Starting a new business can be challenging, especially when it comes to attracting investors and customers. (VC) Venture capital funds are a great way to raise capital for your new venture, as they are specifically designed to provide financial support to startups and other high-growth companies.
By partnering with a venture capital fund, you can gain access to the resources, expertise, and network needed to take your business to the next level. However, to win over investors and customers, you need to make sure that your idea is compelling and that you are able to communicate its potential effectively. This is where Special Purpose Vehicles (SPVs) come in, as they provide a legal and regulatory framework that can help you structure your venture capital investments and maximise returns.
Here are some tips to help you get started.
Best Performing Venture Capital 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.
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:
- You have difficulties in following your early-stage focused fund
- There are concentration limits that pull you back in pouring more money
- 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.
Excel with Special Purpose Vehicles (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:
- A VC would otherwise have to let go because it is not fitting to the Venture Capital fund’s core strategy; or
- 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, corporate matters, authorised 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!
Don’t let the complexities of setting up an SPV hold you back from achieving your investment goals. Let our incorporation experts at Lanturn guide you through the process and take your investment strategy to the next level. Click here to get started.
