The Rise of Special Purpose Vehicles (SPVs) in the AI Landscape
Venture capitalists are clamoring to invest in hot artificial intelligence (AI) companies, with many willing to pay exorbitant share prices for coveted spots on their cap tables. However, despite the intense interest from VCs, most investors aren’t able to get into these deals at all. Meanwhile, small, unknown investors – including family offices and high-net-worth individuals – have found a way to get shares of the hottest private startups like Anthropic, Groq, OpenAI, Perplexity, and Elon Musk’s X.ai (the maker of Grok).
The Role of Special Purpose Vehicles (SPVs)
These small investors are using special purpose vehicles (SPVs), where multiple parties pool their money to share an allocation of a single company. SPVs have been around for years, but they’re becoming increasingly popular in the AI space. They’re 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.
How SPVs Work
Here’s how it works: when an investor gets an allocation in an AI startup through an SPV, they can charge additional fees on top of the initial investment. These fees can be quite high, with some reports suggesting that SPV sponsors can charge up to 2% of the total money invested and keep 20% of the profits. In other cases, investors may use multiple layers of SPVs to increase their returns.
The Risks of Investing in SPVs
While SPVs offer a way for small investors to get into hot AI companies, they also come with significant risks. Unlike venture funds, backers of SPVs don’t receive direct information on the companies. This lack of transparency can make it difficult for investors to make informed decisions about their investments.
Some experts warn that investing in SPVs is similar to the excesses of the 2020 and 2021 period, when people were essentially investing blindly into SPVs with fees on top of fees on top of fees. Jack Selby, managing director at Thiel Capital and founder at AZ-VC Fund, said it "boggles my mind" that investors are doing this all over again with AI companies.
The Benefits of Investing in SPVs
Despite the risks, investing in SPVs can offer several benefits for small investors. For one, they provide access to hot AI companies that may not be available to VCs or other institutional investors. They also allow investors to diversify their portfolios by investing in a wide range of companies.
The Future of SPVs in the AI Landscape
As the AI landscape continues to evolve, it’s likely that SPVs will play an increasingly important role. With more and more money flowing into the space, small investors may find themselves at an advantage when it comes to getting access to hot AI companies. However, as with any investment opportunity, it’s essential for investors to carefully consider the risks and rewards before putting their money in.
Conclusion
The rise of SPVs in the AI landscape is a testament to the growing interest in artificial intelligence among small investors. While these vehicles offer a way for individuals to get into hot AI companies, they also come with significant risks. As the AI market continues to evolve, it’s essential for investors to carefully consider their options and do their due diligence before investing.
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- How to Invest in AI Startups: A guide for small investors looking to get into the AI space, including tips on how to evaluate investment opportunities and manage risk.
Recommended Reading
- "The AI Revolution: How Artificial Intelligence Will Change Everything" by Kai-Fu Lee
- "Life 3.0: Being Human in the Age of Artificial Intelligence" by Max Tegmark
- "Deep Learning" by Ian Goodfellow, Yoshua Bengio, and Aaron Courville