Venture capitalists are drooling over hot AI startups, prepared to shell out enormous share prices to get coveted positions on their capital tables. The majority, however, are unable to enter into any such agreements. However, obscure investors—such as family offices and wealthy individuals—have managed to obtain shares of the most popular private companies, such as Anthropic, Groq, OpenAI, Perplexity, and Elon Musk’s X.ai (the company that created Grok).
They are utilizing special purpose entities, or SPVs, in which a number of investors pool their funds to divide ownership stakes in a single business. The majority of the time, investors who have direct access to these firms’ shares join SPVs. They then sell a portion of their holdings to outside investors, frequently at a premium while keeping a portion of the profit (referred to as carry).
Even though SPVs are nothing new—smaller investors have been using them for years—there is a developing pattern of SPVs being able to obtain shares from the biggest names in AI.
At their smaller investment levels, these investors are finding that it is not too difficult to purchase the most well-known AI companies—OpenAI excepted. This is due to the fact that early investors in in-demand artificial intelligence businesses are keen to utilize their pro-rata rights, which enable them to purchase additional shares at each round of funding while retaining their ownership stake. An SPV would be ideal in that situation. When an early investor cannot afford to give up their shares, they will instead construct a SPV, raise funds from others to fund it, and typically levy additional fees.
Often, the VCs will provide their current limited partner investors with access to the SPV, but they may also use brokers to provide access to a far wider pool of possible investors. Indeed, a single AI business may have several SPVs, or small investor representation vehicles, on their capitalization table. However, each small investor’s terms will be determined by the SPV. Buyer careful, this is a bit like the wild west.
Frequently, SPVs for the same company are promoted with various terms, according to Ken Sawyer, co-founder of Saints Capital, a secondaries market venture capital firm. He stated that “fees and carry are all over the map” and that SPV sponsors are allowed to take up to 2% of the entire investment amount in addition to keeping 20% of the earnings.
In addition, certain SPVs are created on top of one another. Menlo Ventures, for example, raised a $750 million SPV earlier this year to invest in Anthropic. However, some of the funds who invested in the SPV later sold a portion of their allocation to other investors, collecting fees on their second-layer SPV, according to Sawyer.
There are many of options available to investors who specifically desire Anthropic. As part of FTX’s bankruptcy, shares in the rival to OpenAI were put up for auction. Prior to FTX’s collapse in late 2022, the cryptocurrency exchange’s fund was invested in Anthropic.
The market was oversupplied with shares as a result of FTX’s sale, according to Glen Anderson, CEO of Rainmaker Securities, a secondary market for late-stage businesses. Like us, many brokers set up SPVs to purchase Anthropic shares. Based on court documents that, the FTX estate sold Anthropic shares for around $900 million.
Occasionally, corporations in fundraising mode create SPVs in connection with their primary rounds. Thus, small investors have the opportunity to invest in a startup or a highly sought-after private company concurrently with major investors.
Anderson stated that there were many shares available for Elon Musk’s xAI. In its most recent $6 billion fundraising round, xAI used SPVs to raise a portion of its funding. These SPVs occasionally charged 5% upfront fees on top of management fees and carried interest, or profit split charges.
Weeks passed during xAI’s open round, during which time different investors may create SPVs and sell them to smaller firms. As previously reported, the company was initially raising $3 billion on a pre-money valuation of $15 billion. However, xAI grew to $6 billion on a pre-money valuation of $18 billion once it recognized how much demand there is.
According to Sawyer, main round SPVs are now frequently left open for a while, allowing businesses to assess the level of interest in their shares from a wide range of backers.
Some investors caution that using SPVs to purchase shares of hot companies that aren’t available to investors through normal channels carries a significant risk. Funders of SPVs do not obtain direct access to the companies, in contrast to venture funds.
“It is mind-boggling that, only a few years after the excesses of 2020 and 2021, people were essentially investing blindly into SPVs, with fees on fees on fees, into vehicles that were totally opaque,” stated Jack Selby, the founder of AZ-VC Fund, a company that supports startups in Arizona and managing director at Thiel Capital. “Every shiny toy, including AI, is making people do that over and over again.”
