Warning Signs in Venture Capital

According to Roelof Botha, a managing partner at Sequoia, the venture capital industry is exhibiting signs of another cycle of greed, which may ultimately harm the least sophisticated investors.

Botha recently posted a warning on X, stating, “We are destined to repeat the mistakes of the past. Special purpose vehicles (SPVs) are making a comeback, where the lead investor represents less than 10% of the capital but eagerly lines up new investors who believe the outcome will be different this time.” He accompanied the post with an exploding-head emoji to emphasize his point.

The Previous Cycle’s Aftermath

The previous cycle ended in disaster. The overheated VC market of 2021 crashed in 2022, and the consequences are still ongoing, with predictions suggesting that 2025 will be another brutal year for failed startups.

Special Purpose Vehicles (SPVs)

Botha specifically warned about SPVs, a structure that allows a startup’s investor to sell access to a portion of their shares to other investors. However, these new investors are not actually purchasing shares in the startup; instead, they are buying shares of the SPV, often at significantly inflated prices. As a result, the startup’s valuation must soar for some SPV share owners to break even.

Prevalence of SPVs in AI Investing

SPVs have become particularly common in AI investing, where some startups are raising substantial sums. A search of SEC filings reveals at least nine SPVs tied to Anthropic since 2024 alone. The company is reportedly in talks to raise an additional $3.5 billion. Figure AI’s attempt to raise $1.5 billion is also reportedly filled with SPVs, according to The Information. Notably, neither company is in Sequoia’s portfolio.

Industry-Wide Trend

This trend is not limited to a few companies; nearly every major multi-billion AI company has investors offering SPVs. The involvement of a prominent VC firm, such as Andreessen Horowitz, can lure in buyers, even if the firm is only contributing a small amount to the deal.

Insider Perspective

Someone involved in the secondary markets described SPV-laden deals as follows: “They are passing the hat on deals that cannot find enough VC investors, and the name firm puts up a tiny amount. These family offices then say, ‘Oh, Andreessen is leading, it must be good,’ even though we know these are their worst companies that cannot raise money from traditional VCs.”

Warning to Investors

Botha’s message to potential investors is clear: “Don’t buy it.”

Response from Sequoia

Sequoia did not immediately respond to a request for further comment.