Ben_Miller_AI_v2
00:00:00.000 | Hello, everybody, and welcome to the Financial Samurai podcast.
00:00:11.720 | In this special episode, I have with me Ben Miller, co-founder and CEO of Fundrise.
00:00:17.680 | And we're going to talk about venture capital and what's up with the innovation fund.
00:00:22.480 | Welcome to the show, Ben.
00:00:23.480 | Thanks for having me.
00:00:24.600 | So last time we spoke, you were all bulled up on real estate, which was a little bit
00:00:29.520 | different from where it was a year ago, two years ago.
00:00:33.040 | So what about venture capital?
00:00:34.640 | What's the latest happening in AI, innovation fund, and what are you all up to?
00:00:40.600 | So private tech investing is so different than real estate investing.
00:00:45.320 | Real estate is largely macro-driven, but technology, it's transformative, at least great technology
00:00:53.800 | companies.
00:00:54.800 | So you can invest into a company that could change the world and we could be in a depression.
00:01:01.760 | And so it's much more about getting into those great companies than it is like the sort of,
00:01:10.160 | I mean, obviously macro matters because tech multiples in 2021 were crazy.
00:01:14.920 | So I'm not saying that it's only the companies that matter, but it's a very different dynamic.
00:01:20.620 | And so we were lucky.
00:01:22.240 | We had two things happen to us in 2023, basically the tech fund launched and we came into the
00:01:28.360 | market near the bottom of venture.
00:01:31.720 | Venture basically, I think, bottomed in '23.
00:01:34.440 | The second thing we did was we ended up getting into among the best private tech companies
00:01:40.280 | in the world.
00:01:41.280 | Can you name some of them?
00:01:42.520 | Yeah, I can name them and we can talk about it.
00:01:44.920 | When I launched this tech fund, I had some naysayers.
00:01:50.640 | One in the venture industry in particular said, "Well, you can't get into the great
00:01:53.960 | companies."
00:01:54.960 | And that we did, which is really, really gratifying.
00:01:59.040 | And so let me break them up into categories and we can talk about the specific companies.
00:02:02.920 | So basically the big thing happening in the world right now is AI.
00:02:07.200 | And so we pursued AI investing in sort of three ways.
00:02:11.680 | We invested into the AI companies directly.
00:02:16.180 | And those are like the big large language models, about 15% of the portfolios in the
00:02:21.480 | top AI companies.
00:02:23.240 | We then invested in the data infrastructure companies.
00:02:27.040 | And data infrastructure, if you're not a tech person, one way to think about that is that
00:02:32.500 | in a gold rush, you can invest in the gold mine, or you can invest in selling picks and
00:02:38.760 | shovels to the gold miners.
00:02:41.200 | So data infrastructure is the picks and shovels strategy.
00:02:44.040 | So everybody who is working on AI, one way or the other, needs data infrastructure because
00:02:49.720 | data is the lifeblood of AI.
00:02:51.720 | And about half the portfolio is in data infrastructure.
00:02:54.760 | So the majority of it is in a picks and shovels kind of strategy, which is more consistent
00:02:58.840 | with my view about investing.
00:03:01.880 | And then the third category are the vertical SaaS or the applications.
00:03:06.620 | And we invested in a bunch of really good applications that are dominant players in
00:03:10.800 | each of their categories, but I think are amplified.
00:03:13.660 | And then we had a little bit of other things, but that's like probably 90, 95% of the portfolio.
00:03:18.720 | Oh, wow.
00:03:19.720 | So what percentage would you say the portfolio is exposed to AI?
00:03:24.920 | I mean, I really have to look at it specifically, but I'm going to say not over 90%.
00:03:30.040 | I mean, it must be close to 100%.
00:03:31.640 | I mean, basically, we can work backwards from the vertical SaaS companies for a second.
00:03:37.000 | But if you take a vertical SaaS company like Canva, so we invested in Canva.
00:03:42.880 | Canva is democratizing design.
00:03:47.200 | And this is actually what technology does.
00:03:48.680 | It takes something that was really expensive or only available to a few people and then
00:03:54.000 | makes it available to everybody.
00:03:56.000 | And that's what E-Trade did with trading, right?
00:03:59.320 | There's so many examples.
00:04:00.520 | So Canva is the dominant, absolutely dominant player in that space.
00:04:04.720 | I don't even think it's close.
00:04:07.840 | Just to put some numbers on it for you, like Adobe has a quarter trillion dollar valuation.
00:04:12.240 | I think it's $250 billion last time I checked.
00:04:14.560 | And Canva, if you go on Google Trends, Canva has just absolutely surpassed them on Google
00:04:20.160 | Trends.
00:04:21.160 | And I think Canva's valuation last time I checked was like $25 billion or 10 times less.
00:04:26.560 | And if you think about AI, if you go in, or you and I go in, we're going to do some designs
00:04:31.480 | for this podcast, AI's ability to edit this podcast, produce transcript, produce notes,
00:04:40.640 | produce designs for it, help us distribute it, I mean, that's all part of what AI is
00:04:46.120 | going to do and doing.
00:04:47.880 | And Canva is going to be, I think, the dominant design solution for the next generation.
00:04:54.320 | Yeah, I was kind of skeptical of AI a year ago, and I was like, "Oh, it's like plagiarism
00:05:00.880 | and copying stuff and doing all that."
00:05:02.800 | But now that I've used some of the tools to do some editing for grammar, clarity, idea
00:05:08.600 | generation, it's really increased my productivity.
00:05:11.600 | So I guess the question that I have for our children, because my kids are four and six,
00:05:17.240 | six and a half, is will AI be so revolutionary that it's going to take away millions of jobs
00:05:23.160 | and leave our children underemployed or unemployed, making college and grade school education
00:05:28.880 | kind of not very valuable?
00:05:31.760 | Or is it not going to be that revolutionary for those who are able to use AI and therefore
00:05:37.680 | be able to be more productive, make more money, and be more free in their lives and their
00:05:42.960 | careers?
00:05:43.960 | What's the take 10, 20 years in the future on how AI will impact our children's lives?
00:05:49.200 | Oh, man.
00:05:50.880 | I feel like I can just repeat with the smartest people out there, I feel like it's a progression
00:05:56.040 | from the latter thing you said to the former.
00:05:59.700 | So I am a believer of the Raker as well, the singularity or the way that the chief science
00:06:05.800 | officer at OpenAI talks about, Ilya, is that the neural network, it does replicate a lot
00:06:13.680 | of the way the brain works, and it's really like, it is a scaling challenge, mostly.
00:06:18.200 | Like if we can scale the compute and the algorithms and things like that, I think we will see
00:06:24.280 | like a surprising amount of progress.
00:06:26.680 | And that's what, I mean, everybody's seeing AI go up the hockey stick rapidly.
00:06:33.440 | But then the nature of technology is that the last 20% ends up taking 80% of the time.
00:06:40.120 | And so we're going to see rapid progress, and essentially when does it slow, when does
00:06:44.480 | it sort of like the linear scaling benefits run out?
00:06:48.000 | Like not anytime soon.
00:06:49.720 | And I think the actual challenge is not so much the technical capacity of, we're calling
00:06:55.720 | AI, whatever you want to call it, GPT.
00:06:58.200 | It's actually the application, changing human behavior, like look at Zoom.
00:07:03.960 | The second the pandemic happened, overnight, everybody changed their behavior and video
00:07:08.000 | became part of how we interact in work and life, and it wasn't true before.
00:07:13.740 | So human behavior is actually the limiting factor, changing human behavior.
00:07:17.520 | My parents shopped at department stores, and my kids don't know what a department store
00:07:21.120 | is.
00:07:22.120 | I don't think it's actually going to be the application and the political and human dynamics
00:07:28.060 | and the technology is just going to keep making pretty awesome progress, and it's just going
00:07:33.240 | to end up being different than what we think.
00:07:34.600 | It's not going to be a human being.
00:07:37.040 | We're going to have some complimentary, it's going to be really good at precise computation
00:07:41.680 | and recall, which we're not so good at, right?
00:07:45.680 | But exactly where we're better and where they're, I mean the computer came along, changed how
00:07:50.080 | we do work, made us more productive, didn't obviate the need for jobs, just created a
00:07:55.800 | different kind of job.
00:07:56.800 | Yeah, I just remember being in school, there was like the HP 12C calculator, the scientific
00:08:01.680 | calculator, and those who knew how to use it were like math geniuses, and then those
00:08:06.200 | who didn't know how to use it like myself were just duds, and I remember quitting math
00:08:10.160 | after sophomore year in high school.
00:08:12.500 | So it feels like the lesson is you better get on board with AI and you better learn
00:08:16.160 | how to use it for your job, otherwise you're going to be out-competed against by those
00:08:21.840 | who are more productive in knowing how to use AI.
00:08:24.160 | Yeah, I actually think it's not really a lesson for our children, because they definitely
00:08:27.880 | will.
00:08:28.880 | It's really a lesson for people our age, and if you're 20 or 30 or 40 or 50, if you're
00:08:34.880 | not embracing it, yeah, you're going to have a disadvantage.
00:08:39.180 | And so just talking about fundraisers for a second, I think that's also true for companies.
00:08:43.640 | Having built a company, I find companies are like people, they age, they go through maturity,
00:08:49.880 | they have cultural or personality quirks, and so our company, Fundrise, we have a team,
00:08:55.720 | we're building with AI, and we're lucky because real estate, most real estate organizations
00:09:01.760 | have zero software engineers, let alone a guy with a machine learning master's and things
00:09:08.480 | like that.
00:09:09.480 | So we're lucky to be at this intersection between tech and real estate when AI comes
00:09:13.280 | along, and we've been messing around with it for a year, and for the first 10 months,
00:09:19.420 | we had nothing.
00:09:20.420 | We just didn't have any way to use it, and it just was like, as you said, you can use
00:09:24.680 | it for summary and pretty silly, they're fine, but they're not world-changing.
00:09:30.720 | But we just were like, "Okay, we're hacked away at it."
00:09:33.660 | And it's also how I got really both really confident about the kind of venture investments
00:09:39.080 | we made, because we were building and using the softwares, and also how I think about
00:09:44.200 | the trajectory of it, because we set up, we have open AI, API access, we've produced things
00:09:50.760 | with it, things we produced were crap, then we had to produce again, and then we realized
00:09:55.680 | we needed data infrastructure, we got the data infrastructure, so you have to use it.
00:10:00.040 | And it's like learning the piano or something, at first you're terrible, but you're basically
00:10:06.000 | too bad, you just have to keep going at it.
00:10:08.280 | Yeah, you got to keep going at it.
00:10:10.000 | And the toughest thing is, the older you get, I'm 46 now, the less you want to learn something
00:10:15.560 | new, right?
00:10:16.560 | Old dog, new tricks, it's tough, but you got to really force yourself if you plan to be
00:10:20.600 | productive, have a job, be an entrepreneur, you got to learn how to use it, folks, because
00:10:26.000 | the productivity gains are significant, and everybody else, at least the younger folks
00:10:30.520 | or the hungrier folks are learning how to use it.
00:10:33.560 | And in terms of profitability, it's interesting, because you follow the open AI debacle with
00:10:39.640 | them outing Sam Altman and bringing him back and those debate, and now the New York Times
00:10:45.480 | is suing open AI for plagiarism and using its content illegally, I guess.
00:10:52.040 | It sure seems to me that open AI, for example, is highly profit-driven, because they started
00:10:57.640 | off as a nonprofit to help all of humanity, they're talking about using AI to help cure
00:11:04.040 | disease and sequence this DNA and all that stuff, but now it seems like it's about max
00:11:10.800 | profitability.
00:11:11.960 | What are your thoughts there in terms of running a business and also helping humanity?
00:11:17.080 | I think that's good.
00:11:19.400 | It's like when I hear about a pharmaceutical company that invents something that saves
00:11:25.040 | millions of lives and they get really rich on it, I'm like, "Great."
00:11:30.240 | So the reality is that, look, I'm not some libertarian when it comes to recognizing the
00:11:37.600 | need for regulations, but capitalism drove more people out of poverty in the last 30
00:11:45.480 | years in China and Korea.
00:11:47.560 | So I think that we're much better off with an open AI that is focused on delivering for
00:11:53.000 | the customer and getting paid for it than a government.
00:11:57.160 | I'm sure China has basically a government version of it, and I just don't expect it
00:12:02.760 | to move as fast or be as good.
00:12:06.440 | But I can see also why you basically better have good government control over the extreme
00:12:13.120 | outcomes that could happen.
00:12:14.760 | Yeah.
00:12:15.760 | This is more philosophical, but I thought we were going to talk about the portfolio.
00:12:18.720 | I feel like the stuff I'm saying, everybody who's in this space, who reads this stuff
00:12:24.480 | and works with software, knows this stuff.
00:12:27.560 | Maybe I'm too much of a nerd or something.
00:12:31.040 | No.
00:12:32.040 | I think investing, do we really want to just invest to make money?
00:12:35.680 | I think we need to invest for a purpose.
00:12:37.520 | We need to use our gains for something.
00:12:41.240 | And I'd love to talk more about portfolio.
00:12:43.160 | So the construction of the portfolio, private growth companies, different verticals, it
00:12:48.240 | looks like 90% exposure to some way to AI.
00:12:51.720 | If you could drill down to pure play AI companies, though, what percentage of that portfolio
00:12:56.960 | are those pure play?
00:12:58.520 | It's just that depending on when this podcast comes out, I believe that AI is the revolution.
00:13:06.080 | Exactly how you feel about valuation and how many models there'll be, we can debate.
00:13:11.080 | But I thought it was important, valuable to have exposure to those companies.
00:13:15.120 | So we worked to get investments into what I think are the top AI companies, and that
00:13:21.880 | took some doing.
00:13:22.880 | It's 15% of the portfolio, so it's not.
00:13:26.640 | Mostly the data infrastructure and the applications are where we invested.
00:13:31.080 | I think they're at a much lower risk.
00:13:34.400 | Here's some stats.
00:13:35.400 | I have our weighted average by amount of dollars invested is 70% annual growth and over a billion
00:13:48.400 | dollars in revenue.
00:13:50.400 | So the point of the portfolio is that these companies are not startups.
00:13:55.240 | They're rat-growing mature companies, and that's basically the best kind of venture,
00:14:00.920 | in my opinion.
00:14:03.240 | You can't get into those companies because, yes, you can get companies that you wish you
00:14:07.640 | could get open AI at the startup, or you wish you could get whatever, Uber at startup.
00:14:12.400 | But the problem is you also get a hundred other ones that aren't.
00:14:16.440 | Sure.
00:14:17.440 | So you're saying that later stage investing in private growth companies is more attractive
00:14:22.440 | because it has a proven roadmap.
00:14:24.840 | It's growing revenue, it could be generating cash flow.
00:14:28.120 | The thing is, you can't get in because everybody can see the trajectory of the company's growth
00:14:33.160 | and everybody wants in, but only a certain number of institutional investors or individual
00:14:39.040 | investors can invest.
00:14:40.960 | We got in, which was the part that the venture community said was impossible.
00:14:46.040 | We were fortunate and lucky because in 2023 there was enough disruption in the market
00:14:51.800 | that we could basically provide a solution and capital and a differentiated approach
00:14:57.640 | that allowed us to get access.
00:15:01.000 | Now we have that portfolio.
00:15:02.000 | Hopefully we can then compound that success and those relationships with those companies
00:15:08.080 | to do it again.
00:15:09.080 | But if you look at the portfolio, I can list some of the companies that we invested in.
00:15:14.120 | This is at Canva.
00:15:15.120 | There's a service Titan we invested in.
00:15:18.080 | Here's one that's interesting, Anduril.
00:15:19.480 | Are you familiar with them?
00:15:21.760 | No.
00:15:22.760 | So Anduril is application of AI to defense.
00:15:27.760 | Defense.
00:15:28.760 | That's big bucks.
00:15:29.760 | That's a well that keeps on giving.
00:15:32.720 | And I believe, they are aiming to, and I believe they'll be successful in becoming the next
00:15:38.000 | prime, like the next Lockheed Martin.
00:15:41.880 | And they are radically different than existing government contractors.
00:15:45.880 | I mean, everything about them is different.
00:15:48.520 | And so let me give you this, let me like state it as a problem statement.
00:15:53.360 | So if you look at the future of defense versus the past, basically you were looking at fighting
00:15:59.720 | the Soviet Union, and that's what the defense industry was designed to do.
00:16:03.840 | And that basically meant massive amounts of really expensive hardware, you know, airplanes
00:16:08.480 | and aircraft carriers.
00:16:10.760 | But Anduril was launched in 2017, but Ukraine has proven it out that the war is being driven
00:16:16.560 | by drones.
00:16:17.880 | It loses 10,000 drones a month.
00:16:20.400 | And so the risk of a swarm of autonomous AI controlled drones is such a radical departure
00:16:29.840 | from how we think about defense.
00:16:33.480 | A thousand low cost drones could sink a $5 billion aircraft carrier or attack a city.
00:16:44.120 | And so the defense of four drones and basically how all that connects to all military hardware
00:16:52.640 | and the people on the ground and in the air is changing rapidly.
00:16:57.080 | It's being driven by software, not by hardware.
00:17:01.080 | And the primes, the big primes are not software companies.
00:17:06.700 | And so there's just like total break in the way the industry needs to work.
00:17:13.480 | And Anduril is, I mean, I think they're like the Tesla of defense industry, or they're
00:17:20.220 | like the SpaceX of the defense industry.
00:17:22.560 | They're taking a radically different approach and they're succeeding.
00:17:27.020 | And so I understand there's people going to be just as worried about the risks of it,
00:17:32.480 | but you basically have to recognize how critically important it is, especially in the world.
00:17:38.100 | This is how Hamas surprised Israel also, and this is what the Houthis are doing in the
00:17:46.000 | Red Sea today.
00:17:47.000 | I mean, they're attacking with drones.
00:17:48.940 | And so anyways, this is going to become critically important.
00:17:53.180 | And we invested in Anduril and that was, I think, a really good example of an application
00:17:58.500 | of AI that is like a sector that is going to be transformed.
00:18:02.700 | No, I mean, thanks for sharing that with me.
00:18:05.940 | I've never heard of them.
00:18:07.300 | And what you said makes a lot of sense in terms of defense, saving lives, protecting
00:18:13.000 | lives and using technology and money to defend freedoms versus lives.
00:18:19.420 | I mean, it's pretty important stuff.
00:18:22.580 | Oh, that's fascinating.
00:18:24.780 | Yeah.
00:18:25.780 | And so I named the three big investments we made in the applications, but they're each
00:18:30.860 | category dominant for their categories.
00:18:34.060 | And same thing with data infrastructure.
00:18:36.220 | Last time we talked about Databricks, they're absolutely category dominant for data industry.
00:18:41.260 | And we also invest in DBT Labs, and I don't know if you have to be a data nerd to know
00:18:47.060 | probably that much about them, but basically they are the essential software for data industry.
00:18:53.940 | Like anybody who's a data professional, data scientist, data engineer, uses them.
00:18:58.540 | They've really transformed how data is transformed and understood inside our organizations.
00:19:07.740 | It did it for us.
00:19:09.120 | We have a lot of data, our real estate and investors, and we adopted DBT a couple of
00:19:13.820 | years ago and it just absolutely changed how we built and what was possible.
00:19:20.660 | And then we wanted to see them, we want to invest in you.
00:19:25.380 | And we ended up actually using us, Fundrise, and the application of DBT is like a marketing
00:19:32.220 | case study.
00:19:33.220 | So I spent a lot of time trying to build a relationship with them, and then we were able
00:19:36.140 | to invest in them.
00:19:37.140 | And they're a singular company, there's nobody that's like a number two, and they are essential
00:19:42.480 | and transformative.
00:19:43.480 | So that's a company that most people never heard of, and it's just awesome, just awesome
00:19:47.660 | that we invested in them.
00:19:48.660 | They're awesome.
00:19:49.660 | It really sounds like a great plan in terms of your value add to be an investor in these
00:19:54.940 | companies.
00:19:55.940 | Because if you're like, let's say a VC at a VC shop, right, you've got relationships,
00:20:00.380 | so your value add is, well, you have a good track record, you know other portfolio companies,
00:20:05.860 | you can make introductions, help with hiring and marketing, whatnot.
00:20:09.420 | But for Fundrise, it's like, you've got connections, you've got a team, you've got a company, you've
00:20:14.420 | got dollars, you can also become a client and help spread the good word about the company
00:20:19.740 | as well.
00:20:20.740 | So to me, it seems like you all have a competitive advantage over a traditional VC who is not
00:20:26.700 | actually implementing that product in a multi-hundred person company.
00:20:30.900 | Yeah, I think we have a small advantage and a big advantage.
00:20:33.180 | The small advantage is that when I'm talking to somebody at those companies, I'm talking
00:20:38.340 | to a peer, I'm a customer, I understand the product, we use the product, we literally
00:20:44.060 | use almost all the products we've invested in.
00:20:47.380 | And I think that makes us just a very different kind of party.
00:20:50.780 | And then second, we have 2 million users and we are a marketing distribution platform.
00:20:57.700 | I was talking to one of our companies, we told them we were going to send an investor
00:21:01.020 | update out, I don't know, a million people, and they're like, "What's it cost us?
00:21:06.140 | How much do we pay you?"
00:21:07.140 | I'm like, "What are you talking about?"
00:21:09.140 | Yeah, you get the exposure if you let us invest in you.
00:21:14.140 | Yeah, I mean, millions of potential customers, brand awareness, potentially if they ever
00:21:21.440 | go public, those are millions of retail investors.
00:21:24.620 | I think about Databricks as an example.
00:21:26.860 | Most people never heard of them, and they're going to go public probably in the next couple
00:21:30.420 | of years.
00:21:31.420 | And the more people know about them, the more I think they'll be impressed.
00:21:34.540 | And so there's just a value to the brand awareness that we can bring that's distinct, or as you
00:21:39.940 | said, competitive advantage over traditional venture funds who bring a different value.
00:21:43.820 | I mean, I'm not going to try to bring the kind of value venture funds bring.
00:21:48.340 | That's not realistic.
00:21:49.340 | Right.
00:21:50.340 | No, it's interesting.
00:21:51.340 | Can we transition to talk about how an investor invests in an open-ended, permanent venture
00:21:58.060 | capital fund, such as the Innovation Fund?
00:22:01.260 | Because as you told us in a previous episode when we were talking about real estate, time
00:22:05.620 | is linear, but things happen in a nonlinear fashion.
00:22:09.820 | And so the good thing about Innovation Fund is you can click on the link and you can see
00:22:14.660 | what y'all are holding, and then you can make a determination based on your holding whether
00:22:19.280 | you want to invest and how much.
00:22:21.620 | But the way venture or private companies get valued is pretty chunky, right?
00:22:27.900 | It's like a revaluation upward or downward after another funding round.
00:22:33.300 | So can you talk to us about the mechanics of, if someone wants to invest, they look
00:22:37.460 | at the portfolio like, "This is great, I'm going to invest $1,000, $10,000."
00:22:42.480 | How do they capture the returns of the fund?
00:22:45.100 | Yes.
00:22:46.100 | I mean, this is, like I said, the same thing happens in real estate, where you basically
00:22:50.060 | have private market and public market, and people in the public market transact every
00:22:55.540 | second and expect change to happen every second.
00:22:58.900 | In the private markets, it's the real world, right?
00:23:01.420 | Like you're building companies, you're building buildings, you're under construction with
00:23:06.420 | a 200-unit apartment building.
00:23:09.220 | What's the value of the building when the concrete's up and the roof's on and the glass
00:23:13.180 | is in, but you haven't put in the toilets?
00:23:16.020 | It's really difficult because you would look at that building and say, "Once it's opened
00:23:20.260 | and there's a certificate of occupancy, then it's a completed building and there's a binary
00:23:26.180 | change."
00:23:27.580 | And the same thing happens with tech companies, like they're worth $100 million, and then
00:23:32.020 | they raise a round and they're worth a billion.
00:23:34.340 | And the day before they raised, were they worth $100 million?
00:23:36.380 | The day after they raised, are they worth a billion?
00:23:39.020 | And that's a very challenging dynamic in the private markets, because in both instances,
00:23:43.340 | whether there's a building or a company, the change didn't happen overnight.
00:23:50.100 | But when the building is completed and people are living in it, there is a step change difference.
00:23:56.500 | When the company gets valued by a venture fund and they raise a billion dollars, there
00:24:00.820 | is a step change difference.
00:24:01.940 | So we need to look at both sets of data, data that's binary, like if something changes,
00:24:09.100 | that's an event, like a fundraising round.
00:24:11.100 | That's easy.
00:24:12.100 | Or data that's non-binary, that's incremental, like the revenue has increased or they got
00:24:18.060 | a new big customer enterprise sale.
00:24:21.700 | Take today, today we've built a pretty remarkable portfolio of private companies, but we can't
00:24:29.900 | really revalue them until there's some external input that changes the facts.
00:24:36.580 | You make venture investments, you know that it takes a while before you really see external
00:24:41.500 | changes in valuation.
00:24:44.460 | In terms of the fund mechanics though, so let's say a company was valued at a hundred
00:24:48.100 | million, raises capital, and now it's valued at five hundred million.
00:24:52.620 | How does, and let's say the innovation fund holds that company, do you all revalue the
00:24:57.700 | company to be worth five hundred million, or do you have discretion to say, well, it's
00:25:01.740 | not five hundred million, you have a discount at two hundred fifty million?
00:25:04.980 | How much discretion do you have to value these companies, or what is the standard practice?
00:25:09.580 | Yeah, well, so our valuations get audited.
00:25:13.660 | Every single investment gets audited by our auditor, so it's part of the fund structure
00:25:20.040 | that we're in, which is a 1940 Act registered investment company.
00:25:24.060 | So they show up and they basically do independent valuation as well.
00:25:27.980 | But ultimately, even when a venture fund invests in a company, they're doing independent valuation,
00:25:32.660 | and so typically there's a whole book, there's this massive book that's put out about how
00:25:36.700 | you look at valuation, and the best way to value something is a third-party independent
00:25:41.660 | transaction like a public market IPO or a third-party venture fund, and that's basically
00:25:48.540 | likely to end up being the valuation we would take.
00:25:51.700 | But if it was an inside round, right, if it's an inside round, and so are they as independent,
00:25:57.660 | that's more challenging.
00:25:59.820 | Were there structured terms in it?
00:26:01.940 | Okay, headline valuation is $500, but there are all these structured terms around pref
00:26:06.660 | multiples and cram downs and things like that.
00:26:10.060 | So yeah, you can't just look at the headline and take the evaluation.
00:26:13.180 | You have to look at the fundamentals of the business, and you have to look at the terms
00:26:17.640 | of it.
00:26:18.640 | Got it, okay.
00:26:19.640 | Alright, so it's a little bit of an art as well as a science.
00:26:23.460 | You know, as an investor, let's say I have a view that, okay, things are getting better,
00:26:28.340 | okay, rates are coming down, risk appetite is going up, public equities are up, you know,
00:26:33.780 | 24% for the S&P 500 in 2023, M&A is probably likely going to come back, the IPO market
00:26:39.860 | is likely going to come back, there's going to be a window of opportunity for private
00:26:42.920 | companies to go public.
00:26:44.940 | Therefore, would it not be strategic to look at companies that are at the cusp of going
00:26:50.120 | public and invest in them before they go public to then capture that upside?
00:26:55.460 | I mean, obviously, the IPO valuation could decline, but in general, in a bull market
00:27:00.980 | or in a growing risk appetite market, those valuations are going to continue to increase.
00:27:07.180 | So what do you think about that strategy?
00:27:08.820 | Yeah, I mean, without naming names, because one of the things I have to be sensitive to
00:27:12.180 | is the companies don't want me talking about them, and I mean, I'm not their CEO.
00:27:17.980 | But if you look at our portfolio, the three most likely, sort of most exciting next companies
00:27:25.100 | to go public are in our portfolio.
00:27:27.420 | Yeah, and we can all see that, and I think we can all make a deduction as to which ones
00:27:32.460 | they could be.
00:27:33.460 | Yeah, and I think that'll be very validating for people.
00:27:36.780 | I mean, again, this funny thing about tech is that, unless you're in the tech industry,
00:27:40.340 | you really haven't heard of all these companies.
00:27:43.100 | We're not talking about name brands in most cases, but it's, yeah, I believe that some
00:27:48.980 | of these companies will go public the next year or two.
00:27:51.620 | I think that they're really good companies, there's no question about that in my mind.
00:27:55.940 | And exactly how the market values it, again, I'm not a short-term investor.
00:27:59.860 | Even when some of these great companies went public, it didn't mean that they were no longer
00:28:03.940 | a good investment.
00:28:05.500 | We have to have some of the fund in liquid assets because investors redeem every quarter,
00:28:11.380 | and so the way we did that in 2023, and even now we have the portfolio in bonds of tech
00:28:18.620 | companies, we basically felt like, when we started deploying the innovation fund, that
00:28:24.340 | our investors were not looking for us to take public market risk that they could take themselves.
00:28:30.740 | So we focused on private tech companies, and then we had the rest of the portfolio in public
00:28:35.420 | tech bonds, which actually are not that easy to buy.
00:28:38.200 | They usually hold lots that are a million dollars, and most people aren't buying public
00:28:43.260 | tech bonds.
00:28:44.260 | We got pretty good yields.
00:28:45.260 | I mean, it was a good time to buy tech bonds, and so we have to have some of the portfolio
00:28:49.460 | in liquid assets in order, basically, to have this hybrid fund, this crossover fund, democratizes
00:28:55.420 | investing in private markets, because otherwise there'd be no liquidity, and investors expect
00:28:59.820 | some limited amount of liquidity when they invest.
00:29:03.580 | So let's say one of your portfolio companies goes public next year, there's a six-month
00:29:08.020 | lock-up period after IPO.
00:29:10.740 | What is the decision process then, in terms of selling in the public market to capture
00:29:15.580 | that gain and liquidity, riding it out?
00:29:18.940 | Is there some type of standard which you all will operate, or is it dependent?
00:29:23.300 | No, it's going to be a micro-decision, a ground-up.
00:29:27.860 | You look at the company, you look at what basically is worth pricing, its growth, etc.
00:29:33.580 | And then you look at the portfolio.
00:29:35.500 | And one of the great things about private markets, it's a funny thing about private
00:29:38.340 | markets, is actually, in some instances, you get more information than public markets.
00:29:42.900 | Like a venture investor who invests in a company gets way more information than a public market
00:29:46.660 | S1.
00:29:49.100 | And so today, at least if you look at the construction of the portfolio, the macros
00:29:54.260 | we invested in are really early in their growth cycle, AI is like a year old.
00:30:01.020 | I mean, I don't think we would be a seller, I think we'd be, like, one of the reasons
00:30:04.980 | a company takes your money is because they want you to be a long-term holder.
00:30:11.020 | They don't want somebody to just trade you, right?
00:30:14.020 | That's actually not a value-add partner.
00:30:16.900 | And so, to get the best companies, you need to be like Warren Buffett.
00:30:20.500 | You need to be low-touch, helpful if they want your help, and a long-term investor.
00:30:27.300 | That's how you basically, I think, attract the type of companies that we want to invest
00:30:31.620 | in.
00:30:32.620 | Right.
00:30:33.620 | No, no, that makes a lot of sense.
00:30:34.620 | You don't want to be, you know, I don't know, the hedge fund investor who buys on a Monday
00:30:39.060 | and sells on a Friday after a 15% pop, right?
00:30:43.020 | You want to be long-term, value-added, you're right, low-touch, not a PITA.
00:30:48.600 | Every time we sell, we trigger capital gains, right?
00:30:52.380 | Investor gets these capital gains, flow down to them, so the investor doesn't want, capital
00:30:56.500 | gains are a huge waste of, you lose, what is it, 37% between state and federal?
00:31:02.780 | Right.
00:31:03.780 | Yeah, I'm just thinking down the line, let's say five years from now, you know, more companies
00:31:09.380 | may go public, probably will go public in the portfolio.
00:31:12.420 | And so, eventually, the mix might be a greater percentage of public company exposure versus
00:31:19.620 | private company exposure, because right now, it's...
00:31:22.540 | That's not our mandate, though.
00:31:23.540 | I mean, our mandate is to be vast majority private.
00:31:26.860 | Right.
00:31:27.860 | Currently, it absolutely is, and I think we can maintain that.
00:31:30.580 | If I look at my lessons from 2021, if we were basically, we wouldn't be making a decision
00:31:37.420 | that private markets are overpriced, and we would be not investing and predominantly maybe
00:31:43.420 | back to bonds or something, because part of what the structure of our funds can do, which
00:31:49.180 | most people can't, most funds can't either, is that you can be allocating to private or
00:31:54.980 | public.
00:31:55.980 | So, that arbitrage between where the multiples or prices are more attractive, it's really
00:32:00.820 | uncommon, not just for individual investors, but even institutions.
00:32:04.540 | Like venture funds can't really invest in public stock, and public funds can't invest
00:32:09.860 | in private, and that's like an arbitrage opportunity.
00:32:13.380 | Right.
00:32:14.380 | Right.
00:32:15.380 | Well, sounds pretty promising.
00:32:16.980 | In conclusion, what are your thoughts for, I guess, the rest of 2024, and maybe a little
00:32:22.620 | bit 2025 in the venture capital land?
00:32:25.220 | I mean, the venture industry is basically today operating in two different environments.
00:32:33.700 | Anything that's AI is basically priced like it's 2021.
00:32:38.460 | Anything that's not AI is almost unpriced.
00:32:43.300 | You have amount of venture capital dollars declined by 50%, 60% in the last two years,
00:32:50.420 | so that's a good sign for investors, but at the same time, there's still markdowns from
00:32:56.300 | the peak that haven't happened yet.
00:32:58.800 | And so, there's a lot of work.
00:32:59.940 | I mean, the same thing with real estate, right?
00:33:01.500 | There's still a lot of change or reality to bring to bear on both industries, and that's
00:33:08.020 | going to take time.
00:33:10.260 | The good thing about our fund structure is we don't have to be in a hurry.
00:33:13.460 | We got a lot of good investments in 2023, and then we may slow down, unless we see something
00:33:18.420 | good, right?
00:33:19.420 | There's no reason to deploy.
00:33:21.020 | All right.
00:33:22.300 | Well, it seems like we're also passing the bottom for the venture capital industry, just
00:33:28.980 | like we're passing the bottom for the real estate industry.
00:33:31.700 | So, in other words, it sounds like you are very optimistic and bullish, just like I am.
00:33:37.500 | Optimistic.
00:33:38.500 | Are you optimistic, too?
00:33:40.140 | If we're aligned again, there's something...
00:33:43.580 | I'm very optimistic.
00:33:44.580 | I mean, I live in San Francisco.
00:33:46.660 | We're a startup city of the world.
00:33:49.620 | All the AI companies are here.
00:33:51.740 | Everywhere I go, everybody's talking about AI, whether I'm on the pickleball court, whether
00:33:55.500 | I'm playing tennis, I'm in the library, whatever, AI, AI, nonstop, or even at the Starbucks
00:34:00.620 | with some guy's laptop out.
00:34:02.500 | So, it's everywhere.
00:34:04.260 | I'm maybe a little bit worried about valuations, how are those going to shake out, but it sounds
00:34:09.620 | to me that investing in AI long-term is worth it.
00:34:15.180 | And if you want to hedge against an interesting future, you want to have some exposure to
00:34:20.220 | AI.
00:34:21.220 | And so, that's what I'm going to be doing.
00:34:22.700 | And I want to thank you for having this open-ended fund, where the investment minimum is only
00:34:26.940 | $10, and there's liquidity.
00:34:29.420 | Well, thanks so much for coming on the Financial Samurai Podcast, Ben.
00:34:33.540 | And maybe what we can do is a mid-year checkup to see how things are going and whether that
00:34:38.660 | optimism remains in both real estate and venture.
00:34:42.620 | Yeah, that would be great.
00:34:44.220 | I love our conversations.
00:34:45.220 | All right.
00:34:46.220 | And when you come out to San Francisco, we're going to grab a beer, and we'll reconvene
00:34:50.220 | then.
00:34:51.220 | All right, everyone.
00:34:52.220 | Thanks so much for listening.
00:34:53.220 | And if you enjoyed this podcast, don't forget to subscribe, share, and review.
00:34:57.660 | We will talk to you all later.
00:34:59.100 | Thanks everyone for listening to the conversation I had with Ben Miller, CEO and co-founder
00:35:03.380 | of Fundrise, about his outlook for venture capital in 2024 and beyond.
00:35:08.680 | If you would like to explore the open-ended Fundrise Innovation Fund, you can go to financialsamurai.com/fundrise.
00:35:14.180 | Unlike traditional closed-end venture capital funds, where you commit capital and then hope
00:35:24.900 | the fund makes wise investment decisions, you can first see what type of investments
00:35:29.740 | the Innovation Fund has made first, before deciding on if and how much to invest.
00:35:35.940 | Fundrise is a long-time sponsor of Financial Samurai, and Financial Samurai is an investor
00:35:40.860 | in Fundrise funds.
00:35:42.620 | Lastly, if you enjoyed this episode, I'd appreciate a rate, review, and a share.
00:35:47.180 | Every single episode takes hours to record, edit, and produce.
00:35:51.340 | Thanks so much.
00:35:52.020 | [music]
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