Venture capitalists (VCs) are increasingly investing in late-stage startups on the secondary market, particularly in the field of AI companies, through special purpose vehicles (SPVs). Some of these SPVs have become highly sought after, commanding premium prices.
While this trend benefits VCs selling SPVs, it poses a greater risk for buyers and signifies a potential bubble in the AI startup industry.
The secondary market allows existing shareholders, like startup employees or VCs, to sell their shares to others. However, many VCs are excluded from direct ownership due to company restrictions, prompting the use of SPVs to enable access to these shares.
Purchasing shares in an SPV does not equate to owning direct stock in the startup; instead, investors become part of a fund holding shares in the startup.
Some sell for 30% higher prices
While SPVs are not new, the practice of VCs selling these shares at a premium is a growing trend. For example, SPVs holding shares in companies like Anthropic or xAI may be priced 30% higher than in previous fundraising rounds.
This buying frenzy allows institutional investors to quickly profit from owning shares in high-demand companies.
Investing in SPVs, even at elevated prices, offers smaller VC firms a chance to gain from potential success in the long run, as they may not have the means to purchase shares directly from startups.
Risks of high-priced SPVs
However, owning an SPV instead of direct shares entails risks and limitations, such as reduced insight into the company’s financial status, lack of voting rights, and absence of negotiated terms with the startup itself.
Investors who pay premiums for SPV shares must rely on significant growth in the startup’s value to make a profit, facing potential losses if the startup does not perform as expected.
Buying shares in SPVs at high prices contrasts the traditional secondary market approach of purchasing at discounted valuations, implying a higher level of risk for investors.
While there is optimism that these companies will deliver strong results, the inflated valuations in the AI sector signal a substantial risk for investors.
