Venture capitalists (VCs) are constantly searching for opportunities to invest in promising AI companies. They are willing to pay high prices to secure a spot on the cap tables of these companies. However, most VCs are unable to get in on these deals. Meanwhile, smaller investors such as family offices and high-net-worth individuals have found a way to invest in these hot startups through Special Purpose Vehicles (SPVs).
SPVs are formed when multiple parties pool their money together to share an allocation of a single company. These investors have direct access to the shares of these startups and sell a portion of their allocation to external backers, often charging significant fees while retaining some profit share. While SPVs have been around for some time, there is a growing trend of SPVs successfully obtaining shares from prominent AI companies.
One of the reasons why smaller investors can easily buy shares of the most popular AI companies is because early backers in these startups have the opportunity to exercise their pro-rata rights. This allows them to buy more shares each time the company raises funds, thereby maintaining their percentage ownership. This creates an ideal scenario for SPVs as they can step in and buy the shares that the early investors cannot afford. By raising money from other investors, they can fund the SPV and charge additional fees.
In many cases, VCs will offer access to the SPV to their existing limited partner investors. They can also use brokers to offer access to a larger pool of potential investors. As a result, the same AI startup may have multiple SPVs on their cap table, representing numerous small investors. However, the terms that each small investor pays depend on the specific SPV. This can create a buyer-beware situation where fees and carry can vary significantly.
It’s worth noting that some SPVs are formed on top of another SPV. For example, Menlo Ventures raised a $750 million SPV to invest in Anthropic. Some funds that invested in this SPV then resold a portion of their allocation to other investors, charging additional fees on the second-layer SPV. This adds another layer of complexity to this investment strategy.
Investors who are interested in Anthropic have various options. Shares in this company were auctioned off as part of FTX’s bankruptcy. FTX’s fund had invested in Anthropic before facing financial difficulties. The sale of these shares flooded the market, providing an opportunity for brokers and SPVs to acquire Anthropic shares.
Another interesting development is that sometimes SPVs are created in association with primary rounds of companies that are still in fundraising mode. This allows small investors to invest in a startup or private company at the same time as major investors. For example, shares in Elon Musk’s x.ai were plentiful, and some SPVs charged upfront fees in addition to management fees and carried interest. This allowed smaller players to invest in the company alongside major investors.
The increase in primary round SPVs staying open for an extended period is another noteworthy trend. This allows companies to gauge demand for their shares from a large pool of backers. It also provides more opportunities for smaller investors to get in on these deals.
While SPVs may be a suitable mechanism for buying shares of hot companies that are otherwise inaccessible to investors, some investors caution against the high risks involved. Unlike venture funds, backers of SPVs do not receive direct information on the companies they are investing in. This lack of transparency and potential for excessive fees is reminiscent of the excesses seen during the 2020 and 2021 period.
Despite these risks, the demand for SPVs in the AI space continues to grow. Investors are drawn to these opportunities to invest in promising AI companies and potentially benefit from their future success. Ultimately, it is important for investors to conduct thorough due diligence and carefully consider the terms and fees associated with each SPV before making an investment.
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