A New (But Familiar) Alternative Investment (VCX)

Many RBD followers are aware that I have a second brand/website/podcast called Access IPOs that initially spun out of RBD way back in 2016.

Access IPOs helps ordinary retail investors find opportunities to invest in the world’s most innovative and disruptive private companies.

Recent innovations from two familiar names — Fundrise and Robinhood — have warranted a rare crossover topic with the launch of their “public venture capital” funds (Symbols: VCX and RVI) that trade (or will soon trade) on the NYSE.

If you’re not familiar, venture capital is startup investing, whereby venture capitalists try to identify the next Facebook or Google in early growth phases, long before they go public.

They risk substantial investment dollars on ideas, founders, and business potential.

Most investments fail. But the best investments can sometimes return 1,000%-10,000%.

Venture capital investing was largely unattainable for most investors until late 2022, when the Fundrise Innovation Fund became available on the Fundrise platform.

Before then, Fundrise was primarily a real estate crowdfunding investing platform, on which I had been investing since 2017.

The new venture capital product offered access to the fast-growing startups of the venture capital world to non-accredited ordinary investors.

I first shared this topic with RBD readers in a September 2023 article called ​Venture Capital Investing for Retail Investors​, and haven’t really touched on it here since.

But it’s been a staple at Access IPOs, as venture capital investments turn into IPOs.

The original premise of the Innovation Fund was to “democratize” venture capital — historically a top-performing asset class — inviting non-accredited investors (people with less than $1 million in invested assets) to own it.

Nobody had done this before because it required significant filings and SEC approvals. Plus, few companies were positioned to make it happen.

Since private companies are staying private longer, the vast majority of individual investors can’t invest in the fastest-growing startups of our time.

SpaceX, for example, is a 23-year-old company and is only now finally planning to IPO this summer. But the company is worth more than $1 trillion.

If private AI companies like Anthropic and OpenAI were public, they’d be among the largest companies in the S&P 500 and part of just about every stock mutual fund and ETF.

As private companies, all that wealth creation was omitted from our IRAs and 401(k)s.

Yet, while the public is watching this incredible wealth creation happen in the private markets, sentiment for AI has turned negative.

That’s because the public has largely missed out on the enormous economic gains, while those eligible to invest in venture capital (aka startup investing) are already wealthy.

Venture capital is seen as another example of the ultra-rich becoming wealthier, exclusive of everyone else.

Fundrise wants to level the playing field.

The timing for the Innovation Fund was perfect, just as AI exploded into our lives.

It was early to invest in Databricks, Anthropic, OpenAI, Anduril, and Ramp, all of which are generational companies.

Those of us who owned the fund participated in those gains.

And while stock index fund investors missed out, those of us who invested in the Innovation Fund participated in the incredible investment gains of these companies.

The Innovation Fund is up 84.44% since its inception date in July 2022. Anthropic is up more than 1,000% since the Fund’s initial investment.

Others have taken note.

On March 6th, Robinhood launched the Robinhood Ventures Fund I (RVI), aiming to achieve the same goal of democratizing an asset that has long been out of reach for retail investors.

They’re late to the AI game and have a lot to prove. But venture capital is a long-term investment, and investors should think in decades, not days.

So What’s Changing This Week?

Since its inception, the Innovation Fund has been non-traded and only available on the Fundrise website.

That meant opening a Fundrise account and investing there. That structure restricted liquidity to quarterly, among other regulatory shackles.

But in early February, management proposed converting the non-traded closed-end fund to a traded closed-end fund, or “public venture capital” fund.

Shareholders approved.

Scheduled for today (Thursday, March 19th), Fundrise is taking the Innovation Fund public through a direct listing and will trade publicly from now on under the symbol VCX.

It’s complicated how it will all work from a regulatory standpoint, but it is fully approved by the SEC, thereby legitimizing the security and providing some investor protections.

Yet, there’s plenty of uncertainty about how it will work. So we’ll see when it starts trading today (it has been postponed a few times, but today looks like a “go”).

In the offering, only a fraction of shares will trade on day one. Most shares will be locked up for 180 days, meaning investors who held shares before February 20th can’t sell those shares until September.

However, instead of doing a traditional IPO where they issue new shares to the public and institutional investors who get priority access, Fundrise presold unrestricted shares to existing Fundrise platform shareholders.

Though not an IPO, it still issued new shares, but only to individual investors who have been part of the Fundrise family prior to the offering.

The longer-term uncertainty stems from the holdings being private, non-traded companies.

Therefore, their private stock prices and valuations don’t fluctuate like stocks.

But they do have private stock prices, and a whole secondary marketplace has emerged because of the trend toward private companies staying private longer.

Secondary market data allows retail and institutional investors (professional traders, hedge funds, mutual fund companies, pensions, market makers, etc.) to estimate the valuation of each private company in the portfolio, and, thus, the net asset value of the fund.

Publicly traded, the market sentiment on the fund’s aggregate holdings will drive the price up and down.

The traded price will almost always diverge from the fund’s net asset value (NAV) — or total value of every holding, plus cash, minus debt.

When the market thinks that underlying assets are undervalued, the funds will trade at a premium (above the NAV). If the market believes they are overvalued, the fund will trade at a discount.

RVI did a traditional IPO, and immediately traded below the NAV. This fund is brand new, however, and doesn’t hold the caliber of marquee holding that VCX owns.

Another similar fund called the Destiny 100 (Symbol: DXYZ) trailblazed the public side of this kind of security and has notably held shares of SpaceX (giving retail investors a proxy to own it).

DXYZ initially traded with extreme volatility, but has since stabilized while maintaining a significant premium over its NAV (because investors expect the value of SpaceX to rise).

Technically, VCX and RVI are not ETFs, even though they look and trade like ETFs. They are closed-end funds, so the number of shares is fixed. Whereas ETF share numbers fluctuate to ensure close tracking of the NAV.

I probably got too into the weeds for the RBD audience on this.

If you’re interested in learning more about VCX and RVI, or just curious about The Access IPOs Podcast (now on episode 51), check out the video below (or adjacent videos if you’re interested in ​VCX​ or ​RVI​).

What Does This Mean for DIY Investors?

One of the main tenets of RBD is the pursuit of a simplified and age-appropriate portfolio of stock and bond index funds tailored to your age and risk tolerance.

Most people are content with just leaving it at that.

For others, that’s not satisfying enough. I’m OK with using 5% or so of your investment portfolio to speculate however you wish.

I speculate through IPO investing and alternatives like Fundrise real estate funds and venture capital.

As retail access to innovative investments expands with technology, loosened regulation, and better access, an argument can easily be made for allocating a retirement portfolio to 10%-20% alternative assets.

I’ve written about alternative assets several times over the year, and advocate exploring opportunities like venture capital for diversification and the potential for increased long-term returns (10+ year investment horizon).

That said, it’s not for everyone. Boring is OK too, and there’s no reason to feel left out when you miss an opportunity (Bitcoin, anyone?).

This is not a recommendation to buy or sell VCX or RVI. DIY investors need to do their own research and make their own determinations.

But this is an interesting area of alternative assets — public access to private companies. New, but familiar. And increasingly for the masses.

Featured image via Deposit Photos used under license.