Venture capitalists (VCs) are increasingly turning to special purpose vehicles (SPVs) in order to buy shares of late-stage startups on the secondary market, with a particular focus on AI companies. While this may be advantageous for the VC selling an SPV, it poses a greater risk for the buyers involved. Such trends in the market are raising concerns about a potential bubble in the AI startup industry.
The secondary market provides an avenue for existing shareholders, including startup employees and VCs who have acquired shares directly from a startup during a fundraising round, to sell some of their shares to interested buyers. However, due to the restrictions imposed by private companies, many VCs find themselves unable to access these shares. As a result, VCs are resorting to setting up SPVs, enabling them to sell access to their shares to other VCs or investors of their choice, such as accredited high-net-worth individuals.
It is important to note that investing in a VC’s SPV does not equate to purchasing the actual stock of the startup itself. Rather, buyers acquire shares of the SPV vehicle, which in turn controls a specific number of shares in the targeted startup.
This shift towards SPVs signifies the growing demand for shares in AI startups but also highlights the inherent risks associated with such investments. Buyers must carefully consider the nature of the SPV and the control it exerts over the underlying shares. While the current market activity surrounding SPVs may indicate a potential bubble, it also prompts us to examine the stability and long-term viability of the AI startup ecosystem.