The rise of special purpose vehicles (SPVs) in the secondary market is attracting the attention of venture capitalists (VCs) who are eager to invest in late-stage startups, particularly those in the AI sector. However, this trend also indicates the potential for a bubble in the AI startup space.
The secondary market provides an avenue for existing shareholders, such as startup employees or VCs, to sell their shares to others. However, due to restrictions imposed by private companies, many VCs are unable to participate. To overcome this, VCs are setting up SPVs and selling access to their shares to other VCs or accredited investors.
It’s important to note that buying into an SPV is not the same as buying the startup’s actual stock. Instead, investors are purchasing shares of the SPV vehicle, which represents a certain number of shares in the startup. This distinction has significant implications for investors.
While SPVs have been around for some time, the recent trend of VCs selling shares of SPVs at a premium is worth noting. For example, shares of SPVs holding shares in companies like Anthropic or xAI have been marked up by as much as 30% compared to their last fundraising round or tender offer.
This buying frenzy allows fortunate investors who own actual shares to make a quick profit. Institutional investors, in particular, can capitalize on this opportunity by putting a higher price on the SPV and instantly earning a 30% return.
Investing in SPVs also presents an opportunity for smaller VC firms to potentially benefit from the future success of these companies. These firms typically don’t have the financial resources to purchase shares directly from the company during a fundraising event.
However, owning an SPV instead of actual shares has its drawbacks. SPV owners have less insight into the financial health of the company and don’t have direct voting rights over the shares. They also lack the same level of influence over the company and don’t have individual deal terms negotiated with the startup.
Moreover, the high prices paid for shares in SPVs pose risks. The startup would have to experience significant growth in value for an investor who paid a premium to make a profit. If investors with voting rights agree to an acquisition that benefits them but not the SPV backers, the latter would suffer losses.
Furthermore, the whole purpose of buying shares on the secondary market is to acquire them at a discount to their current valuation. Investors who purchase high-priced shares in SPVs are aware of this but are betting on the strong performance of these companies.
However, considering the lofty valuations of AI startups despite limited use cases and revenue, investing in high-priced SPVs carries a substantial risk.
In conclusion, the increasing popularity of SPVs in the secondary market indicates a growing interest in AI startups among VCs. While this presents an opportunity for investors to profit, it also suggests the possibility of a bubble in the AI startup space. Investing in SPVs at premium prices comes with risks, and the ultimate success of these companies is uncertain.
