October 21st, 2021
In venture, a special purpose vehicle, or SPV, helps investors pool their money into a single company that is designed for a specific investment in a single company. This is a major departure from the traditional venture fund structure that is set up to be invested in multiple companies, over a longer period of time. Unlike Rolling Funds, which we’ll cover below, SPVs are not entirely new. For years, financial institutions have used SPVs as investment vehicles - most notably with Enron.
General partners at venture funds have traditionally used SPVs for two reasons: investing in companies that fall outside of their fund’s criteria or for a follow-on investment when their fund does not have enough capital. Both of these situations allow LPs in a fund to make individual decisions on their involvement, rather than their capital being deployed as a bigger part of that fund.
What is new about SPVs in recent years, however, is newer investors (not famous GPs or angels) using SPVs to raise money for a singular investment. This allows them to circumvent raising from LPs on an investment thesis, and lets them develop a reputation for quality deal flow in the venture capital world.
One important note about SPVs is that investing in an SPV is not the same as investing in the company itself. The investors in the SPV receive a stake of ownership or interest in the SPV, which will eventually own a stake of interest in the underlying portfolio company. Also similar to traditional funds, SPVs are charged fees for the GPs to manage the SPV and to receive carried interest in the success of the SPV.
Rolling Funds were introduced by AngelList in early 2020 as a way to bring high-resolution fundraising to venture funds. Instead of requiring a massive upfront commitment from investors, fund managers can accept a recurring investment from LPs to invest quarterly. On top of recurring capital from existing LPs over time, rolling funds also allow fund managers to accept capital at any time.
As mentioned above, Rolling Funds are an entirely new model and investment vehicle. Fund managers can now start investing in companies faster and with a smaller capital pool than ever before. Fund managers can remarket their fund as they have success and grow that capital pool to further increase their investment opportunity.
As Naval Ravikant, founder and chairman of AngelList, puts it:
The huge benefit for a fund manager is that they can raise money incrementally, one investor at a time, rather than having to do a one-time, big-bang fundraise and then lock the fund for four years
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