What is a Special Purpose Vehicle (SPV) and how did SV Angel lead a $200M round in Pinterest?

News broke last week that SV Angel led a massive $200M growth round for Pinterest. For those of you that scratched your heads, you are not alone. 

How did a seed fund lead a growth round many times the size of their entire fund?

People who do early stage private investing do it because they love it, but not necessarily because it's the most lucrative stage or asset class. Given seed fund economics, there is only so much upside when you have a fund of $10M-$40M. This upside is not only capped for the General Partners, but also for the fund's investors, the Limited Partners. So seed VCs have found other ways to make economics better for themselves and their LPs. One of those ways is through Special Purpose Vehicles. (it's worth noting that SPVs are used by other investors at various stages). SPVs are used by seed VCs when the investment they are making falls outside the stage, size, or strategic focus of the core fund. 

Simply put, a SPV is an investment vehicle set up for single, special purpose. Picture a stand alone bank account set up just for a single investment. In this case, SV Angel would have gone to their Limited Partners (family offices, institutions, fund of funds, endowments, etc) and asked if they wanted to invest more money into Pinterest. If so, they would collect their money into a SPV and make the investment via that special entity with it's own governance and terms. 

Although other investor types use SPVs, it suits the seed VC asset class very well for three reasons. 

1. It allows a seed VC to put more $$ to work - in a single investment, SV Angel essentially doubled or even tripled the amount of capital invested this year, creating more upside for them and their LPs

2. Seed VCs often build very strong relationships with management teams because they are involved early. This is the only way and seed VC to pull off a late stage SPV like this. The management team at the company must really trust and value the investor.

3. Seed VC funds are typically much smaller than some of the other funds that their Limited Partners may be involved with (Series A/B VC funds, growth VC funds, PE funds). If the LPs really like what a seed fund manager is doing, they will want to put more money behind them but are often limited by the size of the fund. SPVs are a great way for an LP to put more money to work behind a great seed fund manager that they really believe in. 

I wasn't surprised by the investment, but rather I was surprised by the nature in which is was reported. Very rarely are these deals reported publicly. Twitter, for example, raised a ton of money from SPVs late in its life, but only a tiny bit of that was ever covered publicly, and even then it was only during the S-1 filing and IPO given the hood was lifted on its fundraising history. I suspect that we may see more public disclosure of SPVs, especially as companies are taking longer to IPO, since SPVs are a great way to raise capital from people you already know and trust. 

Kudos to the team at SV Angel. They really are a great firm with a 'founder first' mentality. It's nice to see that paying off. It's a great lesson for all seed VCs that if you work very hard for your founders and portfolio companies then special opportunities like this can pop up. This seems like a win-win-win for Pinterest, SV Angel, and SV Angel's Limited Partners. I hope we at Susa Ventures are lucky enough to be able to do this one day with a great portfolio company and our LPs.