I recently caught up with Ben Miller, CEO of Fundrise in person, about the Innovation Fund's latest investments in private AI (artificial intelligence) companies.
Since launching the open-ended venture capital fund in 2H 2022, the Innovation Fund has made a series of promising AI investments that I was eager to learn more about, but unable to access.
There are two key hurdles that individual investors must overcome to be able to invest in private artificial intelligence companies:
- Having enough capital to meet the minimum investment amount.
- Having a personal connection that will grant them the ability to invest.
Many people may have one of these prerequisites, but not everybody has both at any given time.
An Artificial Intelligence Investment That Almost Got Away
For example, I had wanted to invest in Anthropic's latest Series F funding round, which closed in February 2024, but I couldn't because the investment minimum was $100,000.
I didn't have $100,000 lying around, as I had just purchased a house with cash in October 2023. With new expenses, surprise capital calls, and taxes to pay, the most I could afford to invest was up to $50,000, but preferably only $25,000.
I want to build $500,000 of exposure to private AI companies over the next three years. Having $100,000 in just one private AI company is too concentrated for my liking. What if Anthropic becomes the Lyft of ridesharing, while OpenAI becomes Uber, the dominant player?
I knew the investment minimum was $100,000 because a fellow parent had said he invested and could introduce me to a partner at Menlo Ventures, the VC leading the round. So I found myself in the situation of having the connections, but not enough capital. How frustrating.
Easier To Just Invest In The Innovation Fund
However, I then realized there was an easier way to gain exposure to Anthropic and other Large Language Model AI companies, without the 2% management fee and 20% carry fee traditional VCs charge. The Innovation Fund, with its variety of AI investments and a 1.85% management fee and 0% carry fee, provided that opportunity.
I've used Anthropic's large language model AI to help edit my posts, including this one, boosting my productivity. Now my former editors – my father and wife – are somewhat out of a job!
But that's a good thing, as my dad had mentioned he was having a hard time keeping up with my posting schedule. Meanwhile, my wife is busy putting the finishing touches on my second book, set to be published by Portfolio Penguin in Spring 2025.
Now I also don't have to deal with another K-1 come tax time.
Exposure To Private Artificial Intelligence Companies
In talking to Ben Miller, I learned that over 90% of the Innovation Fund's portfolio has exposure to artificial intelligence to varying degrees. This includes investments in large language models, data infrastructure companies, and firms using AI to improve their products.
Furthermore, upon reviewing the Innovation Fund's holdings, it seems evident to me that several of the investments will eventually go public, creating liquidity events for shareholders. In particular, names such as Canva, Databricks, and ServiceTitan appear poised to go public within the next one or two years.
To me, being able to see what a fund is holding and then make deductions about the future of these holdings is a strategic advantage.
Closed-End vs. Open-End Venture Capital Fund Model
When investing in a traditional closed-end venture capital fund, investors normally have to commit at least $100,000 – $250,000, without knowing the specific investments the general partners will make. As the GPs find investments aligned with the fund's stated goals, capital calls are made over two-to-three years to the limited partners to fund these deals.
Essentially, 100% of the investor's trust is placed in the general partners' ability to find good deals, if they can gain access to the closed-end venture capital fund in the first place. The Innovation Fund takes a different approach, where investors can review most of its private company investments before deciding how much to invest.
This more transparent model gives individuals more information before committing capital. And if the existing holdings are valued at levels since the last fund raise, but there's a good chance these companies could raise a new round of funding or go public at a higher valuation, then all the better for investors and future capital distributions.
An Open-Ended Venture Capital Fund Gives Investors More Insight
Thanks to being able to see most of the Innovation Fund's holdings (some are undisclosed per the request of the companies), I was able to gain more insight, thanks to my propensity for connecting the dots as a veteran investor.
My tennis nemesis, whom I beat in last year's 40+ 4.5 playoffs after he rejected me from joining his team, recently joined Canva.
Launched in Sydney in 2013, Canva is an online design and visual communication platform with a mission to empower everyone in the world to design anything and publish anywhere. They launched, Magic Design, an AI-powered design tool where you write a prompt and the tool creates the design for you.
I played against his old team this past weekend and he wasn't there. When I asked the captain where he went so I could cook him again, he said Australia!
In November 2023, he took on the role of Canvas Head of SOX (Sarbanes-Oxley Act) compliance. SOX compliance is necessary for adhering to the financial reporting, information security, and auditing requirements of the SOX Act, which aims to prevent corporate fraud. The primary reason a company would need someone in this role is to prepare for going public in the United States.
Canva Going Public In 2024 Or 2025
Therefore, if my dot-connecting skills are correct, I expect Canva to go public by the end of 2024 with 60% certainty, even though guidance is for 2025 or 2026. And if the firm doesn't go public in 2024, then I think it will by the end of 2025 with an 80% certainty.
I also believe the public markets are hungry for more AI plays besides the big ones like Microsoft and NVIDIA. As a result, I feel like being able to invest before Canva goes public is a better financial decision.
Further, I believe the market is hungry for fast-growing design companies other than Adobe. Adobe tried to buy Figma for $20 billion and failed due to antitrust issues.
Although, of course, there are no guarantees with investing in risk assets, especially private AI companies. Risk is why every investor must decide on an appropriate asset allocation. Personally, I’m willing to allocate between 10% – 20% of my investable capital in alternative investments, including private investments.
A Discussion About Private AI Companies
I encourage you to listen to our podcast episode, where I ask Ben about how the fund values its portfolio holdings, where he sees AI going, and more. Maybe you can connect some investment dots too.
You can click Apple or Spotify or listen via the embedded podcast below.
If you want to invest in private AI companies, you can explore the Innovation Fund here. Fundrise is a sponsor of Financial Samurai and Financial Samurai is an investor in Fundrise.
I’m comfortable owning the pick-axes (so to speak) in NVDA (GPUs) and AMZN (cloud computing). NVDA has already run up but I think AMZN may be undervalued, at least underhyped. I’d be careful about all the AI companies given that Meta has made Llama-3 open source.
I hope Amazon is undervalued. It’s a large holding of mine that has grown over the last 12 years. Counting on the position to pay for college!
Great post Sam! I am a long time reader and listener to your podcast. I am an under 30 tech worker in Bay area, specifically working in AI and ML and my day job involves working with Databricks, OpenAI and other portfolio companies in Innovation fund. I have been a “Boglehead” so far, investing only in low cost index funds and have stayed away from private investments. I have been an employee at a company that went public so I have experience with selling ISOs etc.
1. How does Innovation fund purchase private company stock for general public? Are they essentially buying a ISO or NSO at some predetermined strike price – if so do they make that strike price known to general investors?
2. Should my networth or investible assets be larger than some dollar value for me to venture into private investing? For some reason I have it in my head that I need to continue being a “Boglehead” until my net worth has grown sufficiently large to greater than 1M in taxable accounts to justify putting my money at a higher risk fund. What are your thoughts?
Fundrise started selling shares in their IPO about 6 years back and I bought some back then. They still haven’t gone public and after contacting them recently, they don’t have any plans right now. So I’m sitting on money that hasn’t moved for years. What is your opinion on the Fundrise shares themselves?
After a difficult 2022 and 2023 due to rapid mortgage rate increases, the company is growing assets again and is leveraging its platform to invest in other private growth companies.
As an individual private investor, you have to mentally hold onto shares for 10 years without liquidity. I do like how Fundrise offered chairs and its company relative to the amount invested in. So that is a responsible I do like how Fundrise offered shares in its company relative to the amount you and others invested in their funds. So that is a responsible and equitable way to let platform investors decide.
In general, I like to invest in funds, not individual companies because I don’t have the time or desire. But as an investor in an individual company, you should build a portfolio for diversification.
You may enjoy this post: Just Say No To Angel Investing
I only have about $1500 invested and I Fundrise said they can give me that back right now. So basically made no money on it in 6 years, but for that amount I’ll just wait it out. The upside is greater than just getting the money back assuming they do go public at some point.
Hi Sam,
I’m curious if your main reason to invest in the Innovation Fund is for performance or the fact that you don’t have the emotional roller coaster of owning individual stocks? I noticed 5 publicly traded companies in their top 18 holdings. Paying a management fee for a public stock in this day and age seems suboptimal to me. If a person can handle the day to day swings of individual stocks wouldn’t it be better to just buy 10 great public companies that you know already make money or soon will off AI and hold for 10 years?
Just for fun this is my top ten. Microsoft, Google, Amazon, Nvidia, Amd, Asml, Netflix, Tesla, XBI biotech etf and Uber.
Thanks, Bill
I definitely do not enjoy the emotional roller coast of owning index funds and individual stocks, which is why I’ve held less than 35% of my net worth in public stocks for the past 15 years. I’ve also invested in structured notes to hedge against downside risk, to good results.
The key is patient capital and being a long-term investor. That’s sometimes harder to do when you can buy and sell immediately. For example, with my $105K+ capital distribution in a private real estate investment I made in early 2017, I’m not sure I would have been able to hang on for seven years if it wasn’t locked away without a choice to sell.
I’ve owned a bunch of the large tech companies for over a decade as well. But after getting to somewhat unruly amounts, I want to diversify. For example, I did sell about 80% of my Tesla stock in 2023 to buy my new house. Everybody has their own risk tolerance and goals and has to find their appropriate net worth allocation.
The publicly traded holdings in the Innovation Fund are there to provide liquidity to investors who want to redeem. This is the nature of an open-ended VC fund, versus a closed-end VC fund where you have zero option for liquidity. The holdings are in bonds of Twilio, Uber, ZoomInfo, Elastic, and Match so far. The bonds provide lower-risk return potential + liquidity to investors.
When do you plan to sell some of your stock winners? And what do you plan to do with the proceeds? thanks
That makes sense. Unless I have supreme confidence in my individual stocks I wait for the stock to double and then sell half to get my initial investment back. The majority of times I reinvest that money into SPY. My losers I usually hold on too long and will sell if I need to offset capital gains.
If I own a stock like nvda and it seeming goes up everyday I”ll continually sell 10 percent each time it doubles my initial entry price.
Individual stocks make up roughly 20 percent of my equity holdings. I then take 20 percent of those holdings and use that for trades, options, momentum, or fliers.
In down markets I’ve found selling covered calls on my individual stocks and making a little money lessens my emotions and allows me to ride out down markets. For my S&P funds, I’ve never sold a share in 33 years. Baring a major catastrophe my daughter and charities will get to spend that money.
Bill, you’re looking at the corporate bonds held in the fund to provide liquidity.
It is pretty cool how companies like Fundrise have made real estate and now VC investing so accessible. I love their low investment minimums.
I was initially very against AI mostly because I saw it as a threat and didn’t understand it. Pretty quickly I realized it’s here to stay and it’s best to get on the bandwagon and learn how to utilize it and adapt. I have no doubt that there will be a lot of changes to it in the coming years and decades. We do need regulatory oversights but the amount of innovation it’s already brought is pretty mind boggling. We’re going to be living in a very different world just 5 to 10 years from now.
I invest in the Innovation Fund as well, but what worries me is that I have no idea at what valuation Fundrise is buying into these companies. Perhaps more worrying is that these companies are pre-profit, so the earnings multiple is infinite.
The ONLY hope then is that these hyped companies go public and the fund dumps them when the speculation is exchanged for hype.
As an investor in risk assets, it’s good to worry. When you worry, you make more precise asset, allocation decisions based on your risk tolerance.
I see at least three holdings going IPO within the next two years. And I’m an investor for 5-10 years.
For me, private investing is patient capital. The more patience you have, the greater your probability of success.
I agree. I’ve got money in there too. But it breaks a cardinal rule of investing: only invest in what you understand. I don’t know what I’m investing in apart from a name. This is keeping me from putting more in that fund.
The good thing is, you can understand what you’re investing in by simply searching on the Internet. There are countless talks, and videos, and lectures about AI.
Does OpenAI publish their financial statements? What percent of the fund is in each holding? Fundrise doesn’t say.
Not to the public. But if the fund is $110M+ in size, and Databricks investment is $35 million in size per previous disclosure, I’m guessing OpenAI is likely $5-$10 million.
I’ve heard anywhere from a $30bn to $80bn valuation for OpenAI, who is making $2bn/yr in revenue. I hope Fundrise got in at the lower end of the scale.
I’m in either way. I don’t want my kid to say “you had the opportunity to get in early and you didn’t?”
Two different questions, but for this answer, it’s probably closer to the $80 billion valuation mark.
I’ll ask. Fundrise has been able to buy shares off the secondary market at non-fundraising rounds. So I’m not 100% sure.
Great insight, Sam. I am personally an investor in Fundrise real estate deals but curious to hear your take on whether Fundrise is moving outside its core competency/market (Real Estate) to an area they might not be as well versed in (AI companies, etc.).
As much as I’d like more exposure to AI and companies I wouldn’t typically have access to I’m somewhat leery of Fundrise being a bit too broad.
I had the same concern about Fundrise, given it has been focusing on real estate since 2012, now expanding into private tech companies at the end of 2022. And I discuss and ask here in this podcast with Ben.
There are synergies in what Fundrise, the company and the platform brings to private companies, especially private prop tech companies. Traditional VCs are professional investors that try to spot opportunities. It’s hard nearer the seed stage.
But once you get to the Series B and later finding rounds, it becomes more obvious which companies are growing. The greater challenge is then getting access to the most promising companies where the demand is way greater than supply.
The value proposition of traditional venture capital funds is their money and their network. With Fundrise, it’s their money, network, platform, operational expertise, and potentially being a big client of the private company it’s investing in.
Capital is ubiquitous, access is more often the greater challenge.
So are you assuming the venture capitalists do their job of truly understanding the technology and market for creating the innovation funds? As a scientist, I have seen so many disconnections of investors and actual grunt lab work, i.e. what the investors believe they see vs. what the frontline workers are actually doing etc. A good example is the fallout of Tharanos where online doctor forums questioned the so-called technology years ago before the journalist started investigation, and meanwhile big shots after big shots put their money in and the founder was made to believe as the Lady Steve Jobs. Do you have to do any of the homework yourself or just by talking to some big shots on the casual side? If I win 1 million-dollar lottery, I would put out $100k as fun investment for these new technologies and discoveries, and I think I would spot better if something is just a sales pitch or may have a practical chance to work out.
Everybody is different. I would hope that venture capitalist responsible for investing other peoples money understand what they are investing in.
But, of course, there are varying degrees of quality, knowledge, and success.
But that’s the same with everything in life isn’t it?
Hence, the importance of making asset allocation decisions based on your comfortability and risk tolerance.