VCs are looking to invest in hot AI companies, willing to pay exorbitant stock prices for coveted spots at their desks. However, most are unable to enter into such agreements at all. However, small, unknown investors, including family offices and high-net-worth individuals, have found their way to take shares of the hottest private startups such as Anthropic, Groq, OpenAI, Perplexity and Elon Musk’s X.ai (creators of Grok).
They are using special purpose vehicles, or SPVs, where multiple parties pool their money to share a division of a single company. SPVs are generally formed by investors who have direct access to the shares of these startups and then turn around and sell a portion of their allocation to outside backers, often charging significant fees while keeping a portion of the profit. (known as transportation).
While SPVs are not new – smaller investors have relied on them for years – there is a growing trend of SPVs successfully acquiring stakes from the biggest names in AI.
These investors are finding that the most popular AI companies, other than OpenAI, are not that difficult for them to buy at their smaller investment levels. That’s because early backers in sought-after AI startups are eager to exercise their pro-rata rights, which allow them to buy more shares each time a company raises, while retaining a percentage of ownership. theirs. This is the perfect scenario for an SPV. Instead of giving up shares because the early investor can’t afford them, they will create the SPV, finance it by raising money from others and, in most cases, pay additional fees .
In many cases, VCs will provide access to the SPV to their existing limited partner investors, but they may also use intermediaries to provide access to a much larger universe of potential investors. In fact, the same AI startup can have multiple SPVs on their board, representing many small investors. But the terms that each small investor will pay depends on the SPV. It’s a bit like a wild west, buyer-beware situation.
Ken Sawyer, co-founder of Saints Capital, a secondary market VC firm, said he regularly sees SPVs for the same company traded on different terms. “Fees and carry are all over the map,” he said, adding that SPV sponsors can pay up to 2% of the total money invested and keep 20% of the profits.
Additionally, some SPVs are formed on top of another SPV. For example, when Menlo Ventures was raising a $750 million SPV to invest in Anthropic earlier this year, several funds that invested in it resold a portion of their SPV allocation to other investors, charging additional fees for Their second tier SPV, Sawyer said. .
Investors who want Anthropic, in particular, have many options. Competitor OpenAI’s shares were auctioned as part of FTX’s bankruptcy. The crypto exchange fund invested in Anthropic before FTX exploded in late 2022.
“The sale of FTX flooded the market with a huge amount of shares,” said Glen Anderson, CEO at Rainmaker Securities, a secondary market for late-stage companies. “Many brokers like us set up SPVs to buy Anthropic stock.” The FTX estate sold about $900 million in Anthropic stock, according to court documents reviewed by CNBC.
Sometimes SPVs are created in conjunction with lead rounds of companies still in fundraising mode. This means that small investors can enter a startup, or a coveted private company, at the same time as major investors.
For example, the stake in Elon Musk’s xAI was numerous, according to Anderson. xAI raised part of its capital in its latest round of $6 billion through SPVs that in some situations had an upfront fee of 5%, in addition to management fees and carried interests (profit sharing fee), Business reported Insider.
xAI’s round was open for weeks, allowing various investors to form SPVs and sell them to smaller players. The company was initially raising $3 billion at a preliminary $15 billion valuation, as TechCrunch previously reported. But once xAI realized that there is so much demand, it grew to $6 billion at a preliminary valuation of $18 billion.
Sawyer said he now regularly sees primary round SPVs stay open for some time, which allows companies to gauge demand for their shares from a large pool of backers.
While SPVs can be a convenient mechanism for buying shares of hot companies that are not available to investors through any other means, some investors warn that it comes with high risk. Unlike venture funds, backers of SPVs do not receive direct information about companies.
“It boggles my mind that just a few years after the excesses of 2020 and 2021, when people were basically blindly investing in SPVs, with fees on fees on fees, in vehicles that were completely in the dark,” said Jack Selby, managing director. at Thiel Capital and founder at AZ-VC Fund, a startup-backing firm based in Arizona. “People are doing it again with everything that is a shiny toy: AI.”
