Venture capitalists are selling shares of hot AI companies like Anthropic and xAI to small investors in a wild SPV market.

Venture capitalists are clamoring to invest in hot AI companies, willing to pay exorbitant prices to secure coveted spots on their cap tables. Even so, most are not able to enter into such agreements at all. Yet small, unknown investors, including family offices and high-net-worth individuals, have found their own way to get shares in the hottest private startups like Anthropic, Groq, OpenAI, Perplexity, and Grok d’s X.ai creators. ‘Elon Musk.

They use special purpose vehicles in which multiple parties pool their money to share an allocation from a single company. SPVs are typically formed by investors who have direct access to the shares of these startups, then turn around and sell part of their allocation to external backers, often charging significant fees while retaining a certain share of the profits ( called carry).

Although SVPvs are not new (small investors have relied on them for years), there is a growing trend of SPVs successfully obtaining shares of the biggest names in AI.

What these investors are discovering is that the most popular AI companies, with the exception of OpenAI, are not that difficult to buy, given their more modest investment levels. Indeed, early backers of sought-after AI startups are eager to exercise their rights on a pro-rata basis, allowing them to buy more shares each time a company goes up, while retaining their percentage of property. This is the perfect scenario for an SPV. Rather than abandoning the shares because the first investor can’t afford it, they will create the SPV, finance it by raising money from others, and in most cases charge additional fees.

In many cases, VC firms will offer access to the SPV to their existing limited partner investors, but they may also use brokers to offer access to a much broader universe of potential investors. In fact, the same AI startup may have multiple SPVs on its cap table, representing many small investors. But the terms that each small investor will pay depend on the SPV. It’s a bit of a Wild West situation, where buyer beware.

Ken Sawyer, co-founder of Saints Capital, a secondary market venture capital firm, said he regularly sees SPVs for the same company marketed with different terms. “Fees and carry are everywhere,” he said, adding that SPV sponsors can charge up to 2% of the total money invested and keep 20% of the profits.

Additionally, some SPVs are formed on top of another SPV. For example, when Menlo Ventures raised a $750 million SPV to invest in Anthropic earlier this year, some funds that invested there resold a portion of their SPV allocation to other investors, charging additional fees on their Second-layer SPV, Sawyer said. .

Investors interested in Anthropic, in particular, have plenty of options. Shares of competitor OpenAI were auctioned off as part of FTX’s bankruptcy. The crypto exchange’s fund invested in Anthropic before FTX exploded in late 2022.

“The FTX selloff flooded the market with a huge amount of stock,” said Glen Anderson, CEO of Rainmaker Securities, a secondary market for early-stage companies. “Many brokers like us have created SPVs to buy Anthropic shares.” The FTX estate sold nearly $900 million worth of Anthropic stock, according to court documents reviewed by CNBC.

Another interesting development is that SPVs are sometimes created in association with funding rounds from companies still in fundraising mode. This means that small investors can jump into a coveted startup or private company at the same time as larger investors.

For example, shares in Elon Musk’s xAI were plentiful, according to Glen Anderson, co-founder and managing director of Rainmaker Securities. xAI raised some of its capital in its latest $6 billion funding round via SPVs which, in some situations, had an upfront fee of 5%, in addition to management fees and carried interest (recurring fees). profit sharing), Business Insider reported.

The xAI funding round remained open for weeks, allowing various investors to form SPVs and sell them to smaller players. The company was initially raising $3 billion at a pre-money valuation of $15 billion, as TechCrunch previously reported. But once xAI realized there was such demand, it grew to $6 billion from a pre-money valuation of $18 billion.

Sawyer said he now regularly sees primary round SPVs remaining open for a period of time, allowing companies to gauge demand for their shares from a broad pool of backers.

Although SPVs can be a suitable mechanism for buying shares of hot companies that are not available to investors through other means, some investors caution that this carries high risk. Unlike venture capital funds, backers of SPVs do not receive direct information about the companies.

“It puzzles me that just a few years after the excesses of 2020 and 2021, when people were essentially investing blindly in SPVs, with fees on fees on fees, in completely opaque vehicles,” said Jack Selby, director general. at Thiel Capital and founder of AZ-VC Fund, a company focused on supporting Arizona-based startups. “People are doing it again with whatever is a shiny toy: AI.”