Like breath is needed for life, funds are required to run a Startup. SPVs are a trending funding structure used in the investment landscape to pool capital. Startups need constant investment – be it from one investor or many. An SPV or a syndicate empowers startups and Investors to raise and deploy capital respectively while keeping things simple.
A strong Startup Ecosystem has many components – Accelerators, Service providers, Incubators, Mentors, Investors, etc. But the most important of all is – Startups themselves and the fund to support the Startup idea. The goal is to nourish an exciting Startup idea in the best way possible and enjoy returns in the future. In this blog post, we will learn key features of SPVs, why they are gaining popularity in Startup Ecosystem, their benefit to involved parties, and the venture capital revolution.
Looking at history, we can say that even the brightest ideas of the world – from the debut of the telephone (1876) to the development of the Internet (1983) these inventions also needed funding. We live in the 21st century, where the connection worldwide is stronger than ever, thanks to former innovations. We know that every business idea needs funding – some can run with a little money, while others might require a massive investment.
To grow to its full potential, a Startup requires an outside source of capital. There are traditional methods, including – bootstrapping, bank loans, NBFCs, and government programs. The newer and trending ways of Startup funding includes – Angel Investment, Venture Capital, Incubators & Accelerators, Startup Contests, and Crowdfunding.
Revolution of Startup Funding
Back in the 1950s, even before the establishment of the first Venture Capital firm, to get a Startup off the ground, the founder needed years of industry experience to gain trust, an exceptional Startup idea, and connections with the most successful businessman of the country. After World War II, the young minds returned from the frontline with a dream to lead a peaceful life and contribute to the country’s economy. A few great individuals back then, such as George Soros and J.H. Whitney, found an opportunity to capitalize on the funding of America’s future. At this point, an institutionalized version of Venture Capital came into existence.
A Startup doesn’t dilute itself just for capital needs. Billionaire entrepreneur – Bill Gates sold five percent of equity on a 20 Million Dollars valuation to bring the industry experts and adult advice on board. Funding options such as Venture Capital and Angel Investment are much more than just a source of capital. The consultation and connections that come with experienced investors add great value to the Startup development.
What is the role of Special Purpose Vehicles in the Startup Ecosystem?
The startup ecosystem and fundraising have evolved over the past few years. SPVs in Startup horizon act as a flexible legal infrastructure to raise and deploy capital in a Startup and eliminate complexity by having a single cap table and more investment.
Following the SEC guidelines, the current estimates suggest that accredited investors are closer to 10% of all households in the US. The eligible accredited investors are looking to invest their spare funds in an exceptional startup idea and generate a great return on investment. Where the venture capital fund manager focuses on building a portfolio, an SPV allows individual investors to invest their capital on a deal-to-deal basis. It is a pass-through vehicle empowering investors to inject capital into a Startup through a syndicate.
Key features of an SPV
- Democratizing Investment Opportunities
The traditional VC rounds come up with a minimum amount of direct investments, usually higher. An SPV allows a group of accredited investors to come together and invest as a single entity. This keeps the startup cap table clean and enables investors to hold the desired share and co-invest.
- Raise Capital
Startups need capital to grow and scale their business. Through an SPV, the founders can gain the power to build a strategic relationship and welcome the LPs they want on board. As mentioned above, certain funding options are much more than the capital. If you are a founder with certain leads and a network of people you want to bring on board in exchange for equity, then SPV is a great option.
- Flexible
SPV organizers can have unique needs. At SPV Hub, we fulfill these demands by tailoring the structure of the SPV. Whether you want to give members the specific rights of voting or not, what would be the time of distribution, and much more. All of this can be controlled and defined in the agreement. While raising or deploying capital, if the flexibility of controlling the output is a priority, then SPV is the most preferred method of fund administration.
Creating an SPV requires legal and accounting expertise. You don’t need to go through sleepless nights to understand the fundamentals of an SPV and how it can help you – Because we have done all the work for you. We have created an investor-facing tool to make private investment beautiful for you. Get in touch to create SPV.
I’m the CEO of SPV Hub. Being a founder/ co-founder (of multiple businesses) and investor (in multiple startups) myself, I experienced the challenges that an investor and a founder face while raising capital and handling multiple deals. So, we created SPVHub to simplify everything related to SPV creation and management.
I am also the co-founder of Startup Steroid.
