Why use an SPV?
There are a wide range of use cases for SPVs as they are a very flexible structure. We’ll focus here on how SPVs are used in the alternative investment space, or how SPVs can be used to invest strategically in private companies.
One common use case for utilizing SPVs is as a complement to having a seed or angel fund. SPVs can be used to take advantage of pro rata allocation in later stage rounds (from angel or seed deals) that might be much larger than the original fund intended to support. Companies that break out and increase their value very rapidly are great for the seed fund’s performance, but investors are stuck if they would like to double down or capture this easy upside (assuming they still believe in the company and its performance. In this scenario, to take advantage of the upside, it is common to form an SPV to fund the whole pro rata allocation and offer that investment opportunity to the existing LP base that invested in your angel or seed fund that originated that investment.
SPVs can also be utilized to invest in companies or offerings that are outside the mandate or structure of a main fund. Some situations that might trigger this use case might be investments in marijuana related businesses, gambling companies, or other companies that might trigger morality clauses frequently built into venture fund LPAs. Another example might be buying secondary in a company that might be in-thesis for the fund, but might not be possible under the existing fund structure.
Another common use case for SPVs in the alternative investment space is to establish a track record as an investor. Whether you are an aspiring venture capitalist trying to ultimately raise a venture fund or an experienced seed investor looking to move up-market to later stage deals - SPV structures allow you to begin doing the types of deals you would like to build expertise in with the minimum amount of overhead and commitment.
Moving outside the realm of professional investing, another common use case for SPVs is to participate in one-off opportunities that you have unique access to. Perhaps you are good friends with someone whose company is exhibiting strong growth and raising a competitive round. If you can get access to these types of hot deals opportunistically, SPVs are a great way to capitalize fully on the opportunity and get rewarded for your proprietary access.
So who utilizes SPVs?
We see four main types of investors who utilize SPVs as a way to invest:
- Seed and Angel fund managers who want to capture the value in later stage rounds from their portfolio
- Up and coming venture capitalists who are looking to raise their first fund in the next 2-5 years. They use SPVs to establish and investing track record and show that they can get into competitive deals ahead of a full venture fundraise.
- Professional investors who utilize a SPV strategy as part of their investment strategy. These investors utilize a Master/Series structure [link to ms article] to invest rather than raise a VC fund.
- Opportunistic investors who do not invest regularly. These investors have access to specific or one-off opportunities that they want to take advantage of, but do not make a career or habit of investing regularly.
Want to learn more about who can invest into SPVs and common economics? Read on here in Who can invest in SPVS?