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SPV, PE, VC Funds: What are the differences?


If you're an entrepreneur or new to the private investing market that is looking to raise capital or invest , you may be considering a few different options. Three of the most common options are special purpose vehicles (SPVs), private equity, and venture capital funds. While all three are ways to raise capital, there are significant differences between them.


Special Purpose Vehicles (SPVs)

A special purpose vehicle (SPV) is a legal entity that is created for a specific purpose, often to hold a particular asset or investment. In the context of startup investing, an SPV is typically used to allow a group of investors to pool their money together to invest in a single startup. The SPV is typically managed by a lead investor, who makes investment decisions on behalf of the group.


SPVs are often used in angel investing and early-stage investing because they allow investors to get in on the ground floor of a startup with a relatively small amount of capital. The lead investor can negotiate terms with the startup, and the other investors can invest alongside them without having to negotiate their own terms.


Private Equity

Private equity refers to investments made in private companies, typically by institutional investors such as pension funds, endowments, and large corporations. Private equity firms raise money from these investors and use it to buy stakes in private companies. They then work with the management of those companies to improve their operations and increase their value before selling their stake for a profit.


Private equity investments are often made in mature companies with an established track record of revenue and profitability. Private equity firms typically look for companies that they believe have significant growth potential but are not yet realizing that potential.


Venture Capital Funds

Venture capital funds are similar to private equity firms in that they raise money from institutional investors and use it to invest in private companies. However, venture capital funds typically focus on early-stage companies that are not yet profitable. They invest in these companies with the hope that they will grow rapidly and eventually become profitable, allowing the venture capital fund to sell its stake for a significant return.


Venture capital firms often take a very hands-on approach to their investments, working closely with the management of their portfolio companies to help them grow. They may provide advice and mentorship, as well as introductions to potential customers and partners.


Differences Between SPVs, Private Equity, and Venture Capital Funds


While all three of these investment vehicles involve investing in private companies, there are several key differences between them:


1. Size of Investments: SPVs typically involve smaller investments than private equity or venture capital funds. SPVs may allow individual investors to invest as little as $10,000 or $20,000, while private equity and venture capital funds typically require minimum investments of hundreds of thousands or even millions of dollars.


2. Stage of Company: SPVs and venture capital funds both focus on early-stage companies, while private equity firms typically invest in more mature companies.


3. Involvement: SPVs and private equity firms may take a more hands-off approach to their investments, while venture capital funds are typically very involved in the management of their portfolio companies.


4. Risk vs. Reward: SPVs and venture capital funds are generally considered higher-risk investments than private equity. However, they also offer the potential for higher returns.


When deciding which investment vehicle to use to raise capital for your startup, it's important to consider your stage of development, the size of your funding round, and your goals for the company. Each option has its own advantages and disadvantages, so it's important to do your research and choose the one that best fits your needs.

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