VCs are clamoring to invest in hot AI companies, willing to pay exorbitant share prices for coveted spots on their cap tables. Yet, most do not get involved in such deals at all. Still, smaller, unknown investors, including family offices and high-net-worth individuals, have taken stakes in some of the most popular private startups, such as Anthropic, Grok, OpenAI, Perplexity, and Elon Musk's Grok, maker of X.ai. Have found your way to do it.
They are using special purpose vehicles where multiple parties pool their money and allocate it to a single company. SPVs are typically formed by investors who have direct access to shares in these startups and then turn around and sell a portion of their allocation to outside backers, often a portion of the profits. (known as carry) charge significant fees while maintaining
While SVPvs are not new – small investors have been relying on them for years – there is a growing trend of SPVs successfully acquiring shares from big names in AI.
What these investors are finding is that most popular AI companies, with the exception of OpenAI, are not that difficult for them to buy at small investment levels. That's because early backers looking for AI startups are willing to exercise their pro-rata rights, allowing them to buy more shares while retaining their percentage ownership each time a company expands. Is. This is the perfect scenario for an SPV. Instead of giving up shares because the initial investor can't afford them, they will form 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 partner investors, but they may also use brokers to offer access to a much larger universe of potential investors. In fact, a single AI startup can have multiple SPVs on the cap table, representing many smaller investors. But the terms each small investor will pay depends on the SPV. It's a bit of the Wild West, buyer beware.
Ken Sawyer, co-founder of Saints Capital, a secondary market VC firm, said he regularly sees SPVs for the same company being marketed on different terms. “Fees and carry are all over the map,” he said, adding that SPV sponsors can charge more than 2% of the total amount invested and keep 20% of the profits.
Moreover, some SPVs are built on top of other SPVs. For example, when Menlo Ventures was raising a $750 million SPV to invest in Anthropic earlier this year, some of the funds that invested in it gave a chunk of their SPV allocation to other investors. resold to, charged an additional fee to their second-tier SPV, Sawyer said. .
Investors who want Anthropic, in particular, have plenty of options. Shares of competitor OpenAI were auctioned off as part of FTX's bankruptcy. A crypto exchange fund invested in Anthropic before FTX exploded in late 2022.
“The sale of FTX flooded the market with a large amount of shares,” said Glenn Anderson, CEO of Rainmaker Securities, a secondary market for late-stage companies. “Many brokers like us have formed SPVs to buy Anthropic shares.” According to court documents reviewed by CNBC, the FTX estate sold about $900 million worth of Anthropic shares.
Another interesting development is that SPVs are sometimes formed in conjunction with early rounds of companies that are still in fundraising mode. This means that smaller investors can join a startup, or a prestigious private company, at the same time as larger investors.
For example, according to Glenn Anderson, co-founder and managing director of Rainmaker Securities, Elon Musk's stake in xAI was high. xAI raised a portion of its capital in its latest $6 billion round through SPVs, which in some cases were a 5% upfront fee in addition to a management fee and carried interest (profit distribution charge), Business Insider reported.
xAI's round was open for weeks, allowing various investors to form SPVs and sell to smaller players. The company was initially raising $3 billion at a pre-money valuation of $15 billion, as TechCrunch previously reported. But once xAI realized there was a lot of demand, it jumped to $6 billion at a pre-money valuation of $18 billion.
Sawyer said he now regularly sees primary-round SPVs open for some time, allowing companies to gauge demand for their shares from a larger pool 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 too much risk. Unlike venture funds, backers of SPVs do not have direct access to companies.
Managing director Jack Selby said, “It boggles my mind that just a few years after the excesses in the 2020 and 2021 period, when people were primarily in SPVs, with fees upon fees upon fees, were investing in completely opaque vehicles.” At Thiel Capital and founder of the AZ-VC Fund, the firm focused on backing Arizona-based startups. “People are doing it again with everything that's a shiny toy: AI.”