A Special Purpose Vehicle (SPV), also known as a Special Purpose Entity (SPE), is a legal entity that is created for a specific purpose, typically for the purpose of isolating financial risk. SPVs are frequently used in securitization, real estate transactions, project finance, and venture capital.
In the context of venture capital, an SPV is often created to hold a single investment in a startup or other privately held company. The SPV allows multiple investors to pool their capital together in order to participate in the investment, while providing a structure that limits their liability to their amount of invested capital.
For example, an angel investor who has discovered a promising startup might set up an SPV to allow friends, family, and other accredited investors to invest alongside them. Each investor contributes capital to the SPV, and the SPV in turn makes the investment in the startup.
One of the benefits of an SPV is that it simplifies the startup's cap table, as the SPV counts as a single entry even though it might represent dozens or even hundreds of individual investors.
It's important to note that while SPVs provide a level of risk isolation, they don't eliminate risk entirely. The risks inherent in the underlying investment still exist. Therefore, as with any investment, potential investors should carefully review the specifics of an SPV before investing.
