Why Do Startups Use SPVs?

A graphic depicting a successful startup idea

Looking to get that next great startup idea off the ground? You may want to look into SPVs. Also known as a special purpose vehicle, SPVs are used by startups to bring about growth while also providing an easy financing mechanism for smaller investors. Rather than bringing in too many individual stockholders and spooking venture capitalists that may believe in your idea but have doubts about the finances of it all, SPV investments can help you from going public too early or otherwise compromising your vision to placate stakeholders.

By setting up an SPV, entrepreneurs can bring in dozens, if not hundreds or an unlimited number, of smaller investors as one entity. Rather than having to answer to everyone that invests in your startup idea, you can instead use the SPV model to separate investments in your company from the management thereof, and that can help keep things simpler at this stage of your company's growth. An SPV can also be a great way to avoid existing investment structures or investors that may not have a methodology of their own.

The Benefits of SPVs

Let’s review some of the top benefits of special purpose vehicles for investing.

Special Purpose Vehicles Have a Quicker Timeline for Raising Capital

For most startups, SPVs are an ideal way to raise capital since they enable you to work more closely with companies, organizations and entities that aren't really set up for investing. Even if they do have a VC component or arm, their timeline may not match yours, and that can make for a tough slog when you need a fresh injection of capital. The speed of an SPV can help turn that cash into a bonafide investment vehicle, which can help you line up more investors and capital than you would be able to do otherwise.

Special Purpose Vehicles Provide More Control

Another benefit of SPVs is that you'll be able to limit board seats and other obtrusive meddling since investors in the SPV are represented by the SPV, not their own interests. By limiting the SPV rights, you can prevent having to more fully integrate the investors' concerns, instead allowing you to bring in much needed capital without all those costly trade-offs. Investors may not appreciate it as much, but that's your gain and for them to worry about.

Special Purpose Vehicles Streamline Your Investor Relationships

The reason SPVs can work without strings attached is that larger investors tend to be less hands-on than their smaller counterparts, and the SPV itself allows you to more effectively manage all that cash without overwhelming your cap table. With an SPV, you'll have an investment block that is much easier to manage, and you'll also be able to more easily take on individual investors, even if they work for a larger investment firm that you're already engaged with.

Special Purpose Vehicles Provide Flexibility

Entrepreneurs and executives may also be interested in an SPV because you have existing investors who want to invest more. If the fund is locked or you're unable to raise any more capital for some reason, you'd have to turn those investors away. But with an SPV, you can continue to accept investment in your company without doubling back on your fund. Some companies have even used this mechanism to help raise billions, such as Pinterest, who famously used SPVs to good measure as they were growing.

For those that want to grow quickly and get as much cash investment in as possible, a good SPV platform is one of the best ways to do that. Particularly if you're interested in an acquisition, an SPV can help you raise capital more quickly than via the usual suspects, and that can mean the difference between a successful company worth billions and one that ends up toiling in obscurity.

Furthermore, if you're interested in foreign markets and investors, an SPV may represent the only way that certain investors can get in on the ground floor of your growing company. Whether it's due to national policy or the difficulty in arranging and organizing foreign investment, an SPV can help you meet regulatory and legal requirements while opening up opportunities to foreign money.

Are SPVs Always the Right Decision?

While SPVs can represent one of the best decisions when it comes to securing investments in a growing startup, they're not always the answer. After all, sometimes SPVs can send a negative signal to traditional VCs since they're often used for aggregating smaller and more individual investments. If you're working with a large VC or expect to have no problem raising capital from the typical players, an SPV may not be in your best interest. Generally, SPVs are more for passive investors, and VCs tend to attach strings to their investments, if they're not assuming some kind of oversight role at the company itself.

Another reason you may want to pass on an SPV is if your investors all have dramatically different expectations and concerns. Bundling them all in an SPV will make it even harder to meet the terms of the investment, and some investors may even end up investing for reasons unrelated to growth, such as insight into your industry or to establish themselves for other kinds of deals. In that sense, your success may not be their success, and that could create conflict.

If you're interested in learning more about SPVs and how you can leverage them to generate more cash for your growing startup, contact the SPV experts at Assure. Our SPVs have helped thousands of clients close thousands of SPVs to the tune of more than $8 billion. Start your SPV today!