VCs clamor to invest in hot AI companies willing to pay inflated stock prices for coveted seats at their cap tables. Even so, most are not able to get into such shops at all. Still, small, unknown investors, including family offices and high-net-worth individuals, have found their own way to acquire shares of the hottest private startups, such as Anthropic, Groq, OpenAI, Perplexity, and Elon Musk’s X.ai (creators of Grok).
They use special purpose vehicles, or SPVs, where multiple parties pool their money to share the allocation of one 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 retaining a portion of the profits (known as carry).
While SPVs are not new – smaller investors have been relying on them for years – there is a growing trend of SPVs successfully acquiring shares 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 lower 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 the company raises, maintaining a percentage ownership. This is an ideal scenario for an SPV. Instead of giving up shares because the first investor can’t afford them, they create an SPV, fund it by raising money from others, and in most cases charge additional fees.
In many cases, VCs will offer access to the SPV to their existing limited liability investors, but they may also use brokers to offer access to a much larger pool of potential investors. In fact, the same AI startup can have multiple SPVs on its cap chart, representing many small investors. But the terms each small investor pays depends on the SPV. It’s a bit of a wild west, buyer-beware situation.
Ken Sawyer, co-founder of Saints Capital, a secondary venture capital market firm, said he regularly sees SPVs for the same company offered with different terms. “Fees and carry are all over the map,” he said, adding that SPV sponsors can charge up to 2% of the total money invested and keep 20% of the profits.
What’s more, some SPVs are formed on top of other SPVs. For example, when Menlo Ventures raised a $750 million SPV to invest in Anthropic earlier this year, some funds that invested in it resold part of their SPV allocation to other investors and charged additional fees for their second-tier SPVs, Sawyer said. .
Investors who particularly want Anthropic have plenty of options. Shares of competitor OpenAI were auctioned as part of the FTX 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 of Rainmaker Securities, a secondary market for late-stage companies. “Many brokers like us have formed an SPV to buy Antropia stock. The FTX estate sold nearly $900 million worth of Anthropic stock, according to court documents reviewed by CNBC.
Sometimes SPVs are created in conjunction with primary rounds of companies that are still in fundraising mode. This means that small investors can get into a startup or a coveted private company just like big investors.
For example, shares in Elon Musk’s xAI were plentiful, according to Anderson. xAI raised some of its capital in its latest $6 billion round through SPVs, which in some situations had 5% upfront fees, in addition to management fees and carried interest (a profit-sharing fee), Business Insider reported.
The xAI round was open for several weeks and allowed various investors to create SPVs and sell them to smaller players. The company initially raised $3 billion in a pre-money valuation of $15 billion, as previously reported by TechCrunch. But once xAI realized there was so much demand, it raised to $6 billion at a pre-money valuation of $18 billion.
Sawyer said he now regularly sees primary rounds of SPVs remain open for a period of time, allowing companies to gauge demand for their shares from a large number of backers.
While SPVs can be a convenient mechanism for buying shares of hot companies that are not available to investors in any other way, some investors warn that it comes with high risks. Unlike venture funds, SPV backers do not receive direct information about companies.
“It boggles my mind that just a couple of years after going through 2020 and 2021, people were basically blindly investing in SPVs, with fees for fees, in vehicles that were completely opaque,” said Jack Selby, chief executive. at Thiel Capital and a founder at AZ-VC Fund, a company focused on supporting startups based in Arizona. “People are doing it again with everything that’s a shiny toy: AI.”