📈 🚀  Leveraging SPVs to Get to Fund 1

Leveraging SPV’s (a legal entity that is created to pool investments from multiple investors for the purpose of participating in a specific investment opportunity) are a great way to build a Venture Capital fund. Additionally, starting with SPVs can provide GPs with real world experience to better understand if a VC fund is the right move for them long-term. By starting with SPV’s first, an aspiring GP can break down many of the barriers to starting a VC firm, enabling them to grow their AUM quickly, develop a track record and meet LPs in advance of actually going out to raise their first venture capital fund.

As an example: at my VC firm, Riverside Ventures we deployed ~$40m before starting our first fund. Within our first fund, approximately 75% of our LPs came from our syndicate ecosystem. There was definitely no fund 1 without the SPV track record & experience.

Caterina Fake, Co-founder of Flickr & GP of Yes VC could not agree more!

Leveraging SPV’s feels like an obvious approach to breaking into venture capital – candidly that’s because it was my path (as mentioned above, I now also manage a micro fund), but bias aside, I’ve had a front row seat to dozens of first time VC managers build impressive track records by leveraging the SPV model – several of whom have gone on to raise first time VC funds. For additional context – I did not come from a VC background, so I needed to build my track record in this ecosystem in a frictionless way, which SPVs allowed.

Despite the benefits, this approach to starting out does not seem to be widely adopted by many eager to go out and raise a fund. Again referencing, Caterina:

Thank you Caterina! Zach and I really needed someone way cooler & more impressive than us to publicly get this out there :)

Okay, so let’s talk about how this actually works.

In this post, we’ll explore how SPVs allow you to become a VC GP BEFORE RAISING A VENTURE FUND. Starting with SPVs enable:

1. Faster way to start investing with outside capital

2. Build a track record (with outside capital)

3. Gain experience w/LPs & learn to operate “in some ways” similar to a traditional fund

4. Start building relationships with potential fund LP’s, VCs & Founders

5. Pricing & flexibility of an SPV versus a traditional Venture Fund

1 → SPV’s enable VCs to build a track record

By making multiple investments as a syndicate VC GP, where you only raise capital on a deal by deal basis, GPs can build a portfolio that highlights his/her unique ability to be a fund manager & capital allocator.

By starting with SPVs GPs can much more quickly validate:

1. Your ability to source compelling investment opportunities - how are you able to source, get allocations in competitive deals, invest alongside tier 1 investors. These are some of the key things prospective LPs will want to see prior to backing your fund and a larger part of the fund GP role itself.

2. Your ability to pick winning investments - over time you can show that the deals you have invested in are going on to raise new rounds at higher valuations, enabling a markup on paper for your LP’s, validating your ability to diligence and source compelling investment opportunities. To raise a traditional venture fund, this is of critical importance, so already validating to prospective and current LPs that you have done this will provide more credibility as you go-to-market as a fund manager.

3. Your ability to support LPs with investor relations – believe it or not, VCs are in the service business. We serve founders and LPs – and while this is of secondary importance to our ability to return a high performing fund, LPs want to know you’re there and available for questions/comments, etc. I’ve seen some GPs go dark after raising a syndicate and it is not a good look.

Of note - SPVs go beyond being an angel investor and/or simply picking deals/founders to invest in. SPVs are the start of an actual investment manager in that you are pooling outside capital, securing large allocations, managing the entire lifecycle of the investment (compliance, legal, etc.) and supporting all stakeholders throughout that investment lifecycle. Running a Syndicate and SPVs – working with outside capital and investing in larger allocations – helps validate a GPs ability to be a sound fund manager in a way an angel track record can’t. This is not to say that angel investors can’t become full time fund managers – just look at prolific investors such as Elad Gil or a number of others, but for most of us, it’s a harder path to validate.

I’ll wrap this section with a quote from Jason Shuman, General Partner @ Primary Venture Partners:

2 → Act & Operate similar to a fund before having a true fund responsibility

Running a SPV is almost like creating a different fund for each deal. It will allow you to:

• Meet LPs → new deals lead to potential new LPs w/various interests.

• Get access and secure allocations with founders.

• Provide a compelling thesis → Pitch them to generate enough interest to commit capital into the specific deal.

• Initiate a closing process with a specified timeline LPs will need to wire capital by → similar to how a fund timeline will work.

• Provide updates on the deal going forward and keep LPs afloat of the company’s progress/markups.

• Provide K1’s for LPs for their yearly taxes (or ideally work with a provider who does this on your behalf yet still something you will have to interact with LPs on).

These are all similar action items and process requirements that take place in the management of a traditional venture fund. While the context of an SPV is different from a fund, it will help a prospective fund GP get more exposure/practice in working with LPs in this environment.

3 → Build LP Relationships for a future fund

This one is super important in our opinion because it can also be extremely tough.

Doing SPV’s on a deal by deal basis means that you will need to raise capital on a deal by deal basis. This process will help attract different LPs into different deals and ideally start to act as somewhat of a flywheel to access new LPs over time. GPs will naturally build relationships with these LPs who will want to ask questions, see how they can get more involved, potentially scout for your syndicate, etc.

Additionally, there are unique positives to operating via SPVs as it pertains to building LP relationships. Each SPV is a new opportunity to attract new LPs. The last deal you did may have had 0 interest to an LP but the next one you are running might be of high interest, which will allow you through the door, and an opportunity to get to know one another. Running SPVs across different industries and stages (e.g. pre-seed, seed, growth, pre-ipo, etc.) will also attract different types of investors and widen the investor pool. By comparison, traditional funds do not achieve this as regularly – as usually a fund is more narrowly focused (vertical, stage, region) with fund deployment times of 12-36 months (not days to weeks as with SPVs). More deals = more potential LP intros and relationships.

Also, many LPs like SPV opportunities because this is a rare opportunity where they are actually getting to pick which specific deal to invest in rather than the fund manager calling the shots. I’ve talked to many LPs who were promised direct looks from funds they invested in, but are generally unhappy with their direct access to side SPVs or direct co-investments from those funds.

Know your audience – It’s crucial to understand which type of LPs invest in what type of venture funds. For first time funds looking to raise sub $25M, you will likely want to get in front of non-institutional investors like family offices, high net worth individuals (HNWIs), and any other accredited investor. For second time managers or first time GPs raising much larger first funds, you will likely want to focus on accessing larger institutional capital. This is a wide sweeping generalization, but the key point here is to do your research to understand the different types of LP criteria.

4 → LP Referrals

When putting together an SPV, there are a few avenues to get additional LP exposure:

1. Founders may refer other angels/individual LPs your way. Many founders like SPVs because they bring in a group of investors who can ideally be useful to them in various ways like intros to customers, access to new capital (now or for the next round), and/or partnership opportunities via their network. On the point of SPVs keeping the cap table clean because it aggregates a large number of people into a single entity; as such there have been many times where founders have introduced me to other investors (friends & family, advisors, investors who did not get in the last round etc.) that they want to get into their company but otherwise wouldn’t be manageable without having them come through an SPV. It’s an easy way to access more LPs and literally one of the easiest things you can do to help a founder.

2. LPs refer LPs. There have been many times where I’ve had an LP come into a specific deal and ask if they can share information with another investor friend of theirs. This is always a great and warm intro to access a new LP and start a relationship. If you bring high quality deals, more LP referrals from existing LPs are bound to happen.

3. Organic LPs through reputation: As you do more SPVs, LPs start to find you organically through your press releases from your portfolio company announcing your investment, via social, or other. This has gotten more common as we’ve grown.

5 → Pricing/Economics of SPV versus a Venture Capital Fund

SPV: Launching a SPV can be done in as little as 1-2 days and typically costs anywhere between $4k to $10k all in, depending on the provider and support you are getting.

Zach and I almost always charge no management fee and 20% carried interest but we’ve seen plenty of syndicate leads take a couple percentage points of management fees and carry anywhere from 10% to 20%, and up to 30% when they provide a 3x or 5x or greater return to LPs. i.e. if the GP returns beyond 3x or 5x, they will unlock additional carry for themselves.

I think all of these general structures are fine and I get why they vary by GP.

Venture Fund: A traditional fund is a much longer and more intensive process. This involves fund formation, drafting agreements, onboarding LPs, and way more legal fees. An entire fundraise can take 6-24 months; for first time fund managers and in this macro market, it reigns even more true. By comparison, SPV setups take days.

The most standard fee structure for venture funds is 2% management fee across 10 years and 20% carried interest. The more in-demand & competitive funds are able to charge 30% carry, however many first time GPs will likely break off some of the GP carry to an LP who anchors the fund or writes a meaningful check size to: 1) get them in business to start investing and 2) provide a stamp of approval to make it easier to raise additional capital from other LPs.

In Summary…

There are many routes to raising your first venture fund, but undoubtedly, building a track record via SPVs is one of the best paths to fund 1, allowing new GPs to build a track record, LP relationships, meaningful carry and more.

S/O to some of the Fund GPs that started w/SPV’s: A few GPs who started as syndicate operators who went on to raise first traditional venture funds include Zach Coleus, Jason Calacanis, Shrug Capital, Austin Rief, Spacecadet and many others. We featured one last week – you can read a bit more about him here. We plan to highlight other GPs who have made the transition in future posts as well, so stay tuned.

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✍️ Written by Alex and Zachary