VCs are clamoring for investments in “hot AI” companies, willing to pay exorbitant stock prices for coveted spots on their cap tables. Yet most are completely unable to close such deals. Yet small, unknown investors, including family offices and high-net-worth individuals, have found their own way to grab shares of the hottest private startups like Anthropic, Groq, OpenAI, Perplexity and Elon Musk's X.ai (the makers of Grok).
They use Special Purpose Vehicles (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 third-party lenders, often charging significant fees while keeping a portion of the profits ( also called 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 of the biggest names in AI.
These investors are discovering that it is not that difficult for them to buy the most popular AI companies, other than OpenAI, with their smaller investment levels. That's because early backers of sought-after AI startups are eager to exercise their pro-rata rights, which allow them to buy more shares every time a company raises more shares, retaining their percentage ownership. That's the perfect scenario for an SPV. Rather than give up the shares because the early investor can't afford them, they will set up the SPV, fund it by raising money from others and, in most cases, charge additional fees.
In many cases, the VCs will provide access to the SPV to their existing limited partner investors, but they can also use brokers to provide access to a much larger universe of potential investors. In fact, the same AI startup can have multiple SPVs on their cap table, representing many small investors. But the terms that each small investor will pay depend on the SPV. It's a bit of a Wild West situation, please note: buyers should beware.
Ken Sawyer, co-founder of Saints Capital, a secondary market VC firm, said he regularly sees SPVs for the same company on the market with different terms. “Fees and carries are all over the map,” he said, adding that SPV sponsors can charge as much as 2% of the total money invested and keep 20% of the profits.
In addition, some SPVs are formed on top of another SPV. For example, when Menlo Ventures created a $750 million SPV to invest in Anthropic Earlier this year, some funds that invested in it sold part of their SPV allocation to other investors, charging additional fees for their second-tier SPV, Sawyer said.
Investors who especially want Anthropic have many options. Shares of the OpenAI competitor were auctioned off as part of FTX's bankruptcy. The crypto exchange's fund invested in Anthropic before FTX blew up at the end of 2022.
“The FTX sale flooded the market with a huge amount of stock,” said Glen Anderson, CEO of Rainmaker Securities, a secondary market for late-stage companies. “Many brokers like us have created SPVs to buy Anthropic stock.” The FTX Estate sold for almost $900 million 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 the small investors can get into a startup or a coveted private company at the same time that the big investors do.
For example, according to Anderson, there were enough shares in Elon Musk's xAI. xAI raised part of its capital in the latest $6 billion round through SPVs that in some situations had a 5% upfront fee, in addition to management fees and carried interest (profit split charge), Business insider reported.
xAI's round was open for weeks, allowing several investors to form SPVs and sell them to smaller players. The company initially raised $3 billion at a pre-money valuation of $15 billion, as JS previously reported. But once xAI realized there was so much demand, it soared to $6 billion at a pre-money valuation of $18 billion.
Sawyer said he now regularly sees primary round SPVs remaining open for some time, allowing companies to gauge demand for their shares from a large group of lenders.
While SPVs can be a suitable mechanism for purchasing shares of popular companies that are not otherwise available to investors, some investors warn that this carries a high degree of risk. Unlike venture funds, the backers of SPVs do not receive direct information about the companies.
“It baffles me that just a few years after the excesses of 2020 and 2021, when people essentially blindly invested in SPVs, with fees upon fees upon fees, in vehicles that were completely opaque,” said Jack Selby, managing director at Thiel Capital and founder of AZ-VC Fund, a company focused on supporting startups in Arizona. “People do that over and over again with everything that's a shiny toy: AI.”
