In the current scenario, on numerous occasions, assuming there is social capital in your industry, you have access to new companies and you know the main investors. Also the founders are smart, they are in a hurry, they know what they need. It is almost inevitable: an attempt is made to create a Venture Capital, a Capital Fund. Known venture capitalists are then consulted: How to raise the first fund? One possible answer is: don't. Start with the SPV (Special Purpose Vehicle).
SPVs (Special Purpose Vehicles) are an underrated and overlooked way to get into venture investing. SPVs are much faster to raise than a fund, easy to set up, and best of all, they generate returns faster, because the fees and liabilities are made on every deal. Good for the companies, good for the investors and good for the promoter, who in the future may choose to be a VC.
VCs see SPVs as a trivial league, because they are not "real" funds, but their earnings are just as real. They are a disruptive gateway that many novice (and experienced) venture capitalists use to outperform their slower-moving peers, access otherwise inaccessible opportunities, and, if all goes according to plan, go public. or earn large amounts of money in a short time.
And Combinator invented SAFE so founders could raise capital in smaller chunks and do it faster. It revolutionized fundraising. SPVs are like SAFE to VCs.
SAFE (Simple Agreement for Future Equity, Simple Agreement for Future Equity) is a convertible loan that does not have a debt component. SAFE it is a contract (not a traditional loan) in which an investor chooses to make a cash payment to a company in exchange for the negotiated right to convert that amount into stock if a predetermined trigger event occurs.
What makes SPVs so useful? Keep in mind that VPS are inexpensive and easy to set up on a variety of platforms, including Angel list, Canopy, Ensures, Paper, Republic, Flow y stonks.
A standard VPS in Angel list it takes a couple of days and costs $8.000. Meanwhile, a traditional fund, which involves formation, agreement drafting, and LP incorporation, typically takes months and can add up to tens or even hundreds of thousands of dollars in legal costs.
SPVs can be marketed to a much broader group of investors than a traditional fund, attracting non-institutional investors such as Family Offices, HNWs (high-net-worth individuals) or any accredited investor. They find SPVs attractive because it's like investing directly in a company, except the promoter of that vehicle does the hard work of sourcing, building the relationships, and closing the deal for them. They are restricted to choice only.
Founders also like SPVs because they attract a group of investors who can be useful to them, SPVs can be closed quickly, and SPVs don't clutter their share cap table. Founders will often send investors their way, such as friends and family, small checks, potential advisors, and investors who didn't make it in the last round.
On your way to building your fund, SPVs are also a great way to build a track record, grow your AUM (Assets Under Management) and LP (Limited Partnership) networks, and gain a foothold in today's highly competitive market. You can introduce the SPV to HNW, family offices and other investors without requiring them to commit to an anonymous group of investors as in the case of a fund.
You can even reduce the risk of future deals by first creating an SPV. Silicon Valley is riddled with stories about venture capital firms that GPs (General Partners) don't focus on important aspects or are in the destructive and high-cost process of firing a "key person." Working with a partner doing some SPVs together and dividing the responsibility helps to clarify if there is compatibility of profiles to work together. With a fund, general partners (GPs) are practically tied up for life.
Interesting offers? The best deals? Awesome deals? Deals that you just know are going to be huge? The SPVs allow access to them. You're not limiting yourself to a predefined scenario, strategy, or thesis that exists just to woo some reluctant LP. A specific story or thesis can be developed, proven in the market and supported by history with previous SPVs. Business Angels fundraisers are surprised when LPs are unimpressed by their investment record. Due to their activity, it is difficult for them to understand how important it is for LPs to see who has consistently created and grown vehicles and deployed capital successfully, with trust and with a clear strategy. The SPVs change the perception of being just another Angel and position you in the category of pooled investment manager.
Once you've made a few SPVs, you can move on to launching a traditional fund from a much stronger position. Adding up all the SPVs made and once significant AUMs are managed will lead to Some of the SPV investors joining the new fund, now that they are familiar with the promoter's investment style, deals and activity. Potential LPs who have just joined can contact SPV investors to check references. The result is beneficial for the professional who wants to create the background.
Starting a VC fund requires liquidity. Many first-time Prime Partners go without revenue for a year or more while they raise their first fund, only to then pay out their first commitment made as that partner figure, sometimes hundreds of thousands or even millions of dollars. They are forced to borrow to pay their own commitments. It's also common to invest in the VPS itself, but you can start with a much lower amount (tens of thousands of dollars or even single-digit thousands), and if you need to pay rent or any other expenses, you can take a commission. in cash from investors at the time the SPV is closed.
However, the most important advantage is speed. It may take two years to raise a first fund. Those are two years dedicated to releasing institutional LPs with skeptics who have seen all kinds of casuistry. No single joint investment can be made until initial closing is complete, unless self-financing capacity exists. SPVs work the other way around. You're investing from the start, because you find the deal first, then the investors, and the founders often help the startup by directing people who are already interested in investing in the company to do so through the SPV.
There are always disadvantages.
One disadvantage of an SPV is that once the promoter and founder agree on the assignment and terms, and close a deal, capital must be raised in the SPV quickly to avoid losing the deal. But this can be a positive, but it forces LPs to commit immediately.
Another possible drawback is that some of your joint venture investors will find your SPV annoying, since you are taking away a significant allocation. But with the support of the founder and adding value, the role of the promoter can be justified.
Access to capital also becomes easier with each SPV that is created, because any investor who invested in a first deal (if a good one) is more likely to invest in the second and third as well. If you have constant access to great deals, a single well-crafted Signal or WhatsApp message summarizing the opportunity, sent to the LP pool, can get SPVs even oversubscribing in minutes.
