Portfolio diversification is an important concept for investors looking to manage risk and gain exposure to potential high growth investments. Venture capital investments in startup companies represent an opportunity for diversification in an investment portfolio.
For more information on this, feel free to check out our article Build a Diversified Portfolio with Venture Capital on the Propel(x) Platform.
One of the barriers to venture capital investing can be the large check sizes that are often needed to gain access to startup investment opportunities. An SPV can help investors gain access to venture capital opportunities by allowing multiple investors to pool their resources and invest as a group, often called a “syndicate”.
What is an SPV?
SPV is short for “Special Purpose Vehicle”. An alternative name that is sometimes used is “Special Purpose Entity”.
As the name suggests, an SPV is a legal entity created for a special purpose. For startup investing, that purpose is to invest in a startup company. An SPV is a company with its own set of accounts and may be set up in a range of structures, often as a Limited Liability Company (LLC).
How does a Special Purpose Vehicle work?
When used for startup investments, a group of individual investors can use an SPV to invest in a company as a single investor. The individual investors are members of the SPV, which would typically be structured with a subscription agreement and an operating agreement.
As far as the startup is concerned, the company only sees the SPV as a single investor and does not deal with the individual members of the SPV, nor do they show the individuals as investors on the company’s capitalization table.
If a liquidity event occurs, a distribution is made to the SPV, and funds then flow through to the individual members of the SPV in accordance with their ownership stake and the terms and conditions of the SPV.
The SPV will be administered by an LLC manager. It’s important that the individual investors (SPV members) read and understand the SPV documentation.
SPV Investment and Venture Capital
A venture capital or angel investment may have a minimum check size, which depending on the company and the nature of the deal, might start from somewhere around $25k at the low end, up to $100k, or even extend up into the millions. Such check sizes may put those investments out of reach of many investors, particularly if they are adopting a diversified approach to startup investing where they invest small amounts in a number of startups rather than investing large amounts in just a few startups.
SPV investment can work with venture capital and angel investments by allowing multiple investors to group together, pool their funds, and invest as a syndicate using an SPV.
SPVs Made Easy by Propel(x)
Propel(x) provides curated deal flow to account holders on the Propel(x) Venture Capital platform, allowing potential investors to consider startup investment opportunities.
Certain opportunities may be offered offline by Hubble Investments, member FINRA / SIPC and an affiliate of Propel(x).
If enough investors are interested in a startup but do not wish to invest directly, Propel(x) may facilitate an investment via an SPV. This would enable multiple investors to participate in the startup investment opportunity at a lower investment level. For example, if the minimum check size to invest in the startup was $50k, then the SPV could comprise 10 investors each contributing $5k.
Propel(x) is one of the few investment platforms who manage their own SPVs. We do this via the Planck Fund Management Corporation, which is a wholly owned subsidiary of Propel(x).
We have seen firsthand what can happen when SPVs are managed externally by third parties who are not sufficiently familiar with startup investing, for example using outsourced accountants who may not have appropriate context or specialized experience in this area.
At Propel(x), we are in touch with the startup during the fundraising and on an ongoing basis, so we have an understanding of the status of the startup and can update the investors accordingly. We believe that follow-up communication is important for investors, which we can facilitate as SPV managers.
Propel(x) choose to manage our own SPVs for five important reasons:
- Visibility: To provide comprehensive visibility of investment holdings, both internally within the SPV and externally with the SPV’s stake in the startup.
- Accuracy: We have our own accountants on staff who are familiar with startup investing and understand the details involved.
- Responsiveness: With involvement on both the fundraising side with the founders, and on the investor side under the SPV, we can respond quickly to address issues as they arise.
- Timeliness: We understand obligations for reporting and lodging relevant paperwork for both the startup and the investors, so can facilitate timely submission of relevant documents.
- Convenience: With direct access to both parties, Propel(x) provides a convenient communication conduit between the founders and the investors.
Conclusion
Utilizing the flexibility of an SPV can provide investors with the opportunity to access venture capital investments in startups that may otherwise be out of reach due to high investment minimums. Propel(x) can set up and manage SPVs to streamline the process of both the initial investment and its ongoing management.
If you are interested in building your portfolio by adding investments in startups, you can find more information here on how to start angel investing and how to find opportunities for angel investing on the Propel(x) platform.
This article is for informational purposes only. We do not provide legal, financial, or tax advice and investors should consult their advisors prior to making any investment. As with any investment, past performance is no guarantee of future performance, and any investment decision must balance the risk against the potential return. Private investments are highly illiquid and risky and are not suitable for all investors. There is no guarantee that a liquidity event will ever take place.
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