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Why SPV Investors Must Think Like Fund Managers

According to industry benchmarks, 50-60% of investments in typical VC funds return less than 1x capital—they lose money or return only a fraction of the original investment. This follows venture capital's established pattern where a small number of outlier successes drive the majority of returns, while most investments underperform or fail. For diversified funds, this model is generally accepted by early-stage LPs.

However, SPVs present a critical difference. Here, LPs face identical risks but without the portfolio diversification that traditional funds provide. When running an SPV, GPs create a single-purpose vehicle for investing in just one company—eliminating any portfolio effect to cushion potential losses. If that single company fails or underperforms, investors absorb the full impact directly. Unlike fund investors who benefit from winners offsetting losers across a portfolio, SPV investors experience isolated outcomes, making losses particularly acute and immediately felt.

The Painful Personal Miss: How SPV Selectivity Backfires

I've personally felt this on both the GP & LP side of SPVs. A close friend runs SPVs and pitched me a pre-seed business years ago that he was putting an SPV together for. I trust his judgment—he's selective with an extremely high hit rate, and I'd invested in several of his previous deals. Yet for this particular company, I simply didn't see the upside and passed.

Fast forward five years: that business now generates nearly $500M in annual sales and is likely worth about 100x on a share price basis. Ouch.

What makes it worse? I did invest in several of his other SPVs—the ones that returned less than 1x. If all his SPVs had been pooled in a traditional fund structure, his portfolio would likely be up well over 10x. But because I cherry-picked which opportunities to join, missing his single biggest winner while catching several underperformers, my aggregate return across his SPVs will probably be horrible.

This perfectly illustrates the SPV paradox: even backing a skilled investor with a strong overall track record can result in poor returns if you miss just one outlier—the very outlier that would have made the traditional fund model work.

The All-or-Nothing Proposition

This fundamental difference creates a completely different risk profile and psychological burden. Fund LPs operate with the understanding that most of their picks won't pan out, but they're playing a numbers game designed to capture those rare 50x, or even 100x+ returns that more than compensate for the duds. SPV LPs, however, approach each investment as if it needs to be a winner—because for that particular group of investors, there may not be portfolio diversification to offset the loss. 

This dynamic also creates unique challenges for SPV GPs, with their economic structure and LP satisfaction directly tied to a small set of singular outcomes. Unlike traditional fund structures, where management fees provide operational runway regardless of performance—with many large funds essentially functioning as fee-based businesses generating substantial income for managers irrespective of investment returns—SPVs operate under fundamentally different economics.

SPV Success: Why LPs Should Think Like Fund Managers 

When investing in SPVs as an LP, you must recognize that you have effectively assumed the fund manager's role—with full responsibility for your own portfolio construction and diversification strategy.

Unlike investing in traditional venture funds where a dedicated fund manager optimizes diversification for you and limits your potential losses to your committed capital, SPV investing puts you in direct control of your portfolio strategy. This distinction is critical because in venture capital, missing the outlier investment is often the difference between receiving significant returns (3-10x+ on capital) versus minimal or negative returns (0-1x capital back).

This responsibility cannot be overstated in an asset class where power law distributions dominate returns. The data consistently shows that even professional venture capitalists experience failure rates between 50-66% across their portfolios, with Industry Ventures reporting that 64% of all VC investments lose money. What's particularly illuminating is that some of the highest-performing funds (with MOICs of 4.4x) still had loss ratios of 66%, demonstrating that overall success depends almost entirely on capturing those rare outliers.

For SPV investors, this means that strategic diversification often becomes a critical strategy in driving returns. A concentrated approach of cherry-picking what appear to be the "best" 5-15 opportunities is statistically likely to miss the true outliers, which may be non-consensus investments at the time of funding. By contrast, maintaining smaller positions across a much larger number of opportunities (25+ investments) dramatically increases the probability of capturing those transformative returns that can deliver portfolio-level success in early stage venture capital.

If you enjoyed this article, feel free to view our prior posts on adjacent topics 

• Why Syndicate Leads Don’t Survive 

• The Syndicate LP Churn Problem 

• What Really Drives Investment Interest in SPVs

Last Money in is Powered by Sydecar

Sydecar empowers syndicate leads to manage their investments more effectively. Organize, manage, and engage your investor network effortlessly with Sydecar’s management and communication tools. Their platform also automates banking, compliance, contracts, tax, and reporting, freeing up syndicate leads to focus on securing deals and strengthening investor relations. Elevate your syndicate operations with Sydecar.

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✍️ Written by Zachary and Alex