SPVs or Special Purpose Vehicles are hardly a new tool in the world of investing. Briefly, for the unfamiliar, an SPV is a standalone legal entity formed for the sole purpose of pooling capital from investors and then investing in a target asset. Over the last decade, SPVs have become increasingly common in venture and angel investing settings. Founders and startups find them appealing to help simplify the cap table with the SPV representing a single line on the cap table versus dozens of individual investors. They also are quickly becoming the favorite for a new wave of investors increasingly being more and more active in the venture funding scene.
Angel investors and syndicates are individuals or groups that share similar investing strategies. These are often high-net-worth individuals and often are startup folks themselves or executives in that field giving them a special understanding of the market. These individuals and groups are quickly becoming the go-to source for first and early capital as startups get off the ground and SPVs are quickly being adopted as their vehicle of choice.
For a group of angels or a venture syndicate, there is often an organizer or lead that has identified a startup looking for capital that has offered the individual allocation in an upcoming funding round. Once the group decides to invest, the organizer (an organizer is coordinating the investment and can also invest but they don’t have to) will want to create an SPV, the SPV is an LLC, often incorporated in Delaware given its business-friendly laws, the LLC is given an EIN which allows the SPV to open a business checking account. All of the fellow co-investors transfer the amount they are investing to the SPVs bank account and once all of the funds are collected the organizer then sends the funds from the SPVs bank account to the target company.
The SPV is technically the entity purchasing equity in the startup, so say the SPV invested $250,000 at $1.00 a share as part of a funding round. The SPV would be assigned 250,000 shares in the company. The organizer then assigns ownership units in the LLC to the co-investors based on the % of the $250,000 they contributed. Keeping round numbers, if 5 investors contributed $50,000 each for the $250,000 total, then each would own 20% of the LLC.
So what happens when/if there is a liquidity event? Well, say 5 years later the company is acquired for $25.00 a share (not bad, 25x on your money in 5 years!) the company would pay out the LLC $6.125M for the 250,000 shares. The organizer would then pay that amount our 20% apiece (~$1.2M per investor) through the LLC as earnings and the SPV LLC would be dissolved.
It’s a beautifully simple way for a group of angels and individual investors to pool capital and support startups and is increasing access to stronger pools of capital in the early building stages of startups.
The other group of investors increasingly getting involved in venture investing through SPVs is Family Offices. Family Offices are a tremendous source of capital and support for startup founders given that the majority of them were built on the back of successful businesses so these families are looking to not only invest, but also offer their expertise and network to help support and grow startups.
Family offices will often act similarly to angels and syndicates in that when one of them finds or is brought a deal that they really like and even plan to invest in themselves, they will circulate the deal amongst other offices that they do business with to find co-investors to fill out a round. These offices will leverage SPVs in the same fashion to help pool capital and then invest through the SPV LLC so the founder has only the single line on the cap table.
Overall, the increased use of SPVs has only served to increase access to these markets for founders to look to raise capital for their companies. As venture markets evolve we think that over the next decade SPVs will become a commonplace tool used by angels, syndicates, emerging managers, and family offices alike to help structure deals and again facilitate a healthy market for these groups to invest in the next great generation of startups. With better tools to help facilitate private investment deals will open up more groups for founders to turn to with fresh capital waiting to be invested in great ideas and businesses.