A Special Purpose Vehicle (SPV), also known as a Special Purpose Entity (SPE), is a legal entity created for a specific purpose, typically to shield financial risks. SPVs are commonly used in securitizations, real estate transactions, project financings, and venture capital.
In the context of venture capital, an SPV is often created to hold a single investment in a startup or another non-publicly traded company. The SPV allows multiple investors to pool their capital to participate in the investment, providing a structure that limits their liability to the invested amount.
For example, an angel investor who has discovered a promising startup might establish an SPV to offer friends, family, and other accredited investors the opportunity to participate in the investment. Each investor contributes capital to the SPV, and the SPV makes the investment in the startup.
One advantage of an SPV is that it simplifies the capital structure of the startup, as the SPV is considered a single entry, even though it may represent dozens or even hundreds of individual investors.
It is important to note that while SPVs provide a certain level of risk isolation, they do not eliminate risk entirely. The risks associated with the underlying investment still exist. Therefore, potential investors should carefully examine the details of an SPV before investing, as with any investment.