The Rise of SPVs in Unlisted Equity Investing: How Startups Are Raising Capital from Small Investors
Rudra Garg
Founder & Investment BankerIn my 15 years of helping startups raise capital, I've witnessed a quiet revolution in how early-stage deals get funded. Special Purpose Vehicles (SPVs) have emerged as the bridge between ambitious founders and the growing pool of retail investors wanting a piece of the startup pie.
Why SPVs Are Changing the Game
Last month, one of our healthtech clients raised ₹8 crore from 35 investors in just 3 weeks through an SPV structure. What would have been a logistical nightmare (managing 35 shareholders) became a clean, single-line entry on their cap table.
Real-World Example: MedAI Diagnostics
Challenge: Needed ₹5 crore for FDA trials but wanted to avoid VC dilution
SPV Solution:
- Structured as an LLP with 28 investors (₹5L-₹50L each)
- Single investment into MedAI at ₹25 crore valuation
- 2% management fee + 15% carry for the lead investor
Outcome: When MedAI got acquired 2 years later for ₹120 crore, the SPV investors received 4.2x returns after fees.
The Nuts and Bolts of SPV Structures
1. Legal Frameworks in India
From our work with SEBI-registered platforms, the most effective structures are:
| Structure | Best For | Setup Cost | Compliance |
|---|---|---|---|
| LLP | Deals under ₹25 crore | ₹15,000-₹25,000 | Minimal (GST filing) |
| Trust | Larger pools (₹25-100cr) | ₹50,000+ | ITR-7 filing |
| AIF Category I | Institutional deals | ₹5L+ | SEBI reporting |
Pro Tip: For most early-stage deals under ₹10 crore, an LLP structure offers the best balance of simplicity and compliance. We've set up 37 such SPVs in the last year alone.
2. The Fee Structure That Works
Based on our analysis of 120 successful SPVs:
- Setup Fee: 1-2% of corpus (covers legal/docs)
- Annual Mgmt Fee: 1% (for admin/communication)
- Carried Interest: 15-20% (standard in India)
3. Waterfall Distribution in Practice
Here's how ₹10 crore exit proceeds would flow in a typical SPV:
- Return ₹5 crore principal to investors
- 8% preferred return: ₹40 lakh
- Remaining ₹4.6 crore split 80/20 (investors get ₹3.68cr, sponsor ₹0.92cr)
Why Startups Love SPVs
From our client surveys:
- Speed: Average 4.2 weeks to close vs 3.5 months for traditional rounds
- Control: Single point of contact vs managing dozens of angels
- Flexibility: Can set custom terms with the SPV lead
Investor Protection Measures
We always recommend these safeguards:
- Right of First Refusal (ROFR): For secondary sales
- Drag-Along Rights: Prevents holdouts during exits
- Quarterly Reporting: Financials + key metrics
The Future: SPV 2.0 Trends
What we're seeing in 2025:
- Retail SPVs: Platforms like Tyke enabling ₹50K tickets
- Blockchain SPVs: Automated distributions via smart contracts
- Secondary Markets: Zexit allowing early liquidity
Is an SPV Right for Your Startup?
Good fit if:
- Raising ₹1-10 crore
- Have lead investor commitment
- Want clean cap table
Not ideal if:
- Need ₹25 crore+ (better for VCs)
- Want hands-on investors