Impulse4Women
Angel investing is on the rise, as more people want to support startups with capital. However, once business angels begin their investor journey, many face barriers sooner than anticipated. Getting access to professionally managed venture funds can be difficult – especially since a high minimum commitment is required. SPVs (Special Purpose Vehicles) are often seen as a workaround, yet they come with their own costs and complexity. This article explores the gap between direct investing and fund participation for business angels, the role of the SPV, and why current structures don’t necessarily benefit smaller investors.
How do business angels typically invest?
Many angel investors make direct investments into startups. Direct investments can be more straightforward from a legal standpoint, especially in early-stage deals, and allow smaller investment tickets. In many countries, they come with tax advantages. Investors also value the hands-on relationship with startups, although the direct investment involves a higher risk and does not offer diversification.
Another popular way of investing is through Special Purpose Vehicles (SPVs), legal entities that pool money from various investors to invest as a single unit, usually for startup rounds. Sometimes, they join Venture Capital (VC) funds as a single limited partner (LP). In startup syndicates, SPVs offer lower entry points that usually range from $1K to $25K – though SPVs formed to access VC funds may require larger pooled commitments. However, they come with fees, and the more elaborate legal setup to form the entity can be a barrier. Investors also receive annual tax documents (like K-1s in the United States), which can complicate personal tax filings. Additionally, when the underlying startup exits, SPV payouts can be slow due to legal, tax, or administrative processing.
VC funds allow investors to become limited partners (LPs) in a professionally managed investment vehicle. The fund’s general partners (GPs) decide which startups to invest in, building a diversified portfolio over time. Minimum investments are typically high, often between $100K and $250K, making funds primarily accessible to accredited investors with significant capital. LPs play passive roles, meaning they don’t influence investment decisions. While access is limited, VC funds offer exposure to a broader range of startups and expert deal selection.
Unreachably high fund minimum?
For many business angels, a $100K ticket is simply not an accessible amount. But why is the minimum to join a VC fund so high? First, a new LP adds compliance work, and increases legal and administrative costs. Larger checks also help ensure that LPs are aligned in expectations and understand the long-term, illiquid nature of VC investing. Even if smaller investors try to join through an SPV, many traditional funds may limit or reject that route to avoid extra complexity – a challenge that will be explored further on. Ultimately, high minimums act as a filter, maintaining exclusivity and reducing the operational effort.
The SPV workaround: and why it isn’t always ideal
To avoid the barriers of joining a VC fund, SPVs are often suggested as the solution. Investors form a pooled vehicle and invest in a startup as a group or become a LP in a VC fund. But SPVs aren’t always frictionless – and many business angels lean towards a direct investment because of that. Setting up an SPV typically costs between $5K and $10K, in addition to ongoing management expenses and the need for tax filings. Returns to investors are often delayed, as distributions are made to the SPV first before reaching individual investors. Transparency can also be limited, since investors hold indirect ownership. This structure may prevent them from qualifying for certain tax reliefs or investor rights.
SPVs can become part of a fund as a limited partner. However, VC funds often hesitate to accept SPVs due to the added complexity. SPVs can obscure the identities of underlying investors. They may complicate fund governance, as managers prefer not to give voting rights or influence to multiple indirect investors bundled into a single LP interest. Capital call delays are another concern if the SPV struggles to collect funds from its members on time. Overall, they often introduce legal, tax, and operational risks that many traditional VC funds prefer to avoid.
This means: SPVs make investment and fund participation possible, but the process is complicated and often hard to access, especially for newer business angels.
A system that excludes many investors
Overall, these aspects make investing significantly harder for angels. Most of them don’t meet the minimum $100K ticket to become an LP in a single fund. SPVs do provide a helpful solution – yet they come with their own barriers. Besides, they are not widely accessible or understood. As a result, a large number of angel investors are stuck in between direct deals that are closed one at a time, or they are excluded from the institutional venture ecosystem. For small passive investors, infrastructure is lacking.
Chances through emerging alternatives
Rolling funds and syndicates have expanded venture investing, but actual access to VC funds is still limited for smaller investors. Rolling funds offer lower quarterly minimums, but they’re often invite-only and don’t provide broad access to the full VC landscape. Syndicates let investors back individual deals via SPVs, but this doesn’t give them exposure across a fund’s full portfolio. Investor collectives or cooperative SPVs can help smaller investors pool resources, but they still require coordination, legal setup, and ongoing management. What’s still missing is a truly scalable, low-friction solution that allows angels with less than $100K to gain diversified VC exposure.
Overall, it is visible that angel investing has become easier, but access to venture funds is still limited. This concludes in many business angels being pushed towards direct investments or complex and risky alternatives. Can SPVs help? Yes, but they don’t solve the problem – and becoming an LP is difficult and comes with its own barriers. There is no simple way for small investors or newer business angels to benefit from broad opportunities of fund investing yet.