Author: Shoal Research / Odin

Translation: Deep Tide TechFlow

Deep Tide Introduction: The traditional ten-year blind pool fund model of VC is being replaced by a hybrid model—small managers use lean micro-funds combined with individual SPVs for co-investment, which not only reduces the mixed fee rates for LPs but also allows GPs to focus more on early-stage investments. This article unpacks why the combination of “small funds + SPVs” is mathematically and motivationally superior to a single large fund and why co-investing is becoming the industry standard.

The era of traditional blind pool funds is coming to an end

The structure of traditional VCs is a ten-year closed-end blind pool fund. LPs agree to let GPs manage their capital for up to ten years (often much longer), without decision-making authority over individual investments. GPs can freely invest in any opportunities within an agreed range.

This clearly requires a very high level of trust. However, this design was originally intended for managing single-digit or low double-digit million dollar amounts, focused on early investments. By the time a company becomes an obvious opportunity in the eyes of an LP, it is often close to exiting.

Today’s situation is completely different: companies have more funding rounds and larger amounts, and LPs are more sophisticated. Many LPs themselves are former entrepreneurs or executives in strategic fields who can identify good opportunities earlier, making co-investment decisions simpler.

Essentially, blind pools should not always be the default choice for VCs. Its role is to take risks in the early stages, when VCs must find conviction earlier than everyone else. However, once a company has clear and attractive indicators or market positions (possibly as early as Series A, certainly by Series C), lower-fee co-investment tools are often more suitable—reducing capital costs and gathering a group of aligned LPs.

Technological infrastructure reduces SPV operating costs

In the past five years, better backend infrastructure has reduced the friction of setting up individual SPVs. Independent GPs and small partnerships can now deploy more capital and invest more precisely through “dual-holding” of two complementary tools:

A small fund that allows LPs to diversify and invest in early-stage opportunities (which are essentially high-risk and hard to evaluate), equivalent to a portfolio of options.

Curation of co-investment opportunities that allows LPs to increase their holdings as companies become more attractive, equivalent to direct investments.

Of course, both strategies have their space, depending on the LP base and GP preferences. However, it is becoming increasingly difficult for small fund managers to acquire co-investment capital without SPVs, and pure SPV managers may also prefer to operate without a fund.

“The best investments I’ve been part of have had unusual ownership structures—there was a bit layered on top and then some opportunistic tools added. Trying to make something as messy as early VC rigid and into a model will immediately force out the wrong way of thinking.”

——Enrico Melis, Animal Syndication Company

Previously, early companies built relationships with large late-stage investors to obtain co-investment capital. But this strategy has become increasingly risky in recent years, as the market has concentrated on fewer companies that are only interested in narrower opportunities. There are even reports of large companies undermining fundraising efforts for small funds in an attempt to control more of the market.

Of course, there are also medium-sized funds with capital to continue funding follow-on rounds for portfolio companies. If they adopt reasonable procedural alpha strategies for capital allocation, they might provide attractive returns on larger pools of capital. But this may not be suitable for small companies—the scale not only weighs down performance, but growing companies inevitably drift towards consensus, losing the independence and agility of investors or small partnerships at the frontier.

The demand for choice from LPs is growing

“LP co-investment activity is expected to gradually increase in the medium term. As more institutional investors build internal resources and portfolio infrastructures, enabling continuous co-investment in diversified transaction clusters, the gradual institutionalization of large LP direct investment projects will improve the risk-return characteristics of this strategy and expand the pool of LPs that can execute selectively.”

——PitchBook Analyst Report

The demand for co-investing in VC has already become a meme. Everyone wants it, but it seems no one really knows how to use it. However, this is likely a “growing pain” for the industry as it begins to regard co-investing as an ideal standard, similar to the broader private equity industry. Over time, better tools, standards, and talent will catch up with practice.

Frankly, the current desire for co-investment rights in VC is largely driven by FOMO and a blind application of power law. Essentially, if investors come across a “hot” portfolio company, LPs want to buy in themselves to gain status and IRR metrics.

Because this behavior is driven by opportunism, LPs often lack a real understanding or processes to competently handle these investments. There is also a learning curve for LPs.

For example, some LPs are pressuring emerging managers for zero fee, zero carry SPVs in a tough fundraising environment. Eliminating carry is a bad way to align interests, unless the main goal of LPs is merely to harvest deal flow. This treatment of co-investing partially explains why GPs default to the expansion of funds.

Despite these frictions, co-investment activity is clearly going to continue to increase. This is a natural evolution for the market seeking to maximize investment opportunities and reduce mixed fee costs.

The advantages of hybrid economics

In previous articles, we explored how adopting private equity-style co-investing rights and fee schedules would improve the economics of mega VC funds. The same applies to small markets.

Imagine two hypothetical scenarios:

In the first, a manager raises a $10 million micro fund, making 30 initial investments of $250,000, and then uses individual SPVs (with a GP commitment of 2%, no management fees, 10% carry) for selective co-investments.

In the second, a manager raises a $38.3 million fund. This is the scale needed to make exactly the same set of investments (including co-investments) from inside the fund (without SPVs) as in the first scenario.

Assuming the results of the portfolios are the same in both scenarios, yielding 4x total returns, the micro fund wins on DPI because it is less burdened by fees.

Of course, this means less immediate income for a GP just starting out with a 2% management fee. But the fund will close faster, providing superior performance and facilitating future fundraising. In fact, based on a $10 million fund being more likely to achieve higher multiples than a $38.3 million fund, the compensation gap from carry would quickly shrink. Meanwhile, GPs still have available salaries, and LPs can access attractive deal flow.

The radical claim here is: income should be linked to performance.

The numbers are just a small part of the picture. Micro funds win mathematically, but that’s not particularly important.

The key is that micro fund GPs are more closely aligned with the success of their investments. This hybrid structure incentivizes missionary GPs rather than fee-earning mercenaries, which systematically improves investment decisions and returns.

Smaller funds also allow GPs to operate more effectively as independent investors, maximizing their specific surface area. They do not face pressure to make hires that might be unnecessary to prove fee income. Their funds are small enough to allow continued focus on the earliest stages without the pressure to chase larger, later rounds. This is an ideal setting for investors skilled in frontier investments.

Better standards for SPVs

“Co-investment rights have become one of the most concrete tools for small and emerging managers to showcase their deal access capability and deepen LP relationships. Offering co-investment rights gives LPs a concrete reason to commit capital even while managing liquidity pressure in the current environment.”

——PitchBook Analyst Report

The market is evolving, and small managers are beginning to use individual deal terms more effectively. This is driven by financing resistance and the overall trend of capital concentration. SPVs have become a vital lifeline for managers supporting portfolio companies in subsequent rounds.

However, this evolution is not yet complete; there is much work to be done before LPs can embrace SPVs confidently and enjoy performance benefits. This is partly an infrastructure issue, but primarily an educational one. GPs and LPs need to understand the current standards and how to improve them.

Thus, we conducted a survey of 56 GPs earlier this year.

Access the SPV survey report: https://spvsurvey.joinodin.com/

Of the 56 GPs, 51 invest in Pre-Seed or Seed stages, 80% manage funds under $100 million, and 61% have five or more years of venture capital experience.

Figure: SPV adoption rate distributed by fund size, with 39 out of 56 surveyed GPs already using SPVs, the highest usage rate among funds of $50 million to $100 million. Source: Odin SPV Survey 2026

The adoption rate is already high, with 39 out of 56 GPs using SPVs, 16 using them regularly, and 23 using them occasionally. Among the remaining 17, 8 plan to start using SPVs in the future, bringing the current and potential user rate to 84%. The usage is highest among more experienced GPs and those managing $50 million to $100 million funds; these operators have networks that can provide capital, but reserves are insufficient to cover follow-on investments.

The primary use case for SPVs is follow-on capital, with 39 of the 47 respondents indicating they use (or intend to use) SPVs reporting this.

“Our seed fund invests at the earliest stages. We adopt a light reserve model and instead rely on SPVs for growth round financing. This makes a $20 million fund feel much larger for our companies and enables us to deploy more capital on winners without running out of money.”

——Amy Brandenburg, Denver Ventures

The economic terms are generally LP-friendly. Management fees of 0-0.5% are clearly the norm, with 45% of respondents mentioning this. The most common carry is 16-20%, mentioned by 46% of respondents, although a significant proportion, 26%, charge only 1-10%. Two-thirds of managers pass on the setup and management costs directly to LPs. However, concerning GPs’ own lead commitments, 44% put in only 0-0.5%, with only 27% committing 2% or more.

Figure: SPV terms distribution, with management fees of 0-0.5% being the norm (45%), and the most common carry of 16-20% (46%). Source: Odin SPV Survey 2026

Where there are divergences in the market regarding terms, it is clear that there are opportunities to establish better standards, improve outcomes, and eliminate frictions in the process. The goal should be to reduce costs for GPs, ensuring they truly bear risks, allowing them to focus on result quality rather than increasing fee income, and rewarding LP loyalty with preferential subscription rights.

“Overall, we believe in the principle of dancing with those who brought you. Therefore, while SPVs help attract new LPs, existing LPs always get priority for opportunities.”

——Dan Kimerling, Deciens

In these scenarios (GP managing follow-on capital for fund investments), a good SPV usage template might look as follows:

Figure: Aligned SPV terms template—GP commitment ≥2%, management fee of 0, carry of 10-20%, setup costs borne by LP at cost. Source: Odin

As always, there will be exceptions.

If SPVs are unrelated to the fund, then GP commitments might be better understood as a percentage of the lead investor's net worth rather than a fixed minimum amount.

Most importantly, SPVs must not be used to obscure transaction economic terms or insulate fund performance from excessive risk. They must be constructed and provided in a transparent and honest manner, with clear objectives and aligned incentives.

“SPVs are just a tool; it’s meaningless to like or dislike them. Strong feelings should relate to how they are constructed, whether there is bi-directional transparency, and how they are managed.”

——Helen Min, Articulate

Incentives and outcomes

The last factor is simple advice for LPs.

If small funds perform better, then standard fee incentives pushing managers towards expansion are clearly insane. If the key to sustained outperformance is to maintain fund size (and thus consistent strategy, organizational scale, and target investments), then high-performing small managers should have room to increase their fee percentage rather than expand their fee base.

Therefore, they are expected to seek to manage additional capital through SPVs to fulfill commitments to founders. This arrangement is also economically beneficial for LPs, improving consistency and reducing fee drag.

In return, LPs must enhance their readiness to participate in these transactions, understand the related terms, the costs of breach of commitment, and the portfolio approaches needed to capture performance benefits. Furthermore, they must be willing to provide attractive compensation for successful co-investments through carry.

As all these elements converge in the coming years, the industry will become stronger. The shift towards higher levels of co-investing represents an evolution long overdue, escaping the absurdity of overly leveraged ten-year tools and clumsy fee incentives.