SPVs
This week I’ve heard three separate investors saying they are either setting up or participating in an SPV in the seed round for Ami, Yann Lecun’s much-hyped AI startup reportedly raising $500m at a $2.5bn post-money valuation (yep, 20% dilution).
SPVs, or Special Purpose Vehicles, are shell companies that allow outside investors to participate in an investment as part of a club deal - a bit like a mini venture fund but for a single pre-defined deal. Well-networked investors secure an allocation in a hyped round and then effectively sell access to the deal to other investors.
Usually, the organising investor gets a combination of a management fee (unconditional) and carried interest (conditional on making a profit). It can be highly lucrative if the numbers are big - and not a huge amount of effort.
The speed at which these deals are getting done right now, and the complex structuring that is showing up - SPVs within SPVs, for example - is reminiscent of the frenzy around another type of “Special Purpose” entity.
Special Purpose Acquisition Corporations, or SPACs, were all the rage back in 2018-20. SPACs are blank cheque investment vehicles - they are similar to SPVs in some ways but differ in that the underlying investors don’t know on day 1 what company will be invested in.
Instead, the organising investor raises money into a publicly listed shell company, which is formed for the express purpose of acquiring a to-be-identified private company, therefore taking the target public through the back door. Without recounting the full horror story here, suffice to say it did not go well.
The mechanisms are different, but these schemes share a common theme. Both are perfectly sensible and valid capital formation mechanisms in normal times, but metastasise into something more nefarious when the hysteria and greed of a bubble kicks in.
Lots of people will make money along the way. And then lots of people will lose money when the music stops. I can’t say for sure the timing, but I can say for sure that it will end in tears. It always does.