VCs are demanding to invest in popular AI companies, willing to pay exorbitant share prices for coveted places in the capitalization tables. Despite this, most are unable to enter into such transactions at all. However, small, unknown investors, including family offices and wealthy individuals, have found their very own way to get their hands on shares of the hottest private startups akin to Anthropic, Groq, OpenAI, Perplexity and Elon Musk’s X.ai (creator of Grok).
They use special purpose vehicles, which are special purpose vehicles in which multiple parties pool their money to share the allocation of one company. Special purpose vehicles are typically created by investors who have direct access to the shares of these startups, then turn around and sell part of their allocation to third-party sponsors, often charging significant fees while retaining a portion of the profits (called carry).
While special purpose vehicles are not recent – smaller investors have been relying on them for years – there is a growing trend in which special purpose vehicles are successfully gaining stake from some of the biggest names in artificial intelligence.
These investors are finding that the most popular AI companies, with the exception of OpenAI, are not that difficult for them to buy with a lower investment. That’s because early backers of sought-after AI startups are eager to exercise their pro rata rights, which permit them to buy more shares each time the company raises while retaining their percentage of ownership. This is an ideal scenario for an SPV company. Instead of giving up the shares because the original investor cannot afford them, they’ll create a special purpose vehicle, finance it by raising money from others and, in most cases, collect additional fees.
In many cases, VCs will offer access to the special purpose vehicle to their existing limited partnership investors, but they may additionally use brokers to provide access to a much wider range of potential investors. In fact, the same AI startup may have multiple special purpose acquisition companies on its cap table, representing multiple small investors. However, the terms that each small investor can pay depend on the special purpose vehicle. It’s a bit like the wild west, beware of buyers.
Ken Sawyer, co-founder of Saints Capital, a secondary-market VC firm, said he often sees special purpose acquisition vehicles of the same company offered on different terms. “Fees and carryovers are all over the map,” he said, adding that SPV sponsors can take as much as 2% of the total amount invested and keep 20% of the profits.
Moreover, some special purpose vehicles are established on the basis of other special purpose vehicles. For example, when Menlo Ventures raised a $750 million special purpose vehicle invests in Anthropic Sawyer said that earlier this 12 months, some funds that had invested in it resold some of their SPV allocations to other investors, charging additional fees to their second-tier SPVs.
Investors who want Anthropic in particular have many options. Shares of competitor OpenAI were auctioned off as part of FTX’s bankruptcy. The cryptocurrency exchange fund invested in Anthropic before FTX exploded in late 2022.
“The FTX sale flooded the market with a huge number of shares,” said Glen Anderson, CEO of Rainmaker Securities, a secondary market for late-stage companies. “Many brokers like us have set up special purpose vehicles to buy Anthropic shares.” FTX housing estate sold for almost $900 million Anthropic shares, according to court documents reviewed by CNBC.
Sometimes special purpose vehicles are created in conjunction with major company rounds that are still in fundraising mode. This signifies that small investors can launch a startup or desirable private company at the same time as large investors.
For example, Elon Musk’s xAI holdings were quite a few, according to Anderson. xAI raised part of its capital in the latest $6 billion round through special purpose vehicles, which in some situations charged 5% upfront fees, in addition to management fees and interest (a profit-sharing fee), Business expert reported.
The xAI round was open for weeks, allowing various investors to create special purpose vehicles and sell them to smaller players. As TechCrunch previously reported, the company initially raised $3 billion at a preliminary valuation of $15 billion. However, when xAI realized there was so much demand, it grew to $6 billion at a pre-coin valuation of $18 billion.
Sawyer said he now often sees primary round special purpose vehicles remaining open for some time, which allows companies to gauge demand for their shares from a large pool of sponsors.
While special purpose acquisition vehicles could also be a suitable mechanism for buying shares of hot companies that are not available to investors through any other means, some investors warn that it carries high risks. Unlike enterprise capital funds, sponsors of special purpose vehicles do not receive direct information about the companies.
“What amazes me is that just a few years after the abuses of 2020 and 2021, where people were basically investing blindly in special purpose vehicles, charging fees, in completely opaque companies,” said Jack Selby, managing director at Thiel Capital and founder AZ-VC Fund, a company focused on supporting startups based in Arizona. “People are doing it all over again with everything that is a shiny toy: artificial intelligence.”