Hello, everybody, it's Sam from the Financial Samurai podcast. And in this episode, I have a special guest with me, Ben Miller, the co-founder and CEO of Fundrise, to specifically talk about his Fundrise Innovation Fund. So welcome to the show again, Ben. Sam, good to see you. Yeah, good seeing you again.

So tell us, listeners, how the Fundrise Innovation Fund got started and why you decided to start a Fundrise Innovation Fund, given your focus has been on property for the past 11-plus years? Yeah, that was the most frequent question we got from investors. So when we built Fundrise, we learned a lot about technology.

For the last 11-plus years, we built most of the major components that exist in the technology business. So we have-- I mean, we sit on top of the cloud, so we didn't build the hardware systems ourselves. But we-- databases, APIs, transaction engine, payment processing, data analytics, data engineering, product, product development, iOS apps, Android apps.

We have 2 million users, millions, billions of dollars. So we know a decent amount about technology at this point. And we also know a lot about the business lessons of building a company. Our digital marketing, we spent tens of millions of dollars in digital marketing. And that's a very important part of go-to-markets.

I have 20-some years in real estate. I know a decent amount about real estate. But at some point, we started having observations about what was wrong with venture capital and why it's basically impossible to get. You're essentially not able to invest in venture capital if you're a normal person.

And that's like-- our mission was to democratize real estate, because you couldn't invest in real estate when we started, unless you wanted to buy a house. And so our mission was to democratize investing into essentially great investments that you couldn't normally get. And we really have done that with real estate.

And we are a scaled business. We have 20,000 residential units and millions of square feet of industrial. And we are a big lender in the space. And we have hundreds of thousands of investors. And we raise a lot of money from venture funds. And I know a decent amount about it.

And we just saw it as both a problem and an opportunity. Why shouldn't people be able to do this? That doesn't seem right to me. It seems unjust. And we have expertise in it. And so it became ultimately the natural next step for the business. OK. And timing-wise, it seems pretty auspicious, given there was a downturn in 2022, tremendous valuation bubbles bursting, it seems like.

What are you seeing in terms of valuations from 2022 to now? Yeah. I mean, obviously, being lucky is so critical to being successful. And we were lucky. And also, we went about trying to figure out how to do this, which is democratizing investing into venture capital. And we went to the SEC.

We've worked with the SEC on many other kinds of innovations. And we figured out a way to do that. And that took a couple of years. We've been really trying to figure out how to do this for a while. And we actually sort of got the green light from the SEC in 2020, before the pandemic.

And then the pandemic hit. And for a lot of reasons, but one of the reasons is, you saw the tech valuations went crazy. And so we actually didn't launch it, because we thought that it was maybe not the right moment for us to do that. We focused on the real estate.

We focused on execution of real estate, because there was a lot happening in the world. And then we turned our attention back to venture in 2022. And what had happened is that it turned out 2020, 2021 was a bubble, tech bubble in particular. And the tech valuations were anywhere from 100 to 500 times revenue.

And in the public markets, they got as high as 50 to 70 times revenue. So everything had gotten inflated by the Federal Reserve's sort of stimulus and fiscal stimulus. And so when the tech market collapsed, we said, this is the time to go. And so we launched the fund about a year ago.

We started raising capital into it. But then we were very slow to deploy it. And we can talk about essentially how the fund works, but the one key part-- and it's kind of a constant refrain with me-- is we really try to have discipline. We try. And so we were slow to deploy, which is very unusual in the investment business to have capital and not deploy it.

And we didn't charge fees on the undeployed capital, actually, because it's a different challenge investing in the private markets than public markets. It's not enough to have money. If you have money, you say, oh, I want to buy Nvidia, Google. You can do that. But if you want to buy the best tech companies in the private markets, you can't.

You have to get access. And that's what was taking so long, was just getting access to the companies that we thought we wanted to own. And that's what essentially has been the recent breakthrough. But we can get to that later. Got it. So it does seem like the timing to invest in growth private companies is better, definitely better, than in 2021 and in early 2022.

So in terms of access, because I hear you, and I think a lot of people realize that getting access, investment access to these select private companies is very hard for the average person to do. So how was Fundrise able to, for example, invest alongside tier one venture capital firms like Y Combinator for a company like Vanta, for example, where it looks like Fundrise Invasion Fund invested $5 million at a valuation at last funding of $1.65 billion?

How do you gain access to these deals? Well, so it's changed over time. And there's different market reasons. Usually, it's a combination of your network and the market. And the market is much more important than everybody says it is. Everybody talks about adding alpha and their capabilities. But everybody's riding the wave of the macro.

And the macro-- that's what I learned in 2008 when Lehman Brothers went bankrupt-- is that the macro is way, way more important than everybody pretends. And it's a big part of why people are successful or not successful. So when the market collapsed in tech, a lot of money left this industry.

I mean, the amount of venture money fell by a huge amount. I don't know if it's 50%, 75%, 80%. Depends on the stage of the company. But really, the lack of capital created an opportunity for a new capital source to come in. And so companies were-- especially good executives-- were worried about having enough money, wanted to basically take more money than they would have maybe otherwise.

A lot of the mid- to late-stage investors had disappeared from the market. And so we were lucky to be able to fill a vacuum that had happened as a result of the collapse in the market. Interesting. And would you say that the more you invest in certain companies that turn out to be successful, have momentum, the easier it is to gain access to other companies because it demonstrates a track record?

Yeah. I mean, there's a few-- it's so funny. If you study venture, if you work in venture, most of the storied venture funds that became so successful, they started by having one or two great investments that made them famous. And how much of those investments were luck and how much of those investments were skill-- definitely not all skill, definitely also luck.

And so it's like self-fulfilling prophecy. Once you have one good investment, oh, I invested. I funded Google. I funded Microsoft. It made you basically a venture fund that got the next companies. And so that's definitely how it works. And the more we have world-class companies, the more world-class companies will want us or accept us.

So that's basically the broader frame. And then the second thing happened that happened really recently that we haven't talked about yet. So the first thing was we filled a vacuum. We started investing. But it looks like we're investing slowly. But the market-- we found a new way to invest that really was exceptional.

And what is that new way to invest? So what happened-- let me pan out for a minute. Companies used to go public after three or four or five years. And they would go public way earlier. And so Amazon went public after three years. And Microsoft went public. And so they were actually like, you come in.

You'd be a venture investor. You'd invest in the first one or two rounds. And they go public. And then since 2008, companies have stayed private a lot longer. And that money has been coming from private markets. And so instead of just having a series A and a series B, companies will have A, B, C, D, E.

I mean, they'll just keep-- they'll stay private for 10 years, 12 years. And so then at a macro level, the downstream consequences of that are like normal investors didn't get to participate in Uber going from zero to $50 billion or Facebook going from zero to $50 billion. A lot of that gets that capital or wealth creation is happening in the private markets.

And then two, obviously, there's a lot of capital that's needed in the private markets. And then what happened with the market collapsing was a lot of that capital that they expected to get exits from public offerings, from IPOs, didn't get exits. They got stuck in private markets. Right. And so then we found is that some of them became sellers.

At discounts. Well, discount or not discount, basically, like there's a market price. And the market price is mostly being driven by the public markets. The multiples public markets have a huge influence on private markets. And so if you are a seed investor and you invested at whatever in Stripe at a $10 million valuation and Stripe is now worth $50 billion, you're probably a seller.

And there's just a ton of people like that, a ton of funds and early employees. And so you can get into, or we have been able to get into, basically, I think, the best companies in the world at valuations that I think are fair, attractive, and certainly way lower at deep discounts to 2021.

And so you can say, OK, do I think the revenue multiple is good for the best company in the world? But we're into the best companies in the world, in my opinion. And that's basically the access challenge. And that's been freaking incredible, incredible. Because in a way, my job is basically to give investors, normal investors, access to the best investments they previously couldn't get.

And that is real estate and credit and now venture. And so tell us about the structure of the team looking for these deals. How does that work? Do you have a team? Do they email people that they know in their network? How does that whole process work where once you identify a promising investment, you actually are able to get on the cap table and make that investment?

Yeah. Yeah, I mean, let me just start with what's normal. And then let me tell you how we kind of took a different approach. Because the normal way is that maybe Sam and you and I will start a venture fund. We'll go off and see you and me. And maybe we have a dog.

I have a dog. And we would go raise money from either some super high net worth people or some small institutions. And our first fund might be $10, $20, $30 million. Then, or let's say it's $200 million, whatever. It's a larger, medium-sized fund. Then basically we hired a guy who used to work at one of these larger funds who was freaking incredible.

And he showed up. And he's like, OK, this is what we need to do. This is what I've always done. I start emailing executives of these companies. And I have these cold emails go out. And then I work my network and try to have coffee with them. And we watched him do it.

And we did a little bit. And we were like, well, that doesn't seem like a great way to do business. And then the way venture funds normally invest is they invest in what they can get. So it's somewhat like they think of it-- this is you have a funnel.

And you try to get deal flow. And you try to get as much deal flow as possible by networking and by emailing. And then basically maybe you spend your day meeting with 10 companies a day or five companies a day. And it's like a CRM process, right? You have leads.

And you have-- and you're basically trying to just get as many companies to your funnel. And as you get down through the funnel, you start to filter to the best companies. And it's a combination of what you can get into your funnel, what companies you like, and then what companies will take your money.

There can only be one lead, series A, one lead, series B. And so unless you're the top, top, top ones, which basically are Sequoia, maybe Interest and Hurwitz, maybe there's five. There's not that many that basically the best companies will choose them always. Like you'll always choose Sequoia over a venture fund that is not in the top five to 10.

Because essentially, especially in the beginning, companies are choosing a name brand to try to build their own brand. So the press will write about some Sequoia-backed company working on AI, some Sequoia-backed company working on SaaS. And you're really getting brand affiliation. So you take the money basically for brand affiliation.

And that's why in the series A, you can't win that fight. Can't win that fight. That is a fight that's a losing battle. If you're in the series A space and you're not one of these brands, you're getting the second best companies. Adverse selection. So we said, well, we don't want to do that.

That's who wants adverse selection. That doesn't make sense. Plus it's really, really risky. It's really risky. Series A is, and before, super risky. And so as you get later stage, it's a very different dynamic. Because the later stage companies take Avanta, which is not that late a stage. But if you take a business that has 100 employees or 200 employees or 500 employees, and they may have $50 million in revenue or $200 million in revenue, the money they're raising is totally different.

They don't really need brand affiliation. Their value add provided by a later stage investor is very low, very little. Maybe some business introductions, maybe it's nothing. Often it's negative because the later stage investor is more of a financial institution and less of a company builder. And financial institutions have different incentives than company builders, which is why a lot of companies who raise a lot of money in 2021 have a lot of problems.

So we basically started out trying to get out there and talk to great companies. But basically, people weren't going to take our money, mostly. They'll take some. So we flipped it. So what are the best companies? And you can go look at Bessemer's, Cloud 100. You can go-- you have to be a little bit knowledgeable to know this is a really good company.

Most people haven't heard of these companies. But if you know what you're talking about, you know that-- if you asked 100 venture people, what are the best 20 companies, they probably more or less agree. That's what's so interesting. So it's actually not an identification problem. It's actually an access problem.

And then you have this dynamic where there's a lot of sellers in their cap tables. There's a lot of people who basically, like, I'm a seed investor. I just made 20x. I'm not even that price sensitive. If I make 21x or 19x, it doesn't matter to me. Not that much.

I mean, you basically-- so it's like a really interesting dynamic where you have a somewhat price insensitive seller, and you can get into investing in the best companies in the world that are not public. So we found a really-- and that may be just a moment in time. I think when the companies are going public, and there's not a lot of money in the market today.

So there's a moment where we're just hand over fist trying to get by into these best companies. And we're doing it. I mean, it's just unbelievable. I hear you on being the brand name, a top five brand name company, leading the investment charge. And then you see these other companies co-invest-- or not co-invest.

They're like-- They follow. They follow, right? Is that so bad to be able to follow a big brand company? Because it all kind of depends on your size, too. Because if you have a smaller fund, then if you follow, you don't have to be the lead. Are there better terms for the lead investors than the follow investors?

No, no. But you can't be a follow. The follow is also-- Also tough. Also tough. And it's the lead investor does the work. The follow investor just tags along. They get the same terms. The only main difference is the lead investor usually gets a board seat. Otherwise, economically, it's the same terms.

OK. So strategically, wouldn't it be best to build the best relationships with the best big brand name VCs and then just follow along with as much as they do? Yeah, they don't want-- that's not how it works. That's not how everybody wants to follow the best VCs. And so who decides who the follow is?

Typically, the follow is actually earlier investors. Earlier investors who invested in the beginning will follow. There's not usually that many new investors following. And the new investors following, normally, the company will decide or the venture firms will trade deals. I see. I'll let you follow into this great company if you let me follow into your great company.

There's a value. The follow needs to bring some value, and usually values some kind of like quid pro quo. Yeah, interesting. Yeah, it's really hard to follow. We followed Vanta, but that was like we had a relationship. And so I think over time, we will deliver-- we have some really interesting strategies that will deliver greater and greater value, and we will be able to follow.

But another thing that's happened, you may notice, in the last year or two, is that great companies aren't raising money. What are they doing? You can't follow if they don't raise. And they're not going to raise because they raised previously at a really high valuation, and they don't want to do down round.

What if they run out of money, though? They got 18 months. Most of these great companies raised unbelievable amounts of money. Unbelievable amounts of money. So it's like a funny thing. You talk to a company, they raise money at 400 times revenue. And they have half a billion dollars in the bank.

Are they going to raise? Nope. And they're burning $50 million. They have 10 years of money in the bank. So what happened is that-- it was a challenge for us initially-- that the best companies all had a lot of money and weren't going to raise. And so then you're stuck.

The only people raising money were the second best companies or the not good companies. And then you're raising in a down round. And a down round has all sorts of bad juju, bad dynamics, bad structure, all sorts of problems. That's a whole separate thing. So now you're basically coming into something that's already sort of problematic.

It's a down round. I mean, you can manage it in some cases, but it's not a good dynamic. So normally what was happening is companies didn't want to take down rounds. And so they were taking structured rounds or dirty term sheets. So they would basically trade valuation, headline valuation.

So they'd say, OK, my company was worth $3 billion, but really it's only worth $500 million. I'm going to tell everybody, I'll say I'm a financial investor. I'll let you say it's worth $3 billion, but on the side, I'm going to have a side letter with you where I'm going to get warrants, and I'm going to get two times liquidation preference.

I'm going to get all these sort of financial structures. Basically, you have a headline where you can tell your employees and everybody that you didn't have a down round, but actually you did have a down round. And those structured term sheets, those dirty term sheets, it causes all sorts of problems.

Yeah. No, I hear you. So in terms of-- it sounds like a very competitive process to get the best deals. And I know that you, Fundrise Innovation Fund, recently invested in Inspectify. And I was reading about the company, and it sounds great. PropTech, it has an app that consolidates all the process of doing the inspection, home inspection.

And Fundrise itself is a super user where Inspectify has done at least, sounds like 5,000 inspections for Fundrise properties. So I can see the synergies in that investment. And it looks like a $4 million investment at only a $47 million valuation. Sounds good to me with the synergies involved and with the pain it is to do these inspections for institutional investors or larger, smaller landlords.

Because I've gone through the process before, and it's quite cumbersome. So I can see, as an investor in the innovation fund, the value add there and why Inspectify would want Fundrise to be on the board or as a lead investor. But can you talk about the other companies? Because I look at the innovation fund and I see artificial intelligence and machine learning as one of the areas to invest in, modern data infrastructure, development operations, financial technology, and then real estate and property technology.

So how does the innovation fund identify and get access to the best deals in those other categories? That's a really good question. So clearly, we are value add for Inspectify. And Inspectify is awesome. It's even better than you realize, which we can talk about that as a specific investment.

But you had two questions. You said, how do we identify? And you could also include an identification valuation. You have to know it's good. And then a separate thing, how do you get access? And so let me do access first. Because we've been buying and investing in these companies by buying from existing shareholders who have to sell, who want to sell.

And the company basically just has to approve it. And we find basically that they-- whatever. We bought shares from what looked like an intern in a company that's actually gone just through the roof. I mean, it's probably one of the greatest companies happening in the world today. And when we invest basically in some early employee they're selling-- like, I don't know if he's-- I feel like he's sold because he's like, well, I made a couple million dollars.

I'm just going to-- fine, I'm happy. And the company had to approve it. And actually, in this instance, the company said, OK, we'll approve it. And you can come on our cap table. But you can't tell anybody who the company is. Huh. It's like, OK, well, fine, I'll take that.

So the company has to approve it. But by and large, the companies have been OK with approving it. Like, they don't-- we're replacing some early investor or some early employee with us. We're a long-term investor. We're not a seller. And so they've been approving it. So that's how we've been able to get access.

And it's been-- because the market for secondaries is very inefficient. It is such a mess. I mean, just this random broker gets this random person selling. And they call random people. So it's like a very inefficient market. And that's great. That's a great thing. OK. I guess it's great-- That's the answer to this question.

--if you know what you're doing and if you can buy it at a valuation you think is below what the long-term valuation will be. Well, that's not exactly how I would frame it. Well, in terms of buying the shares from the interning, let's clarify that a little bit. Because the company says you can't tell anybody.

But as an investor in the innovation fund, I need to know what I'm investing in. So-- It's not normal. That's not a normal thing. Normally, yeah, we can-- I mean, it was a special company with special circumstances. Normally, it's like-- yeah, the company just says, great, you're on my cap table.

And for example, we bought Service Titan. Service Titan is like-- according to-- it's on the Bessemer's 100, which Bessemer's a famous venture fund. I think it's number seven on Bessemer's list. And we ended up on Service Titan's cap table. And whatever, that was the end of it. Like, it was just like, approved.

So and then you said like, are you focused on buying it at a great long-term price? And I think of it as the company that is growing explosively. This is what we-- if anybody paid any attention to 2010s, like, the great companies went to valuations that were just-- blew people's mind in retrospect.

Because they grew so much. That's why in venture, the power law, the sort of asymmetrical outcomes, the 1 in 100 drives all the returns. And so you're obsessed with getting into the sort of like, the best, best companies. That like a Google-- take Google or Facebook. Both times when they raised money for their series B, or A, or C, I think it was at crazy valuations.

Oh my god, who would pay $2 billion for Google? Who'd pay $1 billion for Facebook? So valuation is important. But the quality of the company and the quality of the growth is way more important in growth investment, high, high, high growth investment. Got it. Got it. Everybody has been talking about AI recently.

And it sounds like AI is going to be a long-term trend. How do you look at the five categories of investments? Do you break it up by 20, 20, 20, 20, 20, 20% to get to 100%? Or do you have flexibility in terms of how you're going to structure the fund?

Yeah, I mean, the categories are not prescriptive. You really want to invest in the best companies. And that's the most important thing. And so AI, when we launched the fund a year ago, was not obvious to us the best category to invest in. And then what's happened with the JATGBT, OpenAI, Large Language Model, Transformers, wherever you want to describe it, it's caused a sea change in opportunity.

And so it's become our primary focus. And that's really one of the most interesting things happening in the world. And because of the popularity of AI, I'm assuming valuations have gone through the roof as well. So it's one of those things where you kind of have to balance that as well.

Yeah, yes. Well, so you have to basically get inside that to really have a better understanding of what to do. Because AI is-- even the word AI doesn't mean, actually, all that much. It has sort of this broad definition. It's almost a movement as much as it is a technology.

And so what's happened-- I mean, everybody probably knows all this, right? But basically, the hardware and the algorithms usually got to a place where they sort of like-- they passed some cusp where it enabled a whole set of new applications. And that sort of dynamic actually is the way tech and venture works.

So the pattern is you have a new piece of hardware. So you take a mainframe. Mainframe to PC was a change in hardware. And you could also go before mainframe. There were punch card machines. IBM was a punch card machine company. Or PC to the internet, or the internet to mobile, or mobile to cloud.

There's like basic technology innovations that happen. And so take mobile as an example. Mobile was a combination of what happened with Spectrum, and Qualcomm, and Apple, and basically it was hardware. And then inside-- so that's like the bottom of the stack. And you go up to the sort of middle of the stack, which different people have different ways to describe it.

But you call it sort of the platform. That's what I think is a good handle for it. And so the platform is like where software engineers play. Like Twilio is a platform company, right? Consumers don't actually talk to Twilio. Twilio is being used by software engineers to enable an application like Uber.

Uber is an application. And so the App Store created an ability to have apps. And the applications came after the hardware, right? Uber was 2011, but the iPhone was 2008. So what's happened is that like NVIDIA, at the hardware level of AI, that's clearly blowing up and mature. And then in the middle of the stack, which is the platform level, you have like clouds, and you have all this data infrastructure.

And then as you get to the top, the applications, there's very few. And I'm taking this from Tomasz Tangas, who's one of our partners. But basically, if you look at the cloud, cloud companies are worth $3 trillion, or something like that. And that's Amazon, AWS, and Google, and Microsoft.

And there's like four or five cloud companies. And they're worth $3 trillion. And there's 100 apps that are public that are worth $3 trillion, worth about the same. And apps are like Snowflake or ServiceNow or something, right? So that same thing's happening in AI. The apps basically haven't been invented, really.

Or if they have, nobody knows about them, other than maybe chat GPT. And everything that's sort of happened is like infrastructure, platform layer, apps. And so this is actually always how it happens. Maturity moves its way up the stack. And so we can play AI different places in the stack.

And so the data infrastructure, which is sort of the platform level underneath of AI, you could also think of it as like if there's a gold rush, you can try to find gold, or you can sell picks and shovels. Data infrastructure are the picks and shovels. Everybody needs these technologies to be able to do the stuff that is the application.

And we've been investing like crazy into the picks and shovels, because that's clear. And yes, and pricing, like the LLMs. The LLMs are-- there's only really five major-- What's an LLM? Large Language Model. Yeah, Large Language Model. So OpenAI or chat GPT is like the biggest, most famous LLM.

They've kind of, in a way, like reinvented it. Because it was invented by Google, actually, funny enough. OpenAI is the biggest. Then there's Anthropic, Cohere. Databricks basically bought one. So the point is there's-- because Nvidia sort of has one that's partnered with a company. So five LLMs or four LLMs, not that many.

And because as I said, the deeper you go into the stack, the less companies there are. So there'll be less platforms than there are apps. But there'll be more platforms than there are hardware companies. And so in some of the cases, like we invested in Databricks. Databricks is a platform company.

They are one of the great companies in the world right now. So everybody who's in the tech space knows about Snowflake. And Snowflake's been absolutely on a tear. Databricks is comparable to Snowflake in terms of opportunity and excellence. My opinion, many ways better. And even better for what's happening in the world, which is that Databricks is really the go-to company for data rather than databases, which is a different kind of-- we're down in the weeds here.

But we invested in Databricks. Databricks is-- to be able to get Databricks now and own a chunk of that company is just so exciting. And they are integral. Like, it's a different risk profile. You're not taking sort of like, is this company going to be successful at risk? You're taking like, how much are they going to grow risk?

And I think they're going to grow a lot. How much did the innovation fund invest in Databricks, and at what valuation? We put $25 million into Databricks, and it's 25% of the fund, about. Oh, wow. So that's a really bullish-- High conviction. High conviction idea. Yes. At what valuation is Databricks?

I would have to go check. One of the things that's sort of tricky for us is that the best companies, they don't-- getting the valuation is not really what is good for them. So if we invest-- not Databricks, but pick another company, we invested, and we invested a deep discount to their last round.

They don't like us talking about that. OK. Right. All right. So if we want to get the best companies, we don't run around talking about how we got them at great deep discounts. Got it. I hear you. I hear you. Yeah. And I think the discount is sort of irrelevant.

It's a question of what sort of price to growth ratio, or what do you-- the discount is a nice way to back into that. If I look at their growth rates, I look at their opportunity, I look at basically the multiple I'm buying it at. I don't really care if it's a discount or premium.

I care about the future. What the future is. Right, because this is a growth fund. This is a private growth fund. So interesting. So wow, 25% of the fund in Databricks. So we got to do a lot of reading on that. But this is the thing. I think as a common person, we couldn't have gained access to Databricks, right?

We can't invest in Databricks. It's a big secondary. Right. Are you allowed to reveal-- actually, yeah, who were the lead investors in Databricks? Do you know off the top of your head? So the top VCs? The top, top, top. I mean, the other thing that happens with these sort of key platform companies is that you also see the cloud companies invest in them.

So you see Google and Microsoft and NVIDIA all invest into the sort of certain-- that's another really interesting thing we've seen. Like, oh my god. It's like, who's who? And then the other thing about our underwrite, we talked about how we're different. A lot of venture people are CS, computer science degree, real engineers who maybe went and did-- built a company or maybe went into finance.

But a lot of venture people are also just finance people. I would say especially the late stage investors are mostly former investment bankers or management consultants. We use the technology. We have people on our team who live inside and build with these platforms. Like, our ability to understand Databricks or go down the list of data orchestration or data governance-- we invest in a data governance company.

Our engineers-- I love having engineers involved with us underwriting companies because we can buy their software and use it. Or we're already a big customer. That's what happens to make them companies like us. And so our underwriting of technology, it's like a deep underwriting. And so as the investor looking to invest in the innovation fund, I'll go to Fundrise and I'll look at the publicly stated 17 assets invested so far.

Not all are private. When I look at the investment-- so let's say I say, oh, Inspectify. Looks like a no-brainer. Wow. Devaluation of the funding. Last round of funding was only $47 million. I think the total addressable market is much bigger and they can gain market share. And it could be easily $500 million company.

When I invest my money in the fund now, it seems like I'm able to cherry pick or have a competitive advantage to say, oh, this is what you guys have? OK, I'm going to invest in it. So how does an investor think about investing in a fund that already has investments?

And how do those gains accrue to the investor, to the new investor, who didn't invest at the exact same time the fund invested in these specific companies? Right. Let's try to do the mechanics of it and then the so what. So the mechanics, investor buys into the fund. The fund, let's say, round numbers, $100 million today.

Put in $1 million, you own 1% of the fund. And the fund has $100 million and buys or invests into Inspectify or Databricks or ServiceTitan or whomever. And so you essentially own your 1% of those investments. And if we make more investments, you would own a percentage of those investments, too.

It's a fund. It's a portfolio. It's like a mutual fund, except for it's a private company, not public companies. The pricing in the private market is very challenging. So when we invest, obviously, that's a good sign. That's the price. When they raise the next round, that's usually the easiest way to kind of re-strike the nav.

And as we get more and more companies and more and more momentum, which we're getting some serious momentum these days, there'll be more and more companies raising. If you have 100 companies, which would be a lot, but let's say we have 30, probably every company raises every 18 months.

You'll start seeing fairly frequent repricing. And it can go down, too, by the way, just to make my regulator happy. Companies can go out of business or raise at a lower round or have some kind of distress. And our job is to basically try to price it as best we can.

And usually, the best way to do that is a strong external signal. And so when something's going to reprice up or down, like a company, I think that in the beginning, there's less momentum, less repricing. As we get more momentum, there'll be more repricing. And I think it'll be harder to try to time that.

Sure. Yeah, because as a normal, let's say, public stock or bond investor, you buy it. And that's day one. And you gain or lose. And for other venture capital funds that I've invested in, so we commit capital. And then there's capital calls over a two- to three-year period. But given we committed capital at the start of the fund, the logic is we accrue all the gains as the investments come in and go out.

And so with the innovation fund, you've got capital. You've committed the capital. And then it's open to new capital. So understanding the mechanics is helpful. And so when I look at the portfolio, let's say-- let's just, for example, I know that one of the investments in Spectify is going to do a new round of funding at 10x-- let's just say 10x the valuation that Fundrise Innovation Fund was able to invest in.

So instead of $47 million, it goes to $500 million in the next series. Could I think to myself-- or let's say it's Databricks, and Databricks is 25% of the fund. And it raises at 10x, which it's not going to do, but maybe it, but 10x. Would it not be strategically wise to then say, oh, OK, well, let me go invest as much as possible in the Fundrise fund before the NAV reprices?

I mean, you're asking at least two different questions. One is, if you have insider information-- Let's not say insider information. Let's say you believe that it's going to be repriced. Even that-- the definition of insider information applies to public companies. So I don't even know how insider information works for private companies.

That's confusing to me. But obviously, if you have an asymmetrical information advantage, that's how a lot of markets work. I think it's unlikely that you would have that very often. Most people don't know when-- most people don't even know if they've ever heard of these companies. This is like-- you have to be pretty deep in to actually know a lot about the company.

And then you have to know they're going to raise again. So I think that's going to happen pretty unusual-- it's not going to be common. Right. I know it's not going to be common. It's just more like a thought exercise in terms of how an open-ended venture fund works.

Because let's say I have a friend who works at Databricks. They're based in San Francisco. I play softball with them. And I'm like, ah. And he's like, ah, Sam, the business is doing great. And we're probably going to raise a new round of funding. That's just hanging out on the softball field.

Oh, really? OK, you're going to raise new-- and the business is going great. It's a private company. He doesn't really know exactly. But it's like, OK, pretty good. Oh. Oh, and Fundrise Innovation Fund invests in Databricks. Maybe I should invest in the fund, because I can't directly invest in Databricks.

Yeah, or there's an article in the information that Databricks may raise another round. And you look at it, and you're like, hmm, I wonder what price they're going to raise. And in the article, they say, we're not going to raise a discount. So yeah, this is like-- I think you're asking somebody almost something very narrow in a way, because I think that's-- again, I just don't think that's a systematic dynamic.

I think it's much more about, OK, I think that it's hard to reprice Inspectify. Let's say I-- I know Inspectify is-- let's say, in theory, they're killing it. They're doing really well. And I should talk about just one minute why I think Inspectify is better than you might think, even though I think what you said was good.

But if I knew their growing revenue and the growing revenue but haven't raised a round, it's harder for us to actually strike the naff. Or if I knew that they were-- this is a company. Maybe they're down for six months. It doesn't mean they won't be-- they won't revert to the mean and catch back up.

That happened to us in 2020. Our fundraising and our growth slowed during the pandemic. And then it reverted back to the mean. So it's really hard to price these companies. It's really difficult. The hope is that once you have more and more companies-- and we have a decent number already-- it's hard to play inside those intervals.

I think it's challenging. Got it. I mean, it is almost kind of like a belief play, a macro play, where do you believe these technologies and these categories are going to revolutionize and change the future and grow? And if you do, you need to take-- you can take a fund approach where the fund invests in multiple companies.

Or you can take an individual angel or direct private investment approach, which I don't really recommend. Because you don't have any edge as an individual, especially as a common individual. Super hard to get access to these companies. Yeah. And so I'm just always thinking about it as a strategic investor in the way I think about it.

Because I always try to think about the future. And so yeah, if the rising tide lifts all boats in these specific five categories, for example, then obviously the innovation fund will probably ride with it. There's no guarantees on returns, but it'll ride with it. So I'm just trying to think from an investor, potential investor's point of view, how to think about it.

You've got the macro. You've got technology. And you're able to look at the existing portfolio. And as we talk here today, it sounds like there are a lot more opportunities on the horizon. And as the fund raises more capital, you will reinvest that capital in those specific opportunities. Yeah.

Yeah, I mean, I have a broad view-- and this is like runs counter to most people in the investment business-- is that the macro is more important than you as a manager. And that's like-- because everybody sells their sells. Sure, everybody's talking their books. Everybody's saying, I'm such a great manager.

But all those venture people who were a genius in 2019 didn't look so smart in 2022, right? So I mean, there's obviously skill. You have to get access. You have to be able to pick good companies. But I think that picking the good companies is not as hard as you might think if you are picking the best-- Right.

Go look at the top 20 companies. It seems like really it's access. It's like the rich get richer. The alumni of the private college institutions and their legacy admissions, they get in easier by 5 to 8x. So it is access, folks. And this is kind of the reality of the world.

I know the venture world relatively well because I have a lot of friends in the venture world because I'm here in San Francisco, Kleiner, and I have other parents who are in the venture world. And it's really about access. Access, access, and man, I went to this holiday party at one of the top venture funds.

So many other VCs from other competing funds were there because it's all about, OK, I'm going to invest in Series A. And I know someone at another fund who's going to support the Series B, and then Series C, and then there's IPO. So relationships and access, it truly is more important because we already know, or a lot of us know, which are the top companies that you want to gain access to.

Right. And so there's a bunch of implications of that. And you didn't say this part, but then there's this regulatory barrier. Normal people can't even invest in it. They're not allowed to. The companies have to be public. So you have two different barriers. And we created a way to surmount the first one, which is a regulatory barrier, and the second one was a human barrier.

And we've been able to surmount that so far. And I think we will continue to-- I can see a line of sight to I feel like we're confident about the, let's say, the next short period, like three months, six months, a year. Obviously, it's hard to say what two years are going to look like from now.

But the thing about venture is that winning is the best strategy because it causes more winning. If you have the best companies and we have a really supportive investor base who's like-- we bring 2 million users to the table. Like when Inspectify-- when we sent out our email to our investors saying, hey, we invested in Inspectify, Inspectify's web traffic doubled.

Sure. So very hugely value added. They got 100 sales leads, which in B2B business is a lot. And so if we can get more investors, we're more valuable to the companies we invest in. And so that's like our long-term play is that basically we bring something to the table that's different than what-- Sequoia brings all sorts of things to the table.

They don't bring 2 million investors. Right. That's what I think is our kind of like-- so that's like, how do we keep scaling and maintain quality? Is there's a potential network effect. Right. No, that's absolutely true because it's so hard to gain access. The company will say, what can you do besides bringing capital?

Because capital is kind of a commodity, right? Everybody-- there are a lot of people with a lot of money and a lot of institutions with a lot of money. So what is the value add you can provide? And that's actually something that I've been thinking about as well with Financial Samurai and investing in private companies.

Like, well, my value add is I have a platform that I can help market your product. And so that is something I've thought about. But as a stay-at-home dad raising two young kids, there's a lot going on already. So in terms of investing in the fund and then gaining liquidity from the fund, it's a time horizon of five plus years, maybe longer.

Whenever I invest in venture and venture debt, I think about a 10-year horizon. And I hope I don't die before the 10 years, obviously. But if I do, then my heirs will be able to get the distributions. So how should investors think about liquidity, getting exits from the fund, as well as also, what would you say is the recommended percentage of one's investable assets they should invest in private growth VC funds?

Right. Well, let me do the first one. The second one is a very hard one. It's personalized circumstances. So we created something new, which is basically a venture fund that the public can invest in. And the underlying assets, which are companies like Serviceite and your Databricks, which are not liquid, we can sell our shares on the secondary market.

But it's going to be hard to do, because it's very inefficient and maybe not get very good pricing, if you can get any pricing. Because usually when you want liquidity, there's no liquidity to get. That's the way liquidity works. It's bimodal. So we believe we have to hold a chunk of the fund in public liquid assets.

That's why what we have done so far is we've been holding cash in money markets, which is not so bad, and in public tech debt, bonds. We bought a lot of-- the bond market was sort of fractured last year. And so we bought $30-plus million of fractured or broken bond offerings.

So we got some really good pricing. But it's not really where maybe we'll get single digit yields or something. But it's not really what we're-- it's there for liquidity, because investors expect things to be liquid, even if it's a strategy. How long does it take Inspectify to become-- to fulfill its potential?

That's a long time. And most investors, they want to get liquid on their timeline, not on the company's timeline. And so we had to create this hybrid vehicle. And that's how we've done it. And so that answers my question on, oh, why are there publicly holdings in the fund?

So the primary reason is to provide liquidity when people want it? Yeah, and also, if there's a $25 million investment to be had, you can write that check. Right. Right, right, right, right. Got it. That's interesting, because traditional VCs, they don't do that. They don't have that liquidity. You wait 5 to 10 years.

So exactly when is the earliest someone could get liquidity? Because if I'm in-- so it's quarterly. Every quarter, yeah. And how much of that liquidity? Let's say I invest $100 grand. Yeah, we hold enough liquidity that I'm not worried about people needing to get liquid. It's similar to the real estate, where we have quarterly liquidity available.

It's a little different, because the tech fund can not have liquidity, where the real estate funds are required to have 5% liquidity every quarter. But the real estate is much more liquid. You can always sell a building. I can't force Databricks to go public. Sure. So it's a little less liquid than real estate.

But we manage liquidity by having, essentially, like a portfolio that includes liquid public assets. So can we just talk about an example? Let's say I invest $100,000 in the fund. And for some reason, I need liquidity. How much of that $100,000 can I get back? Yeah, you would hit-- you go into our app, hit Redemption.

And in the quarter, we pay $100,000. Oh, 100%. Yeah. So that's a good option to have for people, just in case they need liquidity. Definitely, for folks listening, don't invest in private funds with five-plus-year time horizons if you need the liquidity within five years. You need to properly asset allocation your funds accordingly.

Because sometimes when you need liquidity, as Ben said, you might not get liquidity, or you might have to sell at a larger discount than you desire. So there is a situation, Ben, where let's say-- I don't know-- there's another huge financial crisis, and people just need liquidity. Being able to pay back 100% liquidity from all investors is going to be impossible, because not the entire fund is liquid.

Yeah. Yeah. Well, so two points. One, 100% of people wanting liquidity at the same time is not going to happen. I mean, you have is like our normal liquidity demand. Normally, there's some number of people who want liquidity. Currently on the fund, it's infinitesimal. On other funds that are more mature, we've been doing this for 10 years.

It's pretty statistically predictable for us, because it's across hundreds of thousands of people. So it's like-- and it's highly correlated to the S&P 500, actually. So it's not that hard, actually, to manage against it. But with the venture-- but with the real estate, again, with the real estate, we can sell real estate.

We do sell real estate. With tech, it's a slightly different fund structure, because the underlying asset is the most-- arguably one of the most illiquid assets out there. Right. So again, folks, if you invest in a venture capital fund that's private companies, you really have to invest with a five-plus-year horizon.

Be consistent with the goal of the fund, and allocate illiquid capital to illiquid investments, and then vice versa. We want to talk about our second question, was what percentage do you think is a wise percentage to invest in private companies' private funds? I have my own views, but I'd love to hear yours.

I feel like my chief appliance officer would go crazy if I was answering that question. I could answer it like the sale of-- like institutions hold 20% to 30% of their assets illiquid assets. I think it's the wealthier you are, the more liquid you can be. Right. And so it's very circumstantial.

We have people redeeming every day from our site, and we always ask them, why are you redeeming? And the most common reasons are buying a house. There's life reasons. Sure. And so yeah, there's no objective answer to that. Got it. And that makes sense. If you look at the Yale Endowment Fund, it's something like $30 plus billion.

Something like 70%, 80% of its asset allocation is in private or illiquid funds or investments. And so folks, the reason why the wealthier you are, the more illiquid you can be, is because the remaining smaller percentage of your liquid net worth is still a large, absolute dollar amount. So if you are worth $10 million and you put 80% in illiquid funds, well, you still have $2 million of accessible liquidity.

And of course, it depends on your cash flow. Personally, I like to invest no more than 20% of my net worth in private companies and private funds because, well, I don't have tens and tens of millions of dollars, and that's just my capital allocation. So everybody has to figure out on their own, but also be really consistent with their liquidity goals and understand your cash flow and understand your future and what you need.

All right, Ben. So is there anything else we should talk about regarding the fund and what the future holds for the fund? What is the ideal scenario for the fund in the next one to two years in your mind? Yeah, I mean, I can't believe how lucky we are because the AI revolution is maybe the biggest technological change in our lifetime.

I mean, going from creating the internet, created tons of companies, tons of value, and creating mobile, mobile didn't, cloud did. So this is like-- Goldman Sachs came out saying they thought it could double GDP growth. And they measured-- they said that they could have 500 times the productivity gains than a personal computer did.

So the amount of value created and captured here is going to be astronomical. And that has nothing to do with us. We just happened on the scene when that's happening. And our job is to basically just to get in the middle of that as much as possible because that's what's happening today.

And that's the opportunity. It's just unbelievable. Right. To focus-- well, first, identify investment trends and get on that rocket ship and not really care where's your seat, right? That famous quote, just identify that rocket ship and get on. Because if you can focus on the investment trends and focus on the big picture, the macro, a lot of the other stuff will take care of itself.

And I know there's going to be some blowups here and there because there always are in new riskier investments. But if you can focus on that trend, I think good things will happen. So how many investments would you think would be ideal for the fund? Is there a cap on the limit?

Is there a cap on the size of the fund? The fund is a registered-- or sorry, regulated investment corporation, which basically has certain diversification parameters. So for example, we can't have more than 25% of the fund in one company. We have approximately 25% in one company. And so there's a-- I don't need to get into the details, but basically you're not supposed to have more than-- well, I'll do this because I'm a detailed person.

But half the company, half of the portfolio can be concentrated, and then the other half has to be diversified. What does concentrated mean? Concentrated means technically not more than half. So half has to be in at least two companies. So a quarter, right? Yeah. Quarter max. So that's fairly concentrated.

The other half, no one company can be more than 5% of the fund. Interesting. So you end up with 22 companies is the kind of requirement from a-- Minimum? From a RIC, a regulated investment corporation sort of structure. And what that lets you do is the fund then is tax free.

There's no corporate tax at the fund level if you're a RIC. So that's why you want to conform to those regulations. Tax free. So that's like the minimum. Can you talk about what that means to the consumer? Because what do you mean the fund has to pay taxes? Fund is tax-- no, the fund is-- there's no tax at the fund level if you're a regulated investment corporation, if you're a RIC.

So it's a pass-through entity. So why would a fund ever not want to follow and be a RIC? Most venture funds are not RICs. Most venture funds are LLCs. I mean, now you're getting deep into insurance law and tax. Yeah, let's not get into that. But interesting, interesting. OK, so 22.

So it sounds like you'll have at least 22. But what if there's a situation-- because eventually, it can get so big that, actually, it could be good from a risk perspective. But could you envision the fund having 65 investments? Or is that just getting out of control there? It's hard to say at the moment.

Because to some extent, it doesn't really matter the number of investments. It depends on the dollar size. So we've made some small investments. And the reason I make a small investment is I can get on the cap table and get to know the company. And the more you know the company, the more conviction you can get.

And then you can say, oh, this is a great company, and I want to invest more. Right. So that's a whole different strategy. Your foot in the door. Yeah, it's not the first check that matters. It's the size of the check that matters. Mm, yeah. Well, it sounds great.

It sounds like there's a great opportunity. It definitely seems like all these technologies are the wave of the future. Ben, for those who are interested in investing in the Fundrise Innovation Fund, what is the minimum required to invest in the fund? And what are the fees? So the minimum is $10, which is our mission to make it, to lower the barriers.

And the fees are much less than a normal venture fund. So a normal venture fund charges $2.20. It's a 2% annual asset management fee. And then a 20% carried interest for $20. And then a 20% carried interest for 20% of the profits. Some charge more than that. Some charge-- I think Benchmark charges 30% of the profits.

We have no carried interest. So we just charge a 1.85% annual asset management fee. So less than venture charges for annual asset management and no carried interest, zero profit participation. Right. Now, that's good, because I'm definitely invested in a fund that is-- I think it's 3-plus percent and 30% carried interest.

And it's one of the top funds out there. So I was like, well, again, it's about access. All right, well, you heard it here, folks. $10 to get into-- to start investing in these technologies and companies. That is pretty revolutionary, folks, because as a credit investor, a lot of these funds, you have to invest a minimum $200,000, $250,000, at least $100,000 in the friends and family rounds that I've seen.

And a lot of times, there's just no supply. You just can't get in. So thank you for sharing that information and democratizing that access to venture capital, because I don't know if I've heard of any other $10 investment minimum out there. So sounds great. All right, Ben, well, it was great chatting with you for the past hour plus.

We will speak again, hopefully at the end of the year or in the new year, to talk about real estate, your views, and whether they've changed at all. You can listen to a previous episode we had. And also, thank you, Fundrise, for being a supporter and sponsor of Financial Samurai all these years.

I really appreciate it. And until we speak again-- Yeah, onward. --onward. Well, everyone, I hope you enjoyed today's podcast episode with Fundrise co-founder and CEO Ben Miller. If you would like to learn more about Fundrise and the Innovation Fund, please visit financialsamurai.com/fundrise, F-U-N-D-R-I-S-E. Take care.