FS_213_-_Ben_Miller_Part_2
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.
00:00:23.640 | Thanks for having me.
00:00:24.640 | So last time we spoke, you were all bulled up on real estate, which was a little bit
00:00:29.500 | different from where it was a year ago, two years ago.
00:00:33.040 | So what about venture capital?
00:00:34.600 | 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 can-- it's transformative, at least great
00:00:53.380 | technology companies.
00:00:54.380 | And so you can invest into a company that could change the world, and we could be in
00:01:00.440 | 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--
00:01:10.000 | 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, we had two things happen to us in 2023.
00:01:25.920 | Basically the tech fund launched and we came into the market near the bottom of venture.
00:01:31.720 | Venture basically, I think, bottomed in '23.
00:01:34.480 | The second thing we did was we ended up getting into among the best private tech companies
00:01:40.320 | in the world.
00:01:41.320 | Can you name some of them?
00:01:42.600 | Yeah, I can name them and we can talk about it.
00:01:44.960 | When I launched this tech fund, I had some naysayers.
00:01:48.920 | Sure.
00:01:50.680 | And the venture industry in particular said, "Well, you can't get into the great companies."
00:01:55.480 | 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, and those are like the big, large language
00:02:17.600 | models.
00:02:18.600 | We invested about 15% of the portfolios in the top AI companies.
00:02:23.200 | We then invested in the data infrastructure companies.
00:02:27.000 | And data infrastructure, if you're not a tech person, one way to think about that is that
00:02:32.440 | in a gold rush, you can invest in the gold mine, or you can invest in selling picks and
00:02:38.720 | shovels to the gold miners.
00:02:41.160 | So data infrastructure is the picks and shovels strategy.
00:02:44.000 | 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.
00:02:52.240 | And about half the portfolio is in data infrastructure.
00:02:54.760 | So the majority of it is in the 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.
00:03:06.600 | 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.
00:03:13.640 | And then we had a little bit of other things, but that's like probably 90, 95% of the portfolio.
00:03:18.760 | Oh, wow.
00:03:19.760 | 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 over 90%.
00:03:29.600 | 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.
00:03:37.360 | But like 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, it takes something that was really expensive
00:03:51.840 | or only available to a few people, and then makes it available to everybody.
00:03:56.000 | And like, that's what, you know, E-Trade did with trading, right?
00:03:59.160 | 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, 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 they're only, I think Canva's valuation last time I checked was like 25 billion or
00:04:25.160 | 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 build do some
00:04:31.040 | designs for this podcast, like AI's ability to edit this podcast, produce transcript,
00:04:39.480 | produce notes, produce designs for it, help us distribute it.
00:04:43.360 | I mean, that's all part of what AI is going to do and doing.
00:04:47.880 | And Canva is like going to be, I think, the dominant design solution for the sort of next
00:04:53.560 | generation.
00:04:54.560 | Yeah, I was kind of skeptical of AI a year ago, and I was like, oh, you know, it's like
00:05:00.200 | plagiarism 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
00:05:08.360 | generation, it's really increased my productivity.
00:05:11.560 | 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
00:05:23.120 | and leave our children underemployed or unemployed, making college and grade school education
00:05:28.840 | kind of not very valuable?
00:05:31.720 | Or is it not going to be that revolutionary for those who are able to use AI and therefore
00:05:37.640 | be able to be more productive, make more money and be more free in their lives and their
00:05:42.840 | careers?
00:05:43.840 | What's the take 10, 20 years in the future on how AI will impact our children's lives?
00:05:49.040 | Oh, man, that's, I feel like I can just repeat the smartest people out there.
00:05:54.600 | I feel like it's a progression from the latter thing you said to the former.
00:05:59.680 | So I am a believer of the Raker as well, you know, the singularity or the way that the
00:06:05.040 | chief science officer at OpenAI talks about it, Ilya, is that the neural network, it does
00:06:12.240 | replicate a lot of the way the brain works and it's really like, it is a scaling challenge
00:06:17.840 | mostly.
00:06:18.840 | Like if we can scale the compute and the, you know, algorithms and things like that,
00:06:22.840 | I think we will see like a surprising amount of progress.
00:06:26.680 | And that's what, I mean, it's sort of 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?
00:06:44.320 | When does this sort of like the linear scaling benefits run out?
00:06:48.000 | Like not anytime soon.
00:06:49.600 | And I think the actual challenge is not so much the technical capacity of, we're calling
00:06:55.600 | AI, whatever you want to call it, GPT.
00:06:58.200 | It's actually the application, the human, changing human behavior.
00:07:02.480 | Like look at Zoom, the second the pandemic happened overnight, everybody changed their
00:07:06.480 | behavior and video became part of how we interact in work and life.
00:07:11.880 | And it wasn't true before.
00:07:13.720 | 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
00:07:28.040 | and the technology is going to keep making pretty awesome progress.
00:07:32.680 | And it's just going 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, I mean, it's going to be really good at precise
00:07:41.040 | computation and recall, which we're not so good at, right?
00:07:45.080 | But exactly where we're better and where they're, I mean, the computer came along, changed how
00:07:50.040 | we do work, made us more productive, didn't obviate the need for jobs, just created a
00:07:55.720 | different kind of job.
00:07:57.080 | Yeah.
00:07:58.080 | I just remember being in school.
00:07:59.080 | There was like the HP 12C calculator, the scientific calculator, and those who knew
00:08:03.080 | how to use it were like math geniuses.
00:08:05.920 | And then those who didn't know how to use it like myself were just duds.
00:08:08.600 | And I remember quitting math after sophomore year in high school.
00:08:12.480 | 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.
00:08:18.400 | Otherwise you're going to be outcompeted against by those who are more productive in knowing
00:08:23.280 | how to use AI.
00:08:24.280 | Yeah.
00:08:25.280 | I actually think it's not really a lesson for our children because they definitely will.
00:08:28.160 | It's really a lesson for people our age and, you know, if you're 20 or 30 or 40 or 50,
00:08:33.800 | like if you're not embracing it, yeah, you're going to have a disadvantage.
00:08:39.160 | And so just talking about Fundrise for a second, I think that's also true for companies.
00:08:43.600 | Having built a company, I find companies are like people, they age, they go through maturity,
00:08:49.840 | they have like cultural or personality quirks.
00:08:53.300 | And so our company Fundrise, we have a team, we're building with AI and we're lucky because
00:08:58.880 | real estate, most real estate organizations have zero software engineers, like let alone,
00:09:04.800 | you know, a guy within a machine learning masters and things like that.
00:09:08.960 | So we're lucky to be at this intersection between tech and real estate when AI comes
00:09:13.200 | along and, you know, we've been messing around with it for a year.
00:09:17.360 | And for the first 10 months, like we had nothing, we just didn't have any way to use it.
00:09:22.520 | And it just was like a kind of, as you said, you can use it for like summary and, you know,
00:09:27.200 | pretty silly.
00:09:28.200 | They're fine, but they're not like world changing, but we just were like, okay, we're hacked
00:09:32.360 | away at it.
00:09:33.640 | And it's also how I got really, like both really confident about the kind of venture
00:09:38.640 | investments we made, because we were building and using the softwares.
00:09:42.560 | And also how I think about the trajectory of it, because, you know, we set up, you know,
00:09:47.440 | we have an open AI API access, we've produced things with it, things we produced were crap.
00:09:52.680 | Then we had to produce again, and then we realized we needed data infrastructure, we
00:09:57.080 | got the data infrastructure.
00:09:58.120 | So like, you have to use it and like learning the piano or something like, at first you're
00:10:02.960 | terrible.
00:10:03.960 | Yeah.
00:10:04.960 | But you basically like too bad, you just have to keep going at it.
00:10:08.320 | Yeah, you got to keep going at it.
00:10:09.960 | And the toughest thing is, the older you get, I'm 46 now, the less you want to learn something
00:10:15.600 | new, right?
00:10:16.600 | You want to learn new tricks.
00:10:17.600 | It's tough.
00:10:18.600 | But you got to really force yourself if you plan to be productive, have a job, be an entrepreneur,
00:10:23.960 | you got to learn how to use it, folks, because the productivity gains are significant and
00:10:27.960 | everybody else, at least the younger folks or the hungrier folks are learning how to
00:10:32.680 | use it.
00:10:33.680 | 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, you know, they're talking about using AI to
00:11:03.440 | help cure disease and sequence this DNA and all that stuff.
00:11:07.920 | But now it seems like it's about max 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.
00:11:19.360 | 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.
00:11:30.220 | So I mean, the reality is that, I mean, look, I'm not some libertarian when it comes to
00:11:37.000 | recognizing the need for regulations, but capitalism drove more people out of poverty
00:11:43.840 | in the last 30 years in China and Korea.
00:11:47.520 | 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, you know, I'm sure China has
00:11:58.480 | basically like a government version of it, and I just don't expect it to move as fast
00:12:04.360 | or be as good.
00:12:06.480 | But I mean, I can see also why you basically better have good government control over the
00:12:12.700 | extreme outcomes that could happen.
00:12:14.600 | Yeah.
00:12:15.600 | This is more philosophical.
00:12:16.600 | I thought we were going to talk about like the portfolio.
00:12:18.740 | I feel like the stuff I'm saying, like everybody who's in the space who reads this stuff and
00:12:24.720 | like works with software kind of knows this stuff, but maybe I'm like too much of a nerd
00:12:30.160 | or something.
00:12:31.640 | No, I think investing, I mean, do we really want to just invest to make money?
00:12:35.480 | I mean, I think we need to invest for a purpose.
00:12:37.560 | We need to use our gains for something.
00:12:41.280 | And I'd love to talk more about portfolio.
00:12:43.240 | So the construction of the portfolio, you know, private growth companies, different
00:12:46.960 | verticals, it looks like 90% exposure to some way to AI.
00:12:50.880 | I mean, if you could drill down to pure play AI companies though, what percentage of that
00:12:55.640 | portfolio are those pure play?
00:12:58.360 | Just as I said, depending on when this podcast comes out, I believe that AI is the revolution,
00:13:05.520 | you know, exactly how you feel about valuation and how many models there'll be, we can debate.
00:13:11.120 | But I thought it was important, valuable to have exposure to those companies.
00:13:15.160 | So we worked to get investments into what I think are the top AI companies.
00:13:21.640 | And that took some doing.
00:13:23.120 | It's 15% of the portfolio.
00:13:24.960 | So it's not, it mostly the data infrastructure and applications are where we invested, where
00:13:31.080 | I think they're much lower risk.
00:13:33.040 | I mean, this company, I hear some stats, I have our average or weighted average, if you
00:13:38.360 | sort of dollar per, the weighted average by amount of dollars invested is a 70% annual
00:13:46.400 | growth and over a billion dollars in revenue.
00:13:50.400 | So the point of the portfolio is that these companies are like not startups, they're like
00:13:55.680 | rat growing mature companies.
00:13:57.880 | And that's basically the best kind of venture, in my opinion, is usually you can't get into
00:14:03.800 | those companies because yes, you can get companies that are, you know, you wish you could get
00:14:07.800 | 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.
00:14:16.600 | Sure.
00:14:17.600 | So you're saying that later stage investing in private growth companies is more attractive
00:14:22.420 | because it has a proven roadmap, it's growing revenue, it could be generating cashflow.
00:14:28.120 | And the thing is you can't get in because everybody can see the trajectory of the company's
00:14:32.720 | growth and everybody wants in, but only a certain number of institutional investors
00:14:37.880 | or individual 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.
00:15:00.880 | And now we have that portfolio, hopefully we can then compound that success and those
00:15:06.320 | relationships with those companies to do it again.
00:15:09.440 | But you know, if you look at the portfolio, I can list some of the companies that we invested
00:15:13.680 | in, as I said, Canva, we invested in ServiceTitan, we invested in, here's one that's interesting,
00:15:19.680 | Anduril.
00:15:20.680 | Familiar with them?
00:15:21.680 | No.
00:15:22.680 | So Anduril is application of AI to defense.
00:15:28.000 | Defense.
00:15:29.000 | That's big bucks.
00:15:30.000 | 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
00:15:37.960 | prime, like the next Lockheed Martin.
00:15:41.880 | And they are radically different than existing government contractors, I mean, everything
00:15:47.200 | 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
00:16:00.520 | 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, but Anduril was launched in 2017, but Ukraine has proven it out that
00:16:15.120 | the war is being driven 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, a thousand low cost drones could sink a $5 billion aircraft
00:16:38.960 | carrier or attack a city.
00:16:44.120 | And so the defense of four drones and basically how all that connects to this, sort of to
00:16:51.680 | all military hardware and the people on the ground and 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.
00:17:06.680 | And so there's just like total break in what, 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 like
00:17:20.560 | the SpaceX of the defense industry.
00:17:22.560 | They're taking a radically different approach and they're succeeding.
00:17:26.960 | And so I understand there's people going to be just as worried about the risks of it,
00:17:32.440 | but you basically have to recognize how critically important it is, especially in the world,
00:17:38.440 | you know, this is how Hamas surprised Israel also.
00:17:42.680 | And so it's, and this is what the Houthis are doing in the Red Sea today.
00:17:46.800 | I mean, they're attacking with drones.
00:17:48.920 | And so anyways, this is going to become critically important.
00:17:53.160 | And we invested in Anduril and that was, I think, really good example of an application
00:17:58.480 | of AI that is like a sector that is going to be transformed.
00:18:02.720 | No, I mean, thanks for sharing that with me.
00:18:05.280 | I didn't, I've never heard of them.
00:18:07.280 | And what you said makes a lot of sense in terms of defense, saving lives, protecting
00:18:12.960 | lives and using technology and money to defend freedoms versus lives.
00:18:19.400 | I mean, what's, it's pretty important stuff.
00:18:22.560 | Oh, that's fascinating.
00:18:24.560 | Yeah.
00:18:25.720 | And so whether, you know, I named the three big investments we made in applications, but
00:18:30.700 | they're each category dominant for their categories.
00:18:34.080 | And same thing with data infrastructure.
00:18:36.200 | Last time we talked about Databricks, they're absolutely category dominant for data industry.
00:18:41.240 | And we also invested in DBT Labs.
00:18:43.920 | And I don't know if you have to be a data nerd to know probably that much about them,
00:18:48.080 | but basically they are the essential software for data industry.
00:18:53.920 | Like anybody who's a data professional, data scientist, data engineer uses them.
00:18:58.500 | They've really transformed how data is transformed, how data is transformed and understood inside
00:19:06.880 | our organizations.
00:19:07.880 | 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
00:19:13.840 | years ago and it just absolutely changed how we built and what was possible.
00:19:20.640 | And then we wanted to see them, we want to invest in you.
00:19:25.360 | And we ended up actually, they ended up using our, us, Fundrise and the application of DBT
00:19:30.480 | is like a marketing case study.
00:19:33.360 | So I spent a lot of time trying to build a relationship with them and then we were able
00:19:36.160 | to invest in them.
00:19:37.160 | And they're a singular company.
00:19:38.960 | There's nobody that's like a number two and they are essential and transformative.
00:19:43.400 | So that's a company that most people have never heard of.
00:19:46.160 | And it's just awesome.
00:19:47.160 | It's awesome that we invested in them.
00:19:48.720 | They're awesome.
00:19:49.720 | It really sounds like a great plan in terms of your value add to be an investor in these
00:19:55.000 | companies.
00:19:56.000 | Because if you're like, let's say a VC at a VC shop, right, you've got relationships.
00:20:00.400 | So your value add is, well, you have a good track record, you know, other portfolio companies,
00:20:05.880 | you can make introductions, help with hiring and marketing, whatnot.
00:20:09.440 | But for Fundrise, it's like, you've got connections, you've got a team, you've got a company, you've
00:20:14.440 | got dollars, you can also become a client and help spread the good word about the company
00:20:19.760 | as well.
00:20:20.760 | So to me, it seems like y'all have a competitive advantage over a traditional VC who is not
00:20:26.720 | actually implementing that product in a, you know, a multi hundred person company.
00:20:30.800 | Yeah.
00:20:31.800 | I think we have a small advantage and a big advantage.
00:20:33.360 | 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
00:20:44.040 | use almost all the products we've invested in.
00:20:47.320 | And I think that makes us just a very different counterparty.
00:20:50.760 | And then second, you know, we have 2 million users and we are a marketing distribution
00:20:56.080 | platform.
00:20:57.080 | You know, I was talking to one of our companies, we told them we were going to send an investor
00:21:01.000 | update out, I don't know, a million people, and they're like, "What's it cost us?
00:21:06.100 | How much do we pay you?"
00:21:07.100 | I'm like, "What are you talking about?"
00:21:08.100 | Yeah, you get the exposure if you let us invest in you.
00:21:13.880 | Yeah.
00:21:14.880 | I mean, we, you know, millions of customers, potential customers, brand awareness, potentially
00:21:21.160 | if they ever go public, those are millions of retail investors.
00:21:24.600 | I think about Databricks as an example.
00:21:26.880 | Most people never heard of them and they're going to go public probably in the next couple
00:21:30.400 | of years.
00:21:31.400 | And the more people know about them, the more I think they'll be impressed.
00:21:34.500 | And so there's like, I mean, there's just a value to the brand awareness that we can
00:21:38.160 | bring that's distinct or, as you said, competitive advantage over traditional venture funds who
00:21:43.000 | bring a different value.
00:21:44.000 | I mean, I'm not going to try to bring the kind of value venture funds bring.
00:21:48.360 | That's not realistic.
00:21:49.360 | Right.
00:21:50.360 | No, it's interesting.
00:21:51.360 | 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?
00:22:01.280 | Because as you told us in a previous episode, when we're talking about real estate, time
00:22:05.640 | is linear, but things happen in a non-linear fashion.
00:22:09.820 | And so the good thing about innovation fund is you can click on the link and you can see
00:22:14.640 | 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.
00:22:21.640 | But the way venture or private companies get valued is pretty chunky, right?
00:22:27.920 | It's like a revaluation upward or downward after another funding round.
00:22:33.320 | So can you talk to us about the mechanics of, if someone wants to invest, they look
00:22:37.480 | at the portfolio like, this is great, I'm going to invest a thousand bucks, $10,000.
00:22:42.520 | How do they capture the returns of the fund?
00:22:44.960 | Yes.
00:22:45.960 | I mean, this is, to some extent, the same thing happens in real estate where you basically
00:22:50.080 | have private market and public market and people in the public market transact every
00:22:55.560 | second and expect change to happen every second.
00:22:58.920 | In the private markets, it's a real world, right?
00:23:01.440 | Like you're building companies, you're building buildings, you're under construction with
00:23:06.480 | a 200 unit apartment building.
00:23:09.240 | What's the value of the building when the concrete's up and the roof's on and the glass
00:23:13.200 | is in, but you haven't put in the toilets?
00:23:16.040 | It's really difficult because if you would look at that building and say, once it's opened
00:23:20.280 | and there's a certificate of occupancy, then it's a completed building and there's like
00:23:25.480 | a binary change.
00:23:27.560 | And the same thing happens with tech companies, like they're worth a hundred million and then
00:23:32.000 | they raise a round and they're worth a billion.
00:23:34.320 | And the day before they raised, were they worth a hundred million, the day after they
00:23:36.880 | raised, are they worth a billion?
00:23:39.000 | And that's a very challenging dynamic in the private markets because in both instances
00:23:43.120 | where there's a building or a company, the change didn't happen overnight.
00:23:50.080 | But when the building is completed and people are living in it, there is a step change difference.
00:23:56.080 | Like when the company gets valued by a venture fund and they raise a billion dollars, there
00:24:00.840 | is a step change difference.
00:24:01.960 | So we need to look at both sets of data, data that's binary, like if something changes,
00:24:09.140 | that's an event, like a fundraising round, that's easy.
00:24:12.000 | And data that's non-binary, that's incremental, like the revenue's increased or they got a
00:24:18.100 | new big customer enterprise sale.
00:24:22.120 | And take today, today we've built a pretty remarkable private portfolio or portfolio
00:24:28.080 | of private companies, but we can't really revalue them until there's some external input
00:24:33.480 | that changes the facts.
00:24:35.520 | I mean, you make venture investments, you know that it takes a while before you really
00:24:40.620 | see external changes in the valuation.
00:24:44.480 | In terms of the fund mechanics though, so let's say a company was valued at a hundred
00:24:48.080 | million, raises capital, and now it's valued at 500 million.
00:24:52.600 | How does, and let's say the innovation fund holds that company, do you all revalue the
00:24:57.680 | company to be worth 500 million or do you have discretion to say, well, it's not 500
00:25:02.120 | million, you have a discount at 250 million?
00:25:04.980 | How much discretion do you have to value these companies or what is the standard practice?
00:25:09.480 | Yeah.
00:25:10.480 | Well, so our valuations get audited.
00:25:13.680 | Every single investment gets audited by our auditor.
00:25:16.920 | So it's part of the fund structure that we're in, which is a 1940 Act registered investment
00:25:23.440 | company.
00:25:24.440 | So they show up and they basically do independent valuation as well.
00:25:27.400 | And you know, but ultimately like even when a venture fund invests in a company, right,
00:25:30.920 | they're doing independent valuation.
00:25:32.680 | And so typically there's like a whole book, there's this massive book that's put out about
00:25:36.640 | how you look at valuation and the best way to value something is a third-party independent
00:25:41.680 | transaction like a public market IPO or a third-party venture fund.
00:25:47.440 | And that's basically likely to end up being the valuation we would take.
00:25:51.720 | But if it was an inside round, right, if an inside round, and so are they as independent?
00:25:57.680 | That's more challenging.
00:25:59.140 | Like were there structured terms in it?
00:26:01.880 | Okay, headline valuation 500, but there are all these structured terms around pref multiples
00:26:07.480 | and cram downs and things like that.
00:26:10.040 | So yeah, you can't just look at the headline and take that valuation.
00:26:13.120 | You have to look at the fundamentals of the business and you have to look at the terms
00:26:17.600 | of it.
00:26:18.600 | Got it.
00:26:19.600 | Okay.
00:26:20.600 | All right.
00:26:21.600 | So it's a little bit of an art as well as a science.
00:26:23.440 | You know, as an investor, let's say I have a view that, okay, things are getting better.
00:26:28.240 | Okay.
00:26:29.240 | Rates are coming down.
00:26:30.240 | Risk appetite is going up.
00:26:31.240 | Public equities are up, you know, 24% for the S&P 500 in 2023.
00:26:36.480 | M&A is probably likely going to come back.
00:26:38.840 | The IPO market is likely going to come back.
00:26:41.160 | There's going to be a window of opportunity for private companies to go public.
00:26:44.840 | Therefore, would it not be strategic to look at companies that are at the cusp of going
00:26:50.080 | public and invest in them before they go public to then capture that upside?
00:26:55.480 | I mean, obviously the IPO valuation could decline, but in general, in a bull market
00:27:00.960 | or in a growing risk appetite market, those valuations are going to continue to increase.
00:27:07.160 | So what do you think about that strategy?
00:27:08.640 | Yeah.
00:27:09.640 | Well, I mean, without naming names, because one of the things I have to be sensitive to
00:27:12.160 | is the companies don't want me talking about them and, right, I mean, I'm not their CEO.
00:27:17.960 | But if you look at our portfolio, the three most likely, sort of most exciting next companies
00:27:25.080 | to go public are in our portfolio.
00:27:27.440 | Yeah.
00:27:28.440 | And we can all see that.
00:27:29.440 | And I think we can all make a deduction as to which ones they could be.
00:27:33.200 | Yeah.
00:27:34.200 | And I think that'll be very validating for people.
00:27:36.840 | I mean, again, the funny thing about tech is that unless you're in the tech industry,
00:27:40.360 | you really haven't heard of all these companies.
00:27:41.840 | You know, we're not talking about name brands in most cases, but it's, yeah, I believe that
00:27:48.800 | some of these companies will go public the next year or two.
00:27:51.640 | I think that they're really good companies.
00:27:53.440 | There's no question about that in my mind.
00:27:55.960 | And exactly how the market values it, again, I'm not a short-term investor.
00:27:59.880 | Even when some of these great companies went public, it didn't mean that they were no longer
00:28:03.960 | a good investment.
00:28:04.960 | You know, we have to have some of the fund in liquid assets because investors redeem
00:28:09.940 | every quarter.
00:28:11.400 | And so the way we did that in 2023, and even now we have the portfolio in bonds of tech
00:28:18.680 | companies, we basically felt like when we started deploying the innovation fund that
00:28:24.120 | our investors were not looking for us to take like a kind of public market risk that they
00:28:29.200 | could take themselves.
00:28:30.760 | So we focused on private tech companies and then we had the rest of the portfolio in public
00:28:35.440 | tech bonds, which actually are not that easy to buy.
00:28:38.240 | They usually hold lots or a million dollars and most people aren't buying public tech
00:28:43.480 | bonds.
00:28:44.480 | And so we got pretty good yields.
00:28:45.480 | I mean, it was a good time to buy tech bonds.
00:28:47.960 | And so we have to have some of the portfolio in liquid assets in order basically to have
00:28:52.040 | this sort of hybrid fund, this crossover fund, democratize investing in private markets because
00:28:56.920 | otherwise there'd be no liquidity and investors expect some limited amount of liquidity when
00:29:01.920 | they invest.
00:29:03.560 | So let's say one of your portfolio companies goes public next year, there's a six month
00:29:08.000 | lockup period after IPO.
00:29:10.720 | What is the decision process then in terms of selling in the public market to capture
00:29:15.560 | that gain and liquidity, riding it out?
00:29:18.920 | Is there some type of standard which you all will operate or is it dependent?
00:29:23.160 | No, it's going to be a kind of a micro decision, ground up.
00:29:27.840 | You look at the company, look at what basically is where it's pricing, it's growth, etc.
00:29:33.560 | And then you look at the portfolio.
00:29:35.520 | And one of the great things about private markets, it's a funny thing about private
00:29:38.080 | markets is actually in some instances you get more information than public markets.
00:29:42.880 | Like a venture investor who invests in a company gets way more information than a public market,
00:29:47.080 | you know, S1.
00:29:49.120 | And so today, at least if you look at the construction of the portfolio, the macros
00:29:54.280 | we've invested in are really early in their growth cycle.
00:29:58.960 | AI is like a year old.
00:30:01.040 | I mean, I don't think we would be a seller, I think we'd be like, one of the reasons a
00:30:05.040 | company like, well, I'm not going to say a name, but a company takes your money because
00:30:09.520 | they want you to be a long-term holder.
00:30:11.040 | They don't want somebody to just trade you, right?
00:30:14.040 | That's actually not a value-add partner.
00:30:16.880 | And so to get the best companies, you need to be like Warren Buffett.
00:30:20.480 | You need to be low touch, you know, helpful if they want your help and a long-term investor.
00:30:27.280 | That's how you basically, I think, attract the type of companies that we want to invest
00:30:31.720 | in.
00:30:32.720 | Right.
00:30:33.720 | No, no, that makes a lot of sense.
00:30:34.720 | You don't want to be, you know, I don't know, the hedge fund investor who buys on a Monday
00:30:39.080 | and sells on a Friday after a 15% pop, right?
00:30:42.880 | 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?
00:30:51.760 | The investor gets these capital gains flow down to them so that the investor doesn't
00:30:56.160 | want, capital gains are a huge waste of, you lose, what is it, 37% between state and federal,
00:31:02.800 | maybe 40.
00:31:03.800 | Right.
00:31:04.800 | Yeah.
00:31:05.800 | I'm just thinking down the line, let's say five years from now, you know, more companies
00:31:09.360 | may go public, probably will go public in the portfolio.
00:31:12.400 | And so eventually the mix might be a greater percentage of public company exposure versus
00:31:19.600 | private company exposure.
00:31:21.160 | Because right now it's...
00:31:22.520 | That's not our mandate though.
00:31:23.600 | I mean, our mandate is to be vast majority private.
00:31:26.800 | Right.
00:31:27.800 | Currently, it absolutely is, and I think we can maintain that.
00:31:30.640 | If I look at my lessons from 2021, if we were basically, we wouldn't be making a decision
00:31:37.400 | that private markets are overpriced and we would be like not investing in predominantly
00:31:43.200 | maybe back to bonds or something because you, part of what the structure of our funds can
00:31:48.640 | do, which most people can't, most funds can't either, is that you can be in, you can be
00:31:53.520 | allocating to private or public.
00:31:55.680 | And that arbitrage between where the multiples or prices are more attractive, it's really
00:32:00.840 | uncommon, not just for individual investors, but even institutions like venture funds can't
00:32:06.080 | really invest in public stock and public funds can't invest in private.
00:32:11.080 | And that's like an arbitrage opportunity.
00:32:13.080 | Right.
00:32:14.080 | Right.
00:32:15.080 | Well, sounds pretty promising.
00:32:16.940 | In conclusion, what are your thoughts for, I guess, the rest of 2024 and maybe a little
00:32:22.560 | bit 2025 in the venture capital land?
00:32:25.520 | I mean, the venture industry is basically today operating basically in two different
00:32:31.720 | environments.
00:32:33.640 | Anything that's AI is basically priced like it's 2021.
00:32:38.400 | Anything that's not AI is almost unpriced, almost unpriced.
00:32:43.260 | You have amount of venture capital dollars declined by 50, 60% in the last two years.
00:32:50.400 | So there's a good sign for investors, but at the same time, there's still markdowns
00:32:55.880 | from the peak that haven't happened yet.
00:32:58.760 | And so there's a lot of work.
00:32:59.880 | I mean, the same thing with real estate, right?
00:33:01.440 | There's still a lot of change or reality to bring to bear on both industries.
00:33:07.840 | And that's going to take time.
00:33:10.200 | The good thing about our fund structure is we don't have to be in a hurry.
00:33:13.320 | So we got a lot of good investments in 2023, and then we may slow down unless we see something
00:33:18.360 | good, right?
00:33:19.360 | There's no reason to deploy.
00:33:20.960 | All right.
00:33:22.320 | Well, it seems like we're also passing the bottom for the venture capital industry, just
00:33:28.920 | like we're passing the bottom for the real estate industry.
00:33:32.400 | So in other words, it sounds like you are very optimistic and bullish, just like I am.
00:33:37.320 | Optimistic.
00:33:38.320 | Are you optimistic too?
00:33:40.040 | If we're aligned again, there's something.
00:33:43.560 | I'm very optimistic.
00:33:44.560 | I mean, I live in San Francisco.
00:33:46.640 | We're a startup city of the world.
00:33:49.600 | All the AI companies are here.
00:33:51.720 | Everywhere I go, everybody's talking about AI, whether I'm on the pickleball court, whether
00:33:55.440 | I'm playing tennis, I'm in the library, whatever, AI, AI, nonstop, or even at the Starbucks
00:34:00.600 | with some guy's laptop out.
00:34:02.120 | So it's everywhere.
00:34:04.240 | I'm maybe a little bit worried about valuations.
00:34:06.880 | How are those going to shake out?
00:34:09.120 | But it sounds to me that investing in AI long term is worth it.
00:34:15.160 | And if you want to hedge against an interesting future, you want to have some exposure to
00:34:20.240 | AI.
00:34:21.240 | And so that's what I'm going to be doing.
00:34:22.720 | And I want to thank you for having this open-ended fun where the investment minimum is only $10
00:34:28.480 | and there's liquidity.
00:34:29.480 | Well, thanks so much for coming on the Financial Samurai podcast, Ben.
00:34:33.560 | And maybe what we can do is a mid-year checkup to see how things are going and whether that
00:34:38.680 | optimism remains in both real estate and venture.
00:34:42.720 | Yeah, that would be great.
00:34:44.240 | I love our conversations.
00:34:45.600 | All right.
00:34:46.600 | And when you come out to San Francisco, we're going to grab a beer, hopefully, what in March,
00:34:50.600 | and we'll reconvene then.
00:34:51.760 | All right, everyone.
00:34:52.760 | Thanks so much for listening.
00:34:53.760 | And if you enjoyed this podcast, don't forget to subscribe, share and review.
00:34:58.960 | We will talk to you all later.
00:35:00.400 | Thanks everyone for listening to the conversation I had with Ben Miller, CEO and co-founder
00:35:04.700 | of Fundrise about his outlook for venture capital in 2024 and beyond.
00:35:10.000 | If you would like to explore the open-ended Fundrise Innovation Fund, you can go to financialsamurai.com/innovation.
00:35:21.200 | Unlike traditional closed-end venture capital funds, where you commit capital and then hope
00:35:26.160 | the fund makes wise investment decisions, you can first see what type of investments
00:35:31.000 | the Innovation Fund has made first before deciding on if and how much to invest.
00:35:37.180 | Fundrise is a longtime sponsor of Financial Samurai and Financial Samurai is an investor
00:35:42.120 | in Fundrise Funds.
00:35:43.880 | Lastly, if you enjoyed this episode, I'd appreciate a rate, review and a share.
00:35:48.460 | Every single episode takes hours to record, edit and produce.
00:35:52.620 | Thanks so much.
00:35:53.380 | [Music]