One of the most popular acronyms in Silicon Valley these days is SPV.
It stands for special purpose vehicle. In tech startup land, it’s a type of investment fund that typically involves concentrating all of its assets in one company. SPVs have blown up in recent years as investors clamor to get a piece of hot startups with valuations often in the tens of billions of dollars.
But buyer beware. Investors are warning of hidden fees, unclear rules about ownership, and marketing that’s driven by FOMO, or the fear of missing out.
Traditional venture capital funds spread risk across a portfolio of startups, with the understanding that most bets will fail and that the one or two successes will pay back the fund several times over. In an SPV, a fund manager usually raises capital for a single deal and recruits a syndicate of smaller investors to join for an added fee that covers management and other costs.
Some established venture firms use the vehicles to offer their limited partners — endowments, pension funds or high-net worth investors — a larger slice of a single startup. That allows the firm to write a bigger check and capture more ownership than would be possible using their existing funds.
“In venture capital, a few winners deliver all the results,” said Sandeep Dahiya, professor of finance at Georgetown’s McDonough School of Business. “SPVs are a single shot — if it works out, good. If not, there’s no second bite of the apple.”
Six years ago, SPVs accounted for just 7% of private shares traded on Forge Global, a marketplace for private company stock. That number has since ballooned to 64%.
SPVs have been a cornerstone in major artificial intelligence deals of the past year, including OpenAI, Anthropic and CoreWeave, set to go public later this week. Magnetar, CoreWeave’s largest institutional investor, has used SPVs to help build its stake in the AI infrastructure company.
“We’re seeing a lot of fundraising through SPVs in artificial intelligence names — it’s a way to raise a large amount of money in a short mount of time,” Howe Ng, head of data and investment solutions at Forge Global, told CNBC. “The hotter the name, the higher the fee.”
AngelList, which also offers access to SPVs and secondary shares, noted a similar flurry. CEO Avlok Kohli said his platform has seen a 65% increase in SPV flows in the past year, in part because the venture market has started to recover after a gloomy few years when the story was all about inflation and higher interest rates.
Kohli said he’s seen some shady behavior in the SPV market. When he personally invested in a startup through a syndicate six years ago, he said there were multiple layers of fees and a lack of transparency.
“A bunch of things weren’t disclosed to me,” he said. “It was clear the person I invested behind had no idea what was going on at the company, and that that experience as a [limited partner] is seared into my brain. I would rather not have anyone else go through that.”
Kohli said AngelList often turns down SPVs that it can’t verify. In extreme cases, Kohli said, funds will pool together money to invest in a startup with no guarantee that they’ll actually own the stock. He called such behavior fraud, and said it takes place “in every bull cycle.”
‘Typically a bad sign’
There are differences this time.
In addition to a huge pipeline of high-valued companies that have been on the sidelines due to the dormant IPO market and the mountains of available private capital, employees at late-stage companies are cashing out through selling shares in secondary rounds, which has created more opportunities for SPV deals.
Private market gains are outpacing the stock market of late, attracting more interest from high net worth investors. Forge’s private market index is up 32% in the past three months, outpacing gains for S&P 500 and tech-heavy Nasdaq-100, which are down in the first quarter.
To invest in an SPV, individuals need to be “accredited” and meet certain thresholds set by the SEC. Qualification requires having a net worth of at least $1 million and earnings of at least $200,000 annually over the past two years. At that level, the SEC considers investors sophisticated enough to protect their own financial interests despite the risk of putting money in unregistered securities.
“Because these are private companies, it’s expected that you know what you’re doing,” Georgetown’s Dahiya said.
Hans Swildens, CEO and Founder of Industry Ventures, which focuses on secondary market investments, said access to information is a big challenge and transaction data is spotty. He estimated only 10% of secondary deals are made public.
“Most of the time, counterparties don’t want to disclose what they buy or sell,” he said. “They’re not writing a press release.”
The law requires that SPVs disclose their fees. But how much an SPV investor ultimately ends up paying can vary depending on the holding period of the asset. The longer the waiting period until an acquisition or an IPO, the bigger the return needs to be to make up for those fees.
Swildens said the SPV explosion has parallels to the peak of the dot-com bubble, when retail investors put cash into hyped-up internet companies.
“It’s typically a bad sign in our market, when retail shows up,” he said. “If retail keeps coming in and over the next year or two, and makes up a larger part of this market, I would say that that’s probably a good signal for institutional investors to take some risk off and sell.”
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