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The Lanturn Blog

Carefully curated and thoughtfully written content for businesses of any size.

FINANCE

Venture Capital Funds In Singapore: Your Guide To Attracting Investors To Start A New Business In Singapore

July 2021

Andrew Macintosh

Here are 3 must-knows!

When you start a new business, you’ll be asking investors and customers to take a leap of faith in your idea.

This means that before they invest in you, or try your product or service, they’ll have to decide to buy into something they have little experience or knowledge of.

Here are three tips for how you can make their decision easier, including guidance on SPVs.

The money’s in the list.

 

1. Best Performing VC funds top goal

The number one goal of a VC fund is ensuring your LPs are happy. This means, to LPs, top Venture Capital funds are those that generate consistent, great returns. This principle stands not just for VC funds in Singapore but around the world.

According to a report from Mountside Ventures and Allocate, 60% of LPs mentioned that a VC’s track record is the first thing they look at. Only 12% consider a fund’s investment thesis in their primary selection criteria and only a handful prioritize a fund’s reputation.

 

2. Factors that comprise Venture Capital fund returns

In a Venture Capital fund life cycle, all may seem good and one of your portfolio companies performs exceedingly well, securing a follow-on allocation in their Series C. However, you then realized that:

  1. You have difficulties in following your early-stage focused fund

  2. There are concentration limits that pull you back in pouring more money

  3. It is not a good fit with your fund’s investment thesis

Because of these, the investment becomes economically not feasible from the fund’s perspective. Therefore, the only option is to let go even though it has great potential in yielding superior returns for your LPs.

These along with various restrictions leave you struggling to leverage on valuable rounds and deals – resulting in suboptimal returns for your LPs.

 

3. Excel with SPVs

In recent years, LPs increasingly do not just want to invest in VC firms such as corporate VC funds.  

65% of LPs find appeal in investing directly into startups, back fund-of-funds, and partake in secondaries.

58% of LPs are interested in co-investment opportunities – in the form of special purpose vehicles (SPVs).


What is an SPV? 

An SPV (Special Purpose Vehicle), is a single-deal partnership established on an ad-hoc basis for a deal-by-deal investment. This is particularly useful to create investment opportunities on deals that:

  1. a VC would otherwise have to let go because it is not fitting to the Venture Capital fund’s core strategy; or 

  2. to create additional rounds for extra exposure to the highly attractive portfolio company

Example of how SPVs can complement your Venture Capital fund:

If you are starting a micro VC fund, you will have much lesser funds as compared to corporate VC funds. Therefore, a great way to attract LPs is by providing access to co-investing opportunities. An SPV gives you the avenue to be creative in making the most of a small capital base.


Here is an illustration of how SPV can boost your VC fund returns:

If you have only 1 VC Fund, you can only earn by investing in that Venture Capital fund. Whereas if you follow-up investment via SPV (by way of a deal-specific investment), you create an additional investment vehicle. Now see the difference? The returns could jump from $47.5M (238%) to $63.5M (303%)!

This demonstrates the biggest advantage of co-investing. Supporting the “SPV” is the current trend as more LPs are realizing and catching on to this great potential.

 

How to incorporate an SPV?

An SPV can take the form of various legal structures such as LLP and most commonly Pte Ltd. The key advantage is being tax-transparent with small maintenance requirements.

 

Types of documents to note

To build your LP’s confidence and mutual assurance, you can draft a special purpose vehicle agreement and list down the terms and structure specific to the deal. You can also draft a shareholder agreement to set out the basis on which the SPV is established.

This includes specifying the details of the SPV name, ownership structure, management control, and corporate matters, authorized share capital, and the extent of the liabilities of its members.

By inviting your LPs to invest in the SPVs, not only you can boost their returns, your Venture Capital can take carry and a management fee of the SPV!

If you would like to incorporate an SPV, we can assist you with the setup. Simply click here to speak with our incorporation experts.

 

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