Sequoia's Roelof Botha on SPVs: A Warning to Investors

Warning Signs of a New Venture Capital Cycle

Roelof Botha, a prominent managing partner at Sequoia, is observing indications of a renewed speculative bubble forming within the venture capital landscape.

He anticipates that less experienced investors will be particularly vulnerable to potential losses during this emerging cycle.

Concerns Regarding Special Purpose Vehicles

Botha recently shared a cautionary message on X (formerly Twitter), stating, “History appears poised to repeat itself! SPVs are regaining popularity, with lead investors representing a minimal portion of the capital while attracting new, less informed investors who believe the outcome will differ this time.”

He highlighted that only three years have passed since the previous cycle’s downturn.

Recalling the 2022 VC Market Crash

The previous investment cycle concluded with significant repercussions. The previously overheated venture capital market of 2021 experienced a substantial correction in 2022.

The consequences of this crash are still unfolding, and projections suggest that 2025 will present another challenging year for startup ventures.

Understanding Special Purpose Vehicles (SPVs)

Botha’s warning specifically addresses special purpose vehicles (SPVs) – a financial structure that enables a startup’s existing investor to offer portions of their equity to other parties.

However, new investors aren't directly purchasing shares in the startup itself; instead, they acquire shares within the SPV, frequently at inflated valuations.

This structure necessitates substantial growth in the startup’s valuation simply for SPV shareholders to achieve a return on their investment.

SPVs in the AI Investment Boom

SPVs are becoming increasingly prevalent in the realm of AI investing, where certain startups are securing exceptionally large funding rounds.

A review of SEC filings reveals at least nine SPVs associated with Anthropic since the beginning of 2024.

The company is currently reportedly in discussions to raise an additional $3.5 billion in capital.

Figure AI and the SPV Trend

Figure AI’s recent attempt to raise $1.5 billion is also reportedly characterized by a significant reliance on SPVs, according to reporting by The Information.

It is important to note that neither Anthropic nor Figure AI are currently part of Sequoia’s investment portfolio.

Widespread Adoption of SPVs

This trend extends beyond a limited number of companies. Almost all major AI companies valued at billions of dollars have investors offering SPVs.

The involvement of a well-known venture capital firm, such as Andreessen Horowitz, can significantly attract buyers due to its reputation.

Criticism from Secondary Market Participants

An individual active in secondary markets described these SPV-driven deals as a means of “passing the hat” for companies struggling to secure funding from traditional venture capital sources.

They noted that less sophisticated family offices are often drawn in by the name recognition of the lead firm, even when the underlying companies represent the firm’s less promising investments.

Botha’s Advice to Investors

Botha’s direct message to potential investors considering these opportunities is succinct: “Don’t buy it.”

Sequoia’s Response

Sequoia did not provide an immediate response to a request for further commentary on this matter.