When investing in ventures, the deal structure may be as significant as the startups themselves. The SPV is one of the structures that have emerged to be very prevalent. The knowledge of the functioning of SPVs assists both founders and investors in avoiding confusion and lack of confidence in addition to managing the modern funding rounds. When individuals mention spv venture capital, they tend to mean a flexible capital pooling approach to a particular investment as opposed to lobbying a conventional fund.

Defining the SPV Structure

Special Purpose Vehicle or SPV is a distinct legal entity that is established over one particular investment. The SPV does not have a single investor on the cap table, but rather it is one entity. This eases the ownership situation of founders and enables more than one backer to be involved in the same deal. A sponsor usually runs the SPV, in terms of sourcing the deal, legal establishment, and communication with investors during the life of the investment.

How SPVs Work in Practice

Practically, an SPV is established on a single opportunity. Investors inject capital in the entity, the SPV invests in the startup out of the invested capital, and any gains are transferred back to investors at the time of an exit or liquidity supply at the company. It is a structure that enables investors to engage in individual deals without having to commit to a complete multi year fund. It also allows founders to take in capital on a select list of investors and maintain their cap table clean and manageable.

How SPVs Differ From Traditional Venture Funds

Traditional venture funds raise funds in advance and invest them in numerous investments as time progresses. In contrast, an SPV is a single-purpose entity that is formed due to one particular deal and is subsequently disbanded when an outcome is achieved on that investment. This renders SPVs more flexible and deal-driven. Angel syndicates, new managers or operators who are presented with good opportunities but would not prefer to run a full fund structure often use them.

SPVs and Project Finance Concepts

Although SPVs are popular in startups, venture is not the only concept to apply. In energy and infrastructure, SPVs are used in special purpose vehicle project finance, in which a distinct entity is established to separate risk and run a single project. This is equally true in venture capital where the SPV separates the investment of the other operations of the sponsor and gives clear legal and financial frontiers.

Why SPVs Are Gaining Popularity

The popularity of SPVs is increasing since it reduces entry barriers to the investors, as well as offers a simplified ownership structure to founders. They facilitate focused investment, accelerated deal closure, and specialized networks. With the development of venture capital, SPVs provide a dynamic compromise to individual angel investing on the one hand and conventional fund approaches on the other.