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Investing Through a Special Purpose Vehicle For Venture Capital

2 min read

Sep 27, 2022 9:52:20 AM | Assure

When you’re looking to pool investments into an alternative asset, whether it’s a startup, real estate, art, cryptocurrency, antiques or wine, you must decide how to structure your fund. You could choose a Venture Capital Fund; however, it’s certainly not your only option. If you have a specific startup in mind, you might choose a Special Purpose Vehicle (SPV) instead.

Below, we explain how a SPV works, why you might opt for a Special Purpose Vehicle over Venture Capital Funds, and how to create your own SPV for startup investment.

What Is a Special Purpose Vehicle?

A Special Purpose Vehicle, sometimes known as a Special Purpose Entity (SPE), is a subsidiary business with its own balance sheet. The parent company sets up an SPV to fulfill a specific goal – namely, investing in a certain startup or other asset.

Special Purpose Vehicles are usually structured as Limited Liability Companies (LLCs) or limited partnerships. However, they can also be formed as trusts or corporations, depending on the investors’ objectives.

How SPV Investment Works

SPV investment is fairly simple.

Typically, investors place their money into the SPV and become company members. Once there are sufficient funds in place to fill the investment allocation, the SPV uses the money to invest in the startup. So, the investors become members of the new company and invest in the SPV, while the SPV invests in the startup.

A Special Purpose Vehicle is an example of a flow-through or pass-through vehicle. Members own the SPV, and so income or losses flow straight to the investors. The individual members pay tax on the income, not the SPV.      

In many ways, a Special Purpose Vehicle and Venture Capital Fund are very similar. However, there are key differences.

  • Special Purpose Vehicle management fees are often less than traditional Venture Capital Fund fees. 
  • There’s a higher entry point to join a Venture Capital Fund compared with SPVs.
  • VC Funds are usually “blind pool” funds, where the investors are investing into the fund rather than a single asset or assets. SPVs are transparent, meaning the asset (or assets) are known to all investors when making the investment.

So, for many investors, SPVs are more flexible and more accessible while still delivering a great opportunity to diversify your investment capital.

Creating a Special Purpose Vehicle

Creating an SPV involves forming a separate legal entity. SPV formation can be complex, and it’s crucial you have the right tools and expertise in place to create the best Special Purpose Vehicle for your investment goals.

An Assure SPV simplifies the process.

Using a single platform, Glassboard, you can choose your SPV structure, add investment details, create legal documents, invite investors, sign documents, transfer funds, maintain the investment and shut it down after it results in a, hopefully, healthy return. . You can manage your investment and receive updates for the duration of your SPV’s lifecycle, and oversee all your financials and taxes from the centralized platform. 

Benefits of Special Purpose Vehicle Investment

There are a few key reasons why investors might choose a Special Purpose Vehicle over other options.

Firstly, SPVs are more financially accessible when compared with other funding structures. Since the minimum investment is lower, SPVs are attractive to a wider range of investors than, say, traditional Venture Capital Funds as mentioned earlier.

So, with a Special Purpose Vehicle investment, new or lower net worth investors can access exciting, lucrative opportunities without raising significant venture capital in advance.

Venture Capital Funding SPV Investment

What’s more, SPVs are flexible and simple to set up. They allow angel investors, entreprenuers and business leaders to quickly invest in innovative, groundbreaking startups without worrying about lengthy, expensive administrative delays.  

SPV funding structures are an accessible, streamlined way to meet evolving entrepreneurial needs and investor demand.

SPV Venture Capital Investment Drawbacks

While SPV finance offers investors some advantages, it’s not always the most appropriate investment model.

For some investors, lack of diversification is the main drawback around SPVs as you would have to create multiple SPVs to invest in many classes. The simplest SPV structure is into a single-asset. If you are only investing in one company, there’s a higher risk that investors won’t see a return on venture capital in a Special Purpose Vehicle.

However, you might offset the risk and continue diversifying your portfolio by investing in manySPVs. The experts at Assure can help you set up and manage multiple SPVs, or more complex multi-asset SPVs, finding a solution that is best suited to your goals.  

SPV management can be another drawback for some investors. Monitoring progress can be time-consuming and challenging; however, that’s where we come in. The Assure Glassboard fund and administration software provides a simple, user-friendly way for you to managing investments so you can focus on finding more deals or investors rather than SPV administration.

If you’re looking to invest, a Special Purpose Vehicle may be the flexible solution you’re looking for. Let Assure help you structure a Special Purpose Vehicle for venture capital – contact us and start your SPV today!