexity. Funds typically require substantial legal documentation, including Private Placement Memorandums (PPMs), Limited Partnership Agreements, and ongoing compliance with securities regulations. These costs can easily reach six figures before your first investment.
The long-term commitment of a fund structure (typically 10 years) also means you’re locked into your strategy, even as market conditions evolve. This inflexibility can become problematic in rapidly changing technology sectors.
Perhaps most significantly, funds create significant performance pressure. Your initial investments must succeed to maintain LP confidence, yet these early deals are often made when you have the least experience. This pressure can lead to poor decision-making or conservative approaches that limit returns.
SPVs: The Flexible Alternative
SPVs have gained tremendous popularity among new managers, and for good reasons. They offer a more accessible entry point into venture investing with significantly lower barriers.
The most immediate advantage is simplicity. An SPV can be established relatively quickly (often in 2-3 weeks) with much lower legal and administrative costs than a fund. This allows you to move faster on time-sensitive investment opportunities.
SPVs also provide complete investment transparency. Your investors know exactly which company they’re backing, creating alignment around specific opportunities rather than a broader thesis. This clarity can be particularly appealing to family offices and high-net-worth individuals who want direct exposure to specific companies.
From a learning perspective, SPVs offer an invaluable opportunity to build a track record. Each successful SPV becomes evidence of your investment acumen, gradually building the credibility needed for a future fund. I’ve watched numerous managers use a series of successful SPVs as stepping stones to their first institutional fund.
The flexibility of SPVs also allows you to test different investment theses or sectors without long-term commitments. If you’re ready to get help starting a SPV, Syndicately is here to help.
Making the Strategic Choice: Key Decision Factors
The right choice between a fund and SPVs depends on several factors unique to your situation. Let’s explore the most critical considerations.
Your experience level plays a crucial role. First-time managers often struggle to raise a full fund. They usually lack past success in ventures or entrepreneurship. The data backs this up. Recent industry reports show that over 80% of first-time managers start with SPVs before they try a fund. This creates a track record that makes subsequent fundraising easier.
Your capital network also matters tremendously. If you already have strong relationships with institutional investors or family offices comfortable with fund structures, a traditional fund might be viable even without extensive experience. Conversely, if your network consists primarily of high-net-worth individuals or angel investors, the lower minimum investments typical in SPVs might be more appropriate.
Consider your investment strategy as well. If you’re focused on a specific sector where you have deep expertise and deal flow, a thematic fund might resonate with investors despite limited experience. However, if you’re still exploring different sectors or stages, the flexibility of SPVs allows you to refine your approach over time.
Your personal financial situation is another crucial factor. Traditional funds generate management fees that can provide salary replacement, while SPVs typically don’t. If you need consistent income from your venture activities, a fund structure might be necessary unless you have alternative revenue sources.
The Hybrid Approach: Combining Strategies
Interestingly, many of the most successful emerging managers I’ve worked with have adopted hybrid approaches that leverage both structures.
Some begin with a series of SPVs in a specific sector, building expertise and a track record before raising a micro-fund (typically $10-20M) focused on that same sector. This creates a stepping stone to larger funds while maintaining the flexibility to continue raising SPVs for deals that don’t fit the fund’s thesis or exceed its check size limitations.
Others raise what’s often called a “proof of concept” fund—a small vehicle (usually under $10M) with friends, family, and close network investors. This provides some of the benefits of fund economics on a smaller scale, allowing them to demonstrate fund management capabilities before approaching institutional investors.
Another creative approach I’ve seen work well is establishing an SPV platform with consistent investors across multiple deals. By bringing the same group of LPs into each opportunity, you create fund-like relationships while maintaining SPV flexibility. Some managers formalize this with “first look” agreements that give their core investors priority access to new deals.
Leveraging Technology for Efficient Execution
Regardless of which structure you choose, technology platforms have dramatically simplified the administrative aspects of venture capital over the past few years.
For SPV managers, platforms like Syndicately streamline the entire process from deal formation to investor onboarding and reporting. These tools automate much of the paperwork, reducing the overhead that traditionally made SPVs cumbersome to manage at scale.
Fund administrators and software providers have similarly transformed fund operations, handling everything from capital calls to tax documents through automated systems. These platforms can significantly reduce the operational burden of fund management, particularly for smaller teams.
“Technology cut our operational costs by nearly 40%,” one emerging manager told me. “Tasks that once required a dedicated operations person can now be handled through software, allowing us to run leaner while delivering better investor experiences.”
Real-World Success Stories
To illustrate these principles, let me share two contrasting success stories from managers I’ve advised.
Sarah, a former fintech executive, began with three SPVs investing in financial infrastructure startups. Each SPV ranged from $500K to $1.5M, allowing her to back companies where she had unique insights. After two of these investments showed promising early traction, she raised a $15M sector-focused fund, pointing to her SPV track record as evidence of her investment thesis. The fund now serves as her primary investment vehicle, though she occasionally raises SPVs for larger opportunities that exceed her fund’s check size parameters.
Meanwhile, Michael took a different approach. Despite having an impressive background as a successful entrepreneur, he struggled with the lengthy fundraising process for his first fund. After six months of limited progress, he pivoted to SPVs focused on climate tech hardware companies. By promoting specific companies rather than a general thesis, he found investor conversations shifted from “let’s have another call” to “I’ve just sent the wire.” After completing five SPVs over 18 months, he had built both a track record and an investor network that enabled him to successfully raise a $25M fund.
Both approaches worked, but the paths differed significantly based on their networks, expertise, and market timing.
Your Next Steps in the Venture Journey
Whether you choose a fund, SPVs, or a hybrid approach, your success hinges on finding exceptional deals, making sound investment decisions, and creating value for both founders and investors.
As you weigh your options, talk to managers who have taken different paths to understand the trade-offs they faced and learn from their successes and mistakes. The venture community works together well. Most seasoned investors gladly share their insights with new managers.
Remember that your initial choice isn’t permanent. Many of today’s largest venture firms began with modest SPVs or tiny first funds. Your strategy can and should evolve as you build experience, credibility, and a track record of successful investments.
The most important step is simply to begin. Investing wisely, whether through a fund or an SPV, is key. It shows you create value and sets the stage for your venture capital journey. In an industry where results matter, there’s no replacement for investing money and earning returns.
The road ahead might be tough, but for those with the right insight, connections, and determination, venture capital is one of the most rewarding careers, both intellectually and financially. I wish you success on your journey, whichever vehicle you choose to begin with.
