Author: Shoal Research / Odin
Compiled by: Deep Tide TechFlow
Deep Tide Guide: The traditional VC's ten-year blind pool fund is being replaced by a hybrid model—small managers use lean micro-funds paired with deal-by-deal SPVs for follow-on investments. This not only reduces the blended fees for LPs but also allows GPs to focus more on early-stage investments. This article breaks down why the "small fund + SPV" combination is superior, both mathematically and in terms of incentive structures, to a single large fund, and why co-investments are becoming an industry standard.
The Era of Traditional Blind Pool Funds is Ending
The traditional VC structure is a ten-year closed-end blind pool fund. LPs agree to let GPs manage their capital for up to a decade (often longer in practice), with no decision-making power over individual investments. GPs can freely invest in any opportunity within the agreed-upon scope.
This obviously requires an extremely high level of trust. However, this design was originally intended for firms managing single-digit or low double-digit millions of dollars and making early-stage investments. At that time, when a company became an obvious opportunity in the eyes of LPs, it was often nearing an exit.
Today, the situation is completely different: companies go through more financing rounds with larger amounts, and LPs are also more sophisticated. Many LPs are former entrepreneurs or executives in strategic fields themselves, enabling them to identify good opportunities earlier, making follow-on investment decisions simpler.
In essence, blind pools should not be the default choice for VC forever. Their role is to assume risk in the very early stages, when VCs must find conviction earlier than everyone else. But once a company shows clear attractive metrics or market position (possibly as early as Series A, certainly by Series C), lower-fee co-investment vehicles are often more appropriate—reducing the cost of capital while gathering a group of aligned LPs.
Technology Infrastructure Has Reduced SPV Operational Costs
Over the past five years, better back-office infrastructure has reduced the friction of setting up deal-by-deal SPVs. Independent GPs and small partnerships can now deploy more capital and invest more precisely through "dual-wielding" two complementary tools:
A small fund that allows LPs to diversify into early-stage opportunities (which are inherently high-risk and difficult to evaluate), equivalent to an options portfolio.
Selective co-investment opportunities that allow LPs to increase their stake as a company becomes increasingly attractive, equivalent to targeted investments.
Of course, both strategies have their place, depending on the LP base and GP preferences. But it's becoming harder for small fund managers not to use SPVs to access follow-on capital, and pure SPV managers might be happy operating without a fund.
"The best investments I've been involved with have had weird ownership structures—topped up a bit later, with some opportunistic vehicles layered on top. Trying to make something as messy as early-stage VC rigid, turning it into a model, immediately forces out the wrong mindset."
——Enrico Melis, Animal Syndication Company
In the past, early-stage companies would build relationships with large late-stage investors to secure follow-on capital. But this strategy has become increasingly risky in recent years as the market has concentrated among fewer firms, interested only in narrower opportunities. There are even reports that large firms are disrupting fundraising for small funds, trying to control more of the market.
Of course, there are also medium-sized funds with the capital to continue funding their portfolio companies in later rounds. If they allocate reserves with a reasonable process alpha strategy, they might deliver attractive returns on larger pools of capital. But this might not be suitable for small firms—size not only drags performance, but growing firms inevitably slide towards consensus, losing the agility that independent investors or small partnerships have at the frontier.
LP Demand for Optionality is Growing
"LP co-investment activity is expected to gradually grow in the medium term. As more institutional investors build internal resources and portfolio infrastructure enabling sustained co-investment across diversified deal sets, the gradual institutionalization of large LP direct investment programs will improve the risk-return profile of the strategy and expand the pool of LPs able to execute selectively."
——PitchBook Analyst Report
The demand for co-invest in VC has become a meme. Everyone wants it, but no one seems to really know how to use it. However, this is likely the "growing pains" of an industry starting to treat co-invest as the ideal standard, similar to the broader private equity industry. Over time, better tools, standards, and talent will catch up to the practice.
Frankly, the current hunger for co-invest rights in VC is largely driven by FOMO and a blind application of power laws. Essentially, if an investor hits a "hot" portfolio company, LPs want to buy in themselves for status and IRR metrics.
Because this behavior is driven by opportunism, LPs often lack real understanding or processes to be competent at these investments. There's also an LP learning curve here.
For example, some LPs, in a tough fundraising environment, pressure emerging managers for SPVs with zero fees and zero carry. Eliminating carry is a terrible way to align interests, unless the LP's primary goal is simply harvesting dealflow. This handling of co-invest partly explains why GPs default to fund bloat.
Despite this friction, co-invest activity will clearly continue to increase. It's a natural evolution of the market seeking to maximize investment opportunities and lower blended fee costs.
The Advantages of Hybrid Economics
In a previous article, we examined how adopting private equity-style co-invest rights and fee schedules could improve the economics of VC mega-funds. The same holds true for smaller markets.
Imagine two hypothetical scenarios:
First, a manager raises a $10 million micro-fund to support 30 initial investments of $250k each, then uses deal-by-deal SPVs (GP commits 2%, no management fee, 10% carry) for selective follow-ons.
Second, a manager raises a $38.3 million fund. This is the size required to make the exact same investments (including follow-ons) as in the first scenario entirely from within the fund (no SPVs).
Assuming identical portfolio outcomes in both scenarios, generating a 4x total return, the micro-fund wins on DPI due to less fee drag.
Of course, this means less immediate income for a starting GP charging a 2% management fee. But the fund closes faster, delivers superior performance, making future fundraising easier. In practice, based on the premise that a $10 million fund is more likely to achieve higher multiples than a $38.3 million fund, the compensation gap from carry would close rapidly. Meanwhile, the GP still has a usable salary, and LPs get access to attractive dealflow.
The radical proposition here is: income should be tied to performance.
The numbers are only a small part of the picture. The micro-fund wins mathematically, but that's not actually terribly important.
The key is that the micro-fund GP is more aligned with the success of their investments. This hybrid structure incentivizes missionary GPs, not mercenary fee-collectors, systematically improving investment decisions and returns.
Smaller funds also allow GPs to operate more effectively as independent investors, maximizing the surface area of their idiosyncrasy. They aren't pressured to make potentially unnecessary hires to justify fee income. Their fund is small enough to stay focused on the earliest stages, without pressure to chase larger, later rounds. This is the ideal setup for investors skilled at frontier investing.
Better Standards for SPVs
"Co-investment rights have become one of the most concrete tools for small and emerging managers to demonstrate deal access and deepen LP relationships. Offering co-investment rights gives LPs a concrete reason to commit capital to less-known managers, even while managing the liquidity pressures of the current environment."
——PitchBook Analyst Report
The market is evolving, with small managers starting to use deal-by-deal terms more effectively. This is driven by the overall trends of fundraising headwinds and capital concentration. SPVs have become a vital lifeline for managers to support portfolio companies in later rounds.
However, this evolution is not complete; much work remains before LPs can accept SPVs without hesitation and capture performance gains. This is partly an infrastructure issue, but mostly an educational one. GPs and LPs need to understand current standards and how to improve them.
Therefore, we surveyed 56 GPs earlier this year.
Access the SPV Survey Report: https://spvsurvey.joinodin.com/
51 out of 56 GPs invest at the Pre-Seed or Seed stage, 80% manage funds under $100 million, and 61% have five or more years of venture capital experience.
Chart: SPV Adoption Rate by Fund Size. 39 out of 56 surveyed GPs already use SPVs, with the highest usage among $50M–$100M funds. Source: Odin SPV Survey 2026
Adoption is already high, with 39 out of 56 GPs already using SPVs—16 frequently, 23 occasionally. Of the remaining 17, 8 intend to start using SPVs in the future, bringing current and potential users to 84%. Usage is highest among more experienced GPs and those managing $50M to $100M funds; these operators have networks that can provide capital, but insufficient reserves to cover follow-on investments.
The primary use case for SPVs is follow-on capital, reported by 39 out of 47 respondents who use (or intend to use) SPVs.
"Our seed fund invests at the earliest stages. We run a light reserve model, opting instead to use SPVs directly for growth rounds. This makes a $20 million fund feel much larger for our companies, allowing us to deploy more capital into winners without running out of dry powder."
——Amy Brandenburg, Denver Ventures
Economic terms are generally LP-friendly. A management fee of 0-0.5% is the clear norm, mentioned by 45% of respondents. Carry is most commonly 16-20%, mentioned by 46%, though a significant 26% charge only 1-10%. Two-thirds of managers pass setup and admin costs directly to LPs. However, regarding the GP's own lead commitment, 44% put in only 0-0.5%, and only 27% commit 2% or more.
Chart: SPV Terms Distribution. Management fee 0-0.5% is the norm (45%), carry is most common at 16-20% (46%). Source: Odin SPV Survey 2026
Where the market diverges on terms, there's a clear opportunity to build better standards, improving outcomes and removing friction in the process. The goal should be to reduce costs for GPs, ensure they truly take risk, focus them on outcome quality rather than increasing fee income, and reward LP loyalty with pro-rata rights.
"Overall we believe in the principle of dancing with the one that brought you. So while SPVs help attract new LPs, existing LPs always get first priority on opportunities."
——Dan Kimerling, Deciens
In these cases (where the GP manages follow-on capital for fund investments), a good SPV usage template might look like this:
Chart: Aligned SPV Terms Template—GP commitment ≥2%, management fee 0, carry 10-20%, formation fees borne by LPs at cost. Source: Odin
As always, exceptions will arise.
If the SPV is unrelated to the fund, then the GP commitment might be better understood as a percentage of the lead's net assets, not a fixed minimum.
Most importantly, SPVs must not be used as intermediary vehicles to obscure deal economics or shield fund performance from excessive risk. They must be structured and offered transparently and honestly, with clear goals and aligned incentives.
"An SPV is just a tool; it makes no sense to like or dislike them. Strong feelings should belong to how they are structured, whether there is two-way transparency, and how they are managed."
——Helen Min, Articulate
Incentives and Outcomes
The final element is simple advice for LPs.
If small funds perform better, then it's insane that standard fee incentives push managers toward expansion. If the key to sustained outperformance is maintaining fund size (and thus consistent strategy, organization size, and target investments), then outperforming small managers should have room to raise fee percentages, not expand the fee base.
Therefore, expect them to seek to manage additional capital via SPVs to fulfill obligations to founders. This arrangement is also economically beneficial for LPs, improving alignment and reducing fee drag.
In return, LPs must increase their readiness to participate in these deals, understanding the terms, the cost of reneging, and the portfolio approach needed to capture performance gains. Furthermore, they must be willing to provide attractive compensation through carry for successful joint investments.
As all these elements converge in the coming years, the industry will emerge stronger. The shift toward a higher level of co-investment represents a long-overdue evolution away from the absurdity of over-extended 10-year vehicles and self-defeating fee incentives.
