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

VCs are clamoring to invest in hot AI companies, willing to pay exorbitant share prices for coveted spots on their cap tables. Even so, most aren’t able to get into such deals at all. Yet, small, unknown investors, including family offices and high-net-worth individuals, have found their own way to get shares of the hottest private startups like Anthropic, Groq, OpenAI, Perplexity, and Elon Musk’s X.ai (the makers of Grok).

They are using special purpose vehicles, or SPVs, where multiple parties pool their money to share an allocation of a single company. SPVs are generally formed by investors who have direct access to the shares of these startups and then turn around and sell a part of their allocation to external backers, often charging significant fees while retaining some profit share (known as carry).

While SPVs aren’t new – smaller investors have relied on them for years – there’s a growing trend of SPVs successfully getting shares from the biggest names in AI.

These investors are finding that the most popular AI companies, except OpenAI, are not all that hard for them to buy at their smaller levels of investing. That’s because early backers in sought-after AI startups are eager to exercise their pro-rata rights, which allow them to buy more shares each time a company raises, maintaining their percentage ownership. That’s the perfect scenario for an SPV. Rather than giving up the shares because the early investor can’t afford them, they’ll create the SPV, fund it by raising money from others, and, in most cases, charge additional fees.

In many cases, the VCs will offer access to the SPV to their existing limited partner investors, but they also may use brokers to offer access to a much larger universe of potential investors. In fact, the same AI startup may have multiple SPVs on their cap table, representing lots of small investors. But the terms each small investor will pay depend on the SPV. It’s a bit of a wild west, buyer-beware situation.

Ken Sawyer, co-founder of Saints Capital, a secondaries market VC firm, said he regularly sees SPVs for the same company marketed with different terms. “Fees and carry are all over the map,” he said, adding that SPV sponsors can charge as high as 2% of the total money invested and keep 20% of the profits.

What’s more, some SPVs are formed on top of another SPV. For instance, when Menlo Ventures was raising a $750 million SPV to invest in Anthropic earlier this year, some funds who invested in it, resold a slice of their SPV allocation to other investors, charging additional fees on their second-layer SPV, Sawyer said.

Investors who want Anthropic, in particular, have a lot of options. Shares in the OpenAI competitor were auctioned off as part of FTX’s bankruptcy. The crypto exchange’s fund invested in Anthropic before FTX blew up in late 2022.

“FTX’s sale flooded the market with a huge amount of shares,” said Glen Anderson, CEO at Rainmaker Securities, a secondaries market for late-stage companies. “A lot of brokers like ourselves created SPVs to buy Anthropic shares.”  The FTX estate sold nearly $900 million worth of Anthropic shares, according to court documents reviewed by CNBC.

Sometimes SPVs are created in association with primary rounds of companies still in fundraising mode. That means that the small investors can get in on a startup, or a coveted private company, at the same time the major investors do. 

For example, shares in Elon Musk’s xAI were plentiful, according to Anderson. xAI raised a part of its capital in its latest $6 billion round through SPVs that in some situations had a 5% upfront fees, in addition to management fees and carried interest (profit split charge), Business Insider reported.

xAI’s round was open for weeks, allowing various investors to form SPVs and sell them to smaller players. The company was initially raising $3 billion on a pre-money valuation of $15 billion, as TechCrunch previously reported. But once xAI realized that there’s so much demand, it increased to $6 billion on a pre-money valuation of $18 billion.

Sawyer said that he now regularly sees primary round SPVs stay open for some time, which allows companies to gauge demand for their shares from a large pool of backers.

While SPVs may be a suitable mechanism for buying shares of hot companies not available to investors by any other means, some investors warn that it comes with high risk. Unlike venture funds, backers of SPVs don’t receive direct information on the companies.

“It boggles my mind that just a few years after the excesses of the 2020 and 2021 period, when people were essentially investing blindly into SPVs, with fees on fees on fees, into vehicles that were totally opaque,” said Jack Selby, managing director at Thiel Capital and founder at AZ-VC Fund, a firm focused on backing startups based in Arizona. “People are doing that all over again with everything that is a shiny toy: AI.”