Venture capitalists, eager to get their hands on some of the hottest companies, including AI companies, are increasingly buying shares of late-stage startups on the secondary market, but also through financial instruments called special purpose vehicles (SPVs). Some of these SPVs have become very popular and are commanding premium prices.
That's good for the VCs selling the SPVs, but a riskier proposition for the buyers — and all of this is another sign that AI startups are brewing a bubble.
In the secondary market, existing shareholders, such as employees of a startup or VCs who bought shares directly from the startup in a funding round, can sell some of their shares to others. But private companies like startups have a say in who can own their stock, so many VCs can't get in. Those that can get in set up SPVs to sell their stock to investors of their choice, such as other VCs or high-net-worth individuals who are accredited investors.
But when you buy a VC's SPV, you're not buying actual shares in a startup – you're buying shares in an SPV vehicle that controls a certain number of shares in the startup.
“Purchasing an SPV unit means [VCs] “Instead of owning shares in the actual company, they technically become investors in another investor’s fund,” Javier Avalos, co-founder and CEO of secondary trade tracking platform Caplight, told TechCrunch.
Some are even selling for up to 30% more.
Avalos said that while SPVs themselves are not new, VCs selling shares in SPVs at a premium is a notable new trend: He said he has seen SPVs holding shares in Anthropic and xAI, for example, selling their shares at 30% higher than the price they were sold for in previous funding rounds and tender offers.
These buying frenzies are a way to make quick profits for investors lucky enough to own the actual shares. “If you're an institutional investor and you have access to these companies, you can just price the SPV up and make an instant 30% profit,” he says.
Even if expensive, investing in an SPV gives smaller VC firms the opportunity to profit in the future if these companies are successful. Smaller VC firms typically do not have the financial muscle to take advantage of the opportunity to buy shares directly from companies at fundraising events.
Risks of high-value SPVs
But owning an SPV and owning actual shares is a distinction that makes all the difference.
For example, SPV owners don't have as much visibility into the company's financial situation as actual shareholders. Because they're not direct investors, they don't have access to the communications the startup has with its investors. And because they don't have direct voting power over the shares, they don't have the same influence over the company. Plus, the startup hasn't agreed to negotiate terms with them separately. VCs, who are direct investors, negotiate terms that range from rights to buy additional shares to veto rights over IPOs and acquisitions. SPV owners don't negotiate such terms directly with the startup.
A startup needs to grow its value significantly for the investors who paid a 30% premium to make it profitable, and if voting investors agree to an acquisition that benefits them but not the investors who paid more for their stake in the SPV, the SPV investors stand to lose out.
Plus, the main goal of buying stocks on the secondary market is to buy them below their current valuation, Brian Boughton, a venture capitalist and partner at secondary market specialist firm StepStone, told TechCrunch in June.
Of course, investors who buy high-priced shares in SPVs know this, but they are betting that these companies will perform well enough to be worth it.
Maybe, but that's a pretty big risk given AI's high valuations while its use cases and revenues are still in their infancy.