Sequoia’s Roelof Botha Issues Warning: Why Investors Should Avoid SPVs

In the ever-evolving landscape of venture capital, signs of another greed cycle are emerging, warns Roelof Botha, a prominent managing partner at Sequoia Capital. In a recent post on X, Botha cautioned that less experienced investors may bear the brunt of this cycle, particularly with the resurgence of special purpose vehicles (SPVs).

Understanding the Risks of SPVs in Venture Capital

Roelof Botha expressed his concerns about the potential pitfalls of SPVs in venture capital. He stated, “We remain destined to repeat the mistakes of the past! SPVs are making a comeback, where the lead investor speaks for less than 10% of the capital, yet eagerly lines up the latest set of tourist chumps who think the story will end differently this time.” The implications of this trend could be significant, especially considering the aftermath of the 2021 venture capital market crash.

The Context of the Previous Cycle

The 2021 VC market crash serves as a stark reminder of the consequences of overvaluation and unsustainable investment practices. As we approach 2025, many experts predict another challenging year for startups, with the fallout from previous investments still being felt.

What Are Special Purpose Vehicles (SPVs)?

SPVs allow investors to sell access to a portion of their shares in a startup, but the new investors are not purchasing shares directly in the startup. Instead, they acquire shares in the SPV at potentially inflated prices. This structure necessitates that the startup’s valuation significantly increases for SPV shareholders to recoup their investments.

The Rise of SPVs in AI Investments

The trend of using SPVs is particularly prevalent in the artificial intelligence (AI) sector. Notable examples include:

• Anthropic: At least nine SPVs tied to this company have been identified since 2024, with reports indicating ongoing talks to raise $3.5 billion.
• Figure AI: This company is reportedly attempting to raise $1.5 billion, heavily utilizing SPVs.

It’s important to note that neither company is part of Sequoia’s portfolio, yet they reflect a broader trend in the industry.

Market Dynamics and Investor Behavior

The use of SPVs is not confined to a select few companies; nearly all major multi-billion dollar AI firms are engaging in this practice. The involvement of well-known VC firms, such as Andreessen Horowitz, can attract less experienced investors who may overlook the inherent risks.

One market insider described SPV-heavy deals as follows: “They are passing the hat on all the deals that can’t find enough VC investors. The name firm puts up a tiny amount, and these naive family offices think, ‘Andreessen is leading it; it must be good,’ even though we know these are often their worst companies that can’t raise funds from traditional VCs.”

Advice for Investors

Botha’s clear message to potential investors is to exercise caution: “Don’t buy it.” As the venture capital landscape continues to evolve, being informed and vigilant is crucial for navigating these complex investment opportunities.

For more insights into investing strategies and trends, consider visiting our Investment Strategies page or check out this Investopedia article for a deeper understanding of venture capital dynamics.

Sequoia Capital has not provided any additional comments regarding Botha’s statements at this time.