Venture capitalists are eager to invest in hot AI companies and are willing to pay exorbitant share prices to get a coveted position on their own cap tables. Yet most VCs can’t participate in such deals at all. But smaller, lesser-known investors, including family offices and high-net-worth individuals, are finding their own ways to get stakes in hot private startups like Anthropic, Groq, OpenAI, Perplexity, and Elon Musk’s X.ai, which develops Grok.
They use special purpose vehicles, where multiple parties pool their funds to share allocations in one company. SPVs are typically formed by investors who have direct access to equity in these startups, and then sell part of their allocation to outside backers, often charging a significant fee while keeping a portion of the profits (called carry).
SVPvs are not new and smaller investors have relied on them for years, but there has been a growing trend of SPVs successfully acquiring stakes from some of the biggest players in the AI industry.
What these investors have found is that the most popular AI companies, with the exception of OpenAI, are not that hard to acquire for small investment amounts. This is because early backers of popular AI startups actively exercise their pro rata rights, which allow them to maintain their ownership percentage by purchasing additional shares every time the company raises money. This is a perfect scenario for SPVs: instead of giving up their shares because the early investors can't buy them, they set up an SPV, raise capital from others, and in most cases charge an additional fee.
VCs often provide access to SPVs to their existing limited partner investors, but may also use brokers to provide access to larger potential investors. In fact, the same AI startup may have multiple SPVs on its cap table representing many smaller investors, but the terms on which each smaller investor pays will vary from SPV to SPV. This is a bit of a lawless landscape, and buyer beware.
Ken Sawyer, co-founder of secondary market venture capital firm Saints Capital, said he frequently sees SPVs for the same company being offered on different terms. “Fees and carries vary,” he said, adding that SPV sponsors can charge fees as high as 2% of the total investment and keep 20% of profits.
Moreover, 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, some of the funds that invested there resold some of their SPV allocations to other investors and charged an additional fee for the second-tier SPV, Sawyer says.
Investors who want Anthropic in particular have plenty of options: Shares in OpenAI competitors were auctioned off as part of FTX's bankruptcy. The crypto exchange's funds invested in Anthropic before FTX's collapse in late 2022.
“The FTX sale flooded the market with a ton of stock,” said Glenn Anderson, CEO of Rainmaker Securities, a late-stage corporate secondary marketplace. “A lot of brokers like us formed SPVs to buy Anthropic shares.” FTX's estate sold nearly $900 million in Anthropic shares, according to court documents seen by CNBC.
Another interesting development is that SPVs are sometimes formed in conjunction with a company's primary round of fundraising, meaning that smaller investors can invest in start-ups or popular private companies at the same time as larger investors.
For example, Elon Musk has plenty of stock in xAI, according to Glenn Anderson, co-founder and managing director at Rainmaker Securities. In its latest $6 billion funding round, xAI raised some of its capital through an SPV that in some cases charged a 5% upfront fee on top of management fees and carried interest, Business Insider reported.
xAI's funding round has been open for several weeks, allowing various investors to form SPVs and then sell them to smaller companies. As TechCrunch previously reported, the company initially planned to raise $3 billion at a pre-money valuation of $15 billion. However, xAI realized that demand was so high that it increased its offer to $6 billion at a pre-money valuation of $18 billion.
Sawyer said he now regularly sees primary-round SPVs left open for some time, allowing companies to gauge demand for their shares from larger backers.
SPVs may be a good mechanism for buying shares in popular companies that are otherwise unavailable to investors, but some investors warn that they come with high risks.Unlike venture funds, SPV backers do not receive direct information about companies.
“In the excesses of 2020 and 2021, people were basically blindly investing in SPVs, piling fees on fees, investing in completely opaque investment vehicles, and now just a few years later, people are doing the same thing again with all this shiny AI toys,” said Jack Selby, managing director at Thiel Capital and founder of the Arizona-based AZ-VC fund, which focuses on backing startups.