Should I use SPVs for venture investments?

Special purpose vehicles against a commingled fund

Eleven dimensions. Each line gives the vehicle's position first and the fund's second, so the tradeoff is visible rather than argued.

• Fees. A vehicle usually carries no fee or a reduced one, so it funds no firm; a fund's management fee is what pays for the team.
• Carry. A vehicle's carry is on one outcome, so a single success pays and a single failure pays nothing; a fund's carry is on a portfolio, and the whole-fund waterfall means the portfolio has to return capital first.
• Deal selection. A vehicle is raised for a named company, so investors select the deal; a fund is a blind pool, and the manager selects.
• Governance. A vehicle usually has minimal governance; a fund has an advisory committee, key person provisions, and consent thresholds.
• Reporting. Each vehicle reports separately to its own investors, so ten vehicles are ten reporting streams; a fund reports once to everybody.
• Track record signalling. Vehicle-by-vehicle investing produces a record allocators read differently from a fund record, and Blueprint's page on showing angel, scout, operator, and special purpose vehicle experience covers how that translation is done honestly.
• Investor concentration. A vehicle's investors are self-selected per deal, so relationships are transactional; a fund's investors are committed across the portfolio.
• Speed. A vehicle can move quickly on a specific opportunity once the machinery exists; a fund can move immediately because the capital is already committed.
• Portfolio construction. A vehicle is one position with no construction at all; a fund lets a manager size, reserve, and diversify deliberately, which is most of what portfolio construction means.
• Implications for a first fund. A vehicle history can evidence access and judgment; it can also raise a question about whether the manager wants to run a portfolio or to keep doing deals.
• Administration. Every vehicle needs formation, subscriptions, know-your-customer checks, accounting, tax reporting, and a wind-down, and the cost per vehicle barely falls with volume.

Where they genuinely help

Five situations where a vehicle is the right instrument rather than a substitute for a fund.

• A deal that exceeds the fund's capacity, which is the case Cooley's commentary describes, where the manager wants to stay with a company through a larger round rather than cede the allocation to somebody else.
• Investing before a fund exists, which builds an attributable record and a relationship with investors who may later commit to a fund.
• A deal outside the fund's mandate, where the opportunity is real and the fund documents do not permit it, which requires the allocation policy to have anticipated the situation.
• Satisfying a co-investment right, which is the mechanism Blueprint's page on most favoured nation and co-investment rights describes.
• A company where a specific investor adds something the fund cannot, so the vehicle is a way of bringing a strategic party onto the cap table.

Where they fragment the operating model

Six costs, and they compound rather than add.

• Fifteen vehicles are fifteen sets of documents, fifteen closings, and fifteen wind-downs, all of which arrive on someone's desk.
• Reporting fragments into per-vehicle streams, and investors in one vehicle have no visibility into the others, which produces questions the manager answers individually.
• Allocation becomes a live conflict on every deal, since the same opportunity could go to a fund, a vehicle, or a different vehicle, and the answer has to be a policy rather than an instinct.
• The firm has no fee base, so the operating business is funded from deal-by-deal carry that may be years away or may never arrive.
• The record becomes harder to present rather than easier, because a set of single-deal vehicles has no portfolio-level performance to report and each vehicle's numbers stand alone.
• The next fund's diligence gets longer, since an operational reviewer now has a set of vehicles to work through in addition to the fund.

What to settle before running one beside a fund

Four questions, and the first is a document question rather than a judgment call.

• Does the fund's partnership agreement permit it? Cooley's article is direct about reviewing presentment obligations before establishing a co-investment programme, and notes that such clauses have often been fairly permissive in allowing the general partner to offer opportunities to others. Whether yours is permissive is a matter of reading it.
• What is the allocation rule between the fund and the vehicle, written down before the first opportunity rather than after it?
• What are the economics, and are they consistent with what the fund's investors were told?
• Who administers it, and is that cost borne by the vehicle, the firm, or the fund?

What limited partners are testing

Allocators are not against vehicles. They are testing whether the manager is building a firm or accumulating deals.

• Does the fund come first when an opportunity fits both?
• Is the allocation policy written, and has it ever been applied against the manager's own interest?
• Can the manager operate the number of vehicles they run without the fund's reporting suffering?
• Is the economics of each vehicle disclosed to fund investors?
• Does the manager's vehicle history support the fund thesis, or is it a different strategy?

What this page does not decide

It does not tell you whether to use vehicles, because the answer depends on your stage, your capacity, your documents, and how much operating burden your firm can carry. What it does is make the burden visible before it arrives.

It also states no market standard for vehicle fees or carry. The arrangement it quotes is one law firm's published observation of the vehicles it has seen, attributed and dated, not a requirement.

This page is educational and general. It is not legal, tax, accounting, or securities advice. Forming a vehicle raises offering, adviser, and tax questions in every jurisdiction involved, and each one should be settled with counsel before the vehicle exists rather than after.