A Tool For Women-Led VCs, Angel Groups, And Investors

In a year when the amount of venture capital is declining, billion-dollar-plus funds posted a record for the first half of 2022, according to PitchBook. While that is good news for the big boys, it comes at a cost to women- and diverse-led emerging managers.

Limited partners (LPs) are overwhelmed with commitments to mega VC funds, making it harder for underrepresented emerging managers to raise money from the institutional investors and family offices that can afford high-minimum investment commitments of mega funds.

The dominance of mega funds isn’t the best news for high net worth investors (HNWI) either. The minimums to invest in these venture funds may be more than what they want to invest. Newer and smaller funds—like the ones women- and diverse-led emerging managers start—tend to outperform older and larger ones. However, these funds come with greater risk. The general partners of these firms typically have nontraditional venture backgrounds and require a different set of criteria to evaluate them.

Why The Hubbub About SPVs?

Special Purpose Vehicles (SPVs) offer an additional way for diverse, emerging managers to raise capital. SPVs have lower fees than venture funds, do deals faster, and distribute returns more quickly, making them attractive to female emerging managers, angel groups, and investors to invest in startups.

The number of SPVs more than doubled between 2020 and 2021, according to The 2022 State of the SPV by Assure, a benchmark report based on the organizers and investors who have used its platform. Organizers are people or firms that initiate the creation of an SPV, sourcing the underlying deal and pooling capital from other individuals or firms to invest.

It should be noted that not all SPVs are investing in startups, though the lion’s share is.

“It’s about 60%,” said Leslie Jump, managing director at Assure Analytics. Other SPVs are used to invest in art, crypto, oil wells, real estate, and other alternative investments.

SPVs usually have lower investment commitments than venture funds, especially the large ones. This lower financial commitment may attract HWNI who are not currently investing in startups. Ultra-high-net-worth investors (UHNWI)—$30 million in investable assets—are more likely to have advisors who advise on venture investments than are those investors with portfolios between $1 and $29 million. UHNWI can also afford the high investment minimums that mega funds have.

What Are The Advantages Of SPVs?

SPVs offer greater transparency than venture capital funds. SPVs invest in a single startup that you know about upfront. Conversely, when you invest in a venture fund, you invest in an investment thesis, not specific companies.

“Access is one of the most critical components for any kind of investment, particularly for private markets and women,” said Leslie Jump, managing director at Assure Analytics. It can take emerging managers 19 months to successfully raise a fund, according to Fundraising Best Practices for Emerging Managers by First Republic Bank. “Fees can range from $250,000 to $300,000. If you’re a startup [first-time fund manager], you can’t afford that.”

SPVs may also have a lower minimum-investment commitment. “The median minimum investment is $10,000,” said Jump. They are a more liquid investment than venture capital funds. “It’s typically 2.3 years to get the first distribution from an SPV and 10, maybe even 12 years, for a venture capital fund.”

SPVs allow emerging managers to test venture capital fund concepts cost-efficiently. Using lean startup parlance, it can be used to build a minimum viable product (MVP) to validate the premise for a fund. It provides investors with a proof of concept.

SPVs are built for speed. “The median for an experienced SPV organizer is about 35 days,” said Jump. “That’s a month to deploy your capital versus a private fund, which could be a couple of years before your capital goes to work.”

The volatility of the public markets is making it harder for micro funds—those with assets of less than $50 million—to raise capital to close their fund or to raise their next fund. A fund that might have taken 18 months in the last few years may now take two or three years, commented Jump.

Who Uses Them?

“SPVs are a great tool for emerging managers looking to establish a track record, grow overall AUM [assets under management], and develop relationships with limited partners,” said Jump. “The SPV may even attract new investors who may become investors in my fund.” A first or second-time micro fund manager who has used up her reserve capital could raise additional money to invest in outperforming portfolio companies.

Investors like it because they can understand the future fund’s strategies with greater specificity. Unlike a VC fund, you know the startup is being invested before committing dollars, and the fees are less.

Angel groups use SPVs. too. “It’s low cost and low friction,” said Jump. Use of SPVs has surged over the last two years, according to Angel Groups and SPVs by Assure. Many use them to bundle checks into a single position on a startup’s cap table or to streamline administration and accounting. Others use SPVs as a more affordable structure for their angel funds.

Venture funds in California and New York overwhelmingly dominate investment in startups. SPVs raise more money outside of the top two venture markets.

While VC-backed companies have remained private longer, thousands of early employees holding stock options and early investors want to cash in. SPVs can provide liquidity by purchasing shares through events like tender offers or sourcing deals on the secondary market.

Private secondary markets enable shareholders to sell private company shares to willing buyers, but, unlike the public stock market, it isn’t straightforward, with little transparency. Private companies do not have the same reporting and regulatory requirements. However, that hasn’t stopped secondary markets from growing rapidly.

“I think you’re going to start to see a lot of secondary transactions as people are looking to rebalance portfolios because of everything that’s going on,” said Jump.

How will you take advantage of SPVs?