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Why tech investors need to look beyond seed-stage SPVs

A better, more equitable venture system requires a diverse array of strong, competent, daring venture firms operating at the seed stage.

Why tech investors need to look beyond seed-stage SPVs

[Photo: new look casting/Getty Images]

BY Fast Company Staff6 minute read

There’s no doubt about it: Special purpose vehicles (SPVs) are having a moment. When Uber went public in 2019, more than 100 SPVs dotted its cap table. In 2021, Carta launched a self-service tool that makes SPV formation and management by angel investors as easy as putting together a group lunch order. According to Assure’s “The 2022 State of the SPV” report, the number of SPVs more than doubled between 2020 and 2021. But with Assure, the self-proclaimed “most-used Special purpose vehicle Platform,” suddenly shuttering last month, it might be time for investors to ask themselves if relying so heavily on this financial tool is the best path forward.

As the name implies, an SPV is its own legal entity formed for a specific purpose. In startup investing, an SPV is used to raise funds from investors of many types (from angels and influencers to employees and customers) to invest together in a single company. In the past few years, SPVs have become a routine part of the fundraising landscape as founders welcome the speedy financing and ability to take funds from noninstitutional investors instead of going the VC route. As more opinion pieces and tweet threads pop up to applaud the power of the SPV as the great disruptor of VC, a growing number of early-stage GPs are routinely forming SPVs in what feels almost like a frenzy.

Venture needs to evolve, it’s true. But I worry that early-stage GPs becoming too enamored by the accessibility of SPVs will delay that evolution. A better, more equitable venture system requires a diverse array of strong, competent, daring venture firms operating at the seed stage. As an emerging class of new funds stands poised to open the doors for new kinds of founders with more varied backgrounds and ideas, there is profound energy at this stage right now. We’re on the path. But more and more, fund managers are hearing the siren’s song about SPVs to fund follow-on deals and finding that song hard to resist.

That’s no surprise. For many emerging investors, SPVs are an incredible tool for getting a foot in the door. For investors who don’t fit the venture profile, there aren’t a ton of entry points into established VC funds, and LPs aren’t clamoring to finance the debut funds of unproven investors. But anyone with hustle, heart, and access to a decent deal can spin up an SPV. There’s a feel-good, democratizing element to this financial tool—I feel it, too. But here’s the problem: Used excessively, in place of a core fund, the SPV can actually cause more harm than good for small, seed-stage firms. That can impair our collective progress in fixing what’s broken in venture. And that’s ultimately bad for founders and the companies they build.

So here’s the hot take: To usher in a more equitable venture ecosystem, GPs need to step away from overuse of the SPV at the seed stage. Here’s why.

SPVs break faith between venture firms and LPs

The returns from an SPV typically go into the Individual GP who formed it, not the core fund. So LPs who didn’t participate in the SPV don’t see any upside. LPs hate this—they want to see the returns in the core fund. When LPs contribute to core funds, they are investing in the partners as the investors—in their judgment, their reputation, their power. They expect that investment to earn them access to all the deals the firm’s partners make.

SPVs limit a venture firm’s upside

One of the things that draws most investors to the seed stage is the excitement of discovery. Investing early carries big risks but also huge potential upside if a company a firm bets on does well. This is because early investors get access to pro-rata rights, which let a venture firm maintain the size of its position in the company as it scales. While forming an SPV could help a firm quickly find the funds to pick up its pro-rata from an earlier deal, initially investing with an SPV doesn’t guarantee any pro-rata at all. This might not seem like a big deal at the seed stage, but down the line, it could potentially mean leaving millions of dollars on the table.

SPVs favor consensus

The purpose of a venture capitalist is to identify potential. This is part science, part art, part heart. SPVs favor consensus—with companies selected based on what can get funded, not based on what a venture partner truly believes in and is ready to take a risk on (the art of venture). Starting up a venture firm means having a vision, an investment thesis, and a cohesive idea of the impact you want to make—not just going after the deals you can get done.

SPVs suck up too much GP time

Yes, there are incredible new off-the-shelf tools built for forming, raising, and managing SPVs. These work great for angel investors without institutional LPs behind them. But for venture firms, not so much. In conversation after conversation with fellow GPs, I’ve noticed we all have the same gripe when forced to rely on the SPV: they are a massive distraction and resource drain. Firms tend to default to their own infrastructure, leaning on their own legal and accounting teams, incurring fees. Soliciting a new crop of deal-specific investors eats up valuable calendar blocks that should be spent on new deal flow.

SPVs leave founders exposed

As a former founder, I can see the appeal of SPVs. Delegating fundraising to someone else, faster delivery of funds, a way to bring in noninstitutional investors, not having to deal directly with most of your investors? Yes, please. But every single one of those SPV members (and anyone pitched on the SPV) gets access to proprietary data, which means company decks and financials get disseminated more widely than in a typical raise. That’s an awful lot of exposure if you’re in a competitive field. SPVs also present a complication when a company goes public. A cap table might look clean with just one name per SPV, but under each of those names are investors that can make moves that impact share price.

SPVs can be a useful part of the funding mix, yes. But they aren’t the right tool for every situation. And they certainly aren’t the way to bring about a more equitable future in venture. To truly reshape the venture capital ecosystem, the diverse, emerging class of high-potential managers needs to consolidate power, not give it away. We get power from building up our own firms, from making sure the credit and the profits go back into our core funds, and ensuring that the LPs that bet on diversity in VC get proven right in dollars. We get power from making sure the founders we back are poised to find and grow their own power. We do need to be innovative in developing new financial tools and tactics that increase our speed, flexibility, and ability to follow on to breakaway deals. This is true. But not at the expense of our LPs, founders, and firms. SPVs are a costly shortcut—we need to build a real solution.


Leah Solivan is the managing director at the Precedent Collective, a select fund for seed managers and their breakout companies. She was previously General Partner at Fuel Capital and the founder of TaskRabbit.

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