Fundrise Innovation Fund Review: Disrupting Venture Capital

The Fundrise Innovation Fund is a new fund investing in mid-to-late-stage private tech companies. More broadly, the fund intends to focus on companies within specific sectors that have strong macro tailwinds, such as machine learning and artificial intelligence. The goal is to invest in long-term trends that expand over the next several decades.

Since 2010, Fundrise has focused on disrupting the commercial real estate market. Now they see an opportunity to disrupt the venture capital market.

I was surprised when I first heard Fundrise was launching a venture capital fund. My first thought was this didn’t seem like a logical move. After all, Fundrise’s expertise lies in real estate, especially investing in Sunbelt single-family and multi-family properties.

David Packard, of the computer company Hewlett-Packard, once said, “More companies die from indigestion than starvation.” His idea being that if a company acquires too large of a company or too many companies, the acquiring company’s management could lose its focus. Too many integration issues and moving parts could cause problems.

But after listening to Ben Miller describe his vision (Apple podcast) and touching base with the Fundrise team, I’m more enthusiastic about where the Fundrise Innovation Fund will go. After all, Fundrise is starting this new tech fund initiative from the ground up.

My Private Equity And Venture Capital Investing Background

Before providing a review of the Fundrise Innovation Fund initiative, let me share with you my private equity and venture capital investing background.

I’ve been investing in private companies and in venture capital funds since 2001. I do so because I like to diversify my investments given I had worked in investment banking for 13 years and own real estate as my main source of passive income. Further, I like to invest over long durations. The longer the better. Many of these private funds have 5-10-year investing cycles.

As someone who has lived in San Francisco since 2001, I’ve developed a tremendous desire to invest in technology and innovation. Tech startups are a part of our culture here in the Bay Area. I figured, if I couldn’t get a job at a private tech company, I might as well try to invest in those private tech companies.

Finally, I’m technically an entrepreneur with Financial Samurai. I started this site in July 2009 and I consider it a lifestyle business. There’s only my wife and me running operations so we can stay asset light and as free as possible.

Despite not having a team to manage (hooray), I have an intimate understanding of marketing, finance, customer acquisition, business development, and so forth. In business school, I’d be your favorite adjunct professor!

However, I choose not to scale up because I want our business to fit our lifestyle, not the other way around. We have enough money to be happy.

Fundrise Innovation Fund Review

Now that I’ve gotten my private investing background out of the way, let me share with you my thoughts on the Fundrise Innovation Fund. About 30 of you have asked about Fundrise’s new initiative over comments and e-mails, so here are my candid thoughts. Please note Fundrise is a long-time sponsor of FS.

Great Timing To Launch A Private Tech Fund

Private and public technology valuations have collapsed in 2022. Gains of the past two-to-five years have been wiped away from many technology companies.

If you invested in venture capital in 2021, you were investing at all-time highs. Funds that raised capital at that time were forced to invest due to their target mandates. As a result, many private companies could ask for the moon and get it. In addition, many venture funds couldn’t gain access to the best deals.

In 2022, the landscape is different. Great companies are more willing to talk to new investors. The decline in valuations has removed the frenzy. There is a lot more humility today than there was in prior years.

Hence, the timing of Fundrise’s Innovation Fund launch is good. The fund will start small and work its way to scale. As Ben (CEO) said in the podcast, “Better to invest in the best companies at a good price than invest in good companies at the best price.

Risk and reward by asset class - Fundrise Innovation Fund review

Better Value Proposition As A Builder and Entrepreneur

In the beginning, the greatest venture capital investors were builders. People like Eugene Kleiner built Fairchild Semiconductor in 1957 to great success. With technological and business insights, Eugene went on to invest in companies like Intel in 1968 and a whole host of other great companies.

Today, there are over 2,000 venture funds made up of 3-5 partners, most of whom have no entrepreneurship experience. Instead, they are professional investors who worked in investment banking, went to business school, and compete to effectively deploy capital.

Ben’s argument, which I 100% agree with, is that investors who are also entrepreneurs have an edge over investors who’ve never built something of their own. To me, it seems kind of silly that a venture capitalist who has only read case studies is giving advice to entrepreneurs.

It’s kind of like writing a personal finance book without a finance background. It’s certainly possible, as many authors have succeeded in doing so. However, it may not be most effective in helping the reader since the author can’t go deep into subject matters. Instead, a lot of fluff results, which may make a reader feel good. However, nothing in the reader is actually improving.

Fundrise Innovation Fund review

Fundrise’s Large Product Engineering Department Is A Competitive Advantage

You may be surprised to learn that Fundrise has roughly 100 engineers in its product engineering department. I know I was. Although Fundrise is a vertically integrated real estate investing platform, it is also a technology company.

When you have 100 product engineers, your company develops a deep understanding of technology. These technologies include cloud data infrastructure, analytics, digital marketing, cyber security, payment processing, data storage, and design.

By working with multiple technology companies to help run Fundrise, it also gets to deeply understand the inner workings of technology companies as a consumer and operator. This is a big competitive advantage compared to venture capital firms, all of whom have ZERO product engineers.

Be An Expert User Of Your Product

I remember driving for Uber back in 2015 because I was fascinated with this new way of making money. I figured some Financial Samurai readers would also be interested, so I gave over 500 rides. By going deep, I was able to optimize how to make the most money per hour and share my strategies. Further, I could share insightful stories about the gig economy and everyday people.

People who worked at Uber corporate, on the other hand, refused to drive or were not allowed to drive. It was as if driving was beneath them. But I thought this was a huge policy decision error. After all, how can you really know about your own product if you don’t deliver it yourself? Uber’s valuation, unfortunately, has gone nowhere since 2015.

If you better understand the product you are investing in, you will ultimately make better choices. You will understand the product’s various pain points. Further, you’ll also more easily recognize when there are positive strategic changes.

Fundrise plans to leverage its expertise in real estate and financial technology to find the most promising deals.

Fundrise Innovation Fund Access Advantage

Whenever I mention I invest in a venture capital fund like the Kleiner Perkins 20 fund, most recently, readers ask me how they too can get access. Unfortunately, gaining access to some venture capital funds is difficult if you don’t work at the firm or know someone who does.

I gained access to Kleiner Perkins funds because my good friend went to business school with the fund manager. I also ended up going on an hour-hike with the Kleiner lead manager down in Joshua Tree. Therefore, he let me invest $140,000. I say “let” because the demand for his fund was 3X its targeted fundraise size and he didn’t want to upsize the fund.

With the Fundrise Innovation Fund, eventually, anybody can invest in the fund. You don’t need connections. You just need internet access.

I wrote “eventually,” because, during the initial rollout, the Innovation Fund will first be accessible only to investors in Fundrise’s iPO (internet public offering, the way Fundrise has been raising money to fund its own operations). From there, Fundrise expects to provide the opportunity to invest to select groups of investors over the course of several months as the fund ramps up.

It makes sense to first give access to investors who were willing to invest in Fundrise, the company. This is just as well since the Innovation Fund is just beginning. Fundrise plans to raise $1 billion for the fund. Therefore, there will probably be plenty of opportunities for future investors as well.

When the Innovation Fund does open up to everyone, the minimum investment amount will be just $10 vs. usually $100,000 – $250,000 at other VC funds. Further, unlike traditional venture capital funds, investors will get a 1099-DIV tax form statement instead of a more complicated K-1 statement.

Fundrise Innovation Fund Has Lower Fees

The other knock on venture capital funds is the fee structure. The typical venture capital fund charges a 2% management fee and 20% of the profits (carry). In the past, when venture capitalists were less common and were cut from the entrepreneurial cloth, this fee made more sense.

However, with over 2,000 venture capital funds run by investors, not operators, there’s a lot more pushback on the 2 and 20 fee structure. The fee structure for private funds is the biggest downside. I’ve been spoiled by the minimal fees of index funds and index ETFs. We all have.

But given I like to allocate 10% of my capital toward private funds, I begrudgingly pay the fee. My hope is the fund will far outperform their respective return hurdles and justify the charging of such a high percentage of profits.

The Fundrise Innovation Fund has no carry fee. Instead, it charges a flat fee of 1.85%. If the Fundrise Innovation Fund is able to demonstrate its ability to invest in great companies over the long term, then not having to pay the 20% of profits will be a nice benefit for its investors.

When there is no carry fee, it can no longer be the driver of incentives for venture funds to deploy capital at all costs. This helps save investors from the fund manager chasing hot deals with a time limit to deploy funds.

Fundrise Innovation Fund Is An Evergreen Fund

The Fundrise Innovation Fund plans to be an evergreen fund (permanent fund). In other words, it plans to continuously raise capital, invest in private tech companies, and distribute capital over time.

This is unlike the traditional venture capital fund that raises capital, invests over a two-to-three-year period, and returns capital after a 5-10-year period. This cycle causes venture capital funds to constantly raise new funds (vintages).

On the podcast, Ben mentioned an interesting example of why it is better to have a permanent fund. He said Sequoia, arguably the greatest venture capital firm of all time, sold its shares in Apple after the IPO and made 6X their money. Part of the reason why was Sequoia promised to return capital to its limited partners within a window of time. If Sequoia had held onto its initial investment in Apple, it would have made a 24,000X return.

I’m excited about the growth of the Fundrise Innovation Fund over time. As a CEO, Ben is thinking strategically about how he can add more value to investors while also growing Fundrise’s own value. With over 350,000 existing Fundrise investors who have made solid returns over the past 10 years, surely some of them will invest in the Innovation Fund as well.

Good Old Fashion Skepticism During Build Out

Finally, I also like Ben’s skepticism and cautiousness when evaluating investments and making business decisions. As someone who went through the 2000 dot bomb period and started building Fundrise soon after the 2008-2009 global financial crisis, he is fully aware of the risks. He is also aware of opportunities during downturns as well.

In fact, Ben’s career time frame is quite similar to mine. I started my career in 1999 and experienced the euphoria and collapse of tech. Then I started Financial Samurai in 2009, at the bottom of the global financial crisis, while Ben started Fundrise in 2010.

As an investor, I appreciate a cautious CEO and investor rather than one who is perennially optimistic, like I am. I need that balance in order to make more risk-appropriate investments.

The key is for Fundrise to keep its eye on the ball with real estate. I expect the Innovation Fund to grow in a methodical fashion as more people gradually are hired to evaluate and guide companies.

If you want to invest in venture capital, start small and gradually work your way up once the fund opens. Study the companies the fund has invested in to see whether there’s a place in your portfolio. Remember, venture funds likely wont return capital for 5+ years. Hence, you must allocate capital accordingly.

Fundrise’s Latest Thoughts In Real Estate

For existing or potential new real estate investors, here’s a recap of Fundrise’s real estate investments and what Fundrise plans to do in this environment going forward.

Fundrise’s Sunbelt investments remain strong. Fund NAVs continue to increase because rent appreciation is growing faster than inflation costs. When mortgage rates went up, fewer people could afford homes. As a result, the demand to rent increased, boosting rent prices by ~10% YoY in the Sunbelt.

At the same time, Ben and his team are keeping an eye for more acquisition opportunities going forward. With the doubling of interest rates (but fading again), debt money ground to a halt. As a result, the “hot money players” are no longer able to allocate capital as they did in 2021. The Fundrise team is seeing 15% – 20% discounts on high-quality assets.

Finally, Ben said on the podcast said he is bearish on retail and offices due to technology and continues to be very bullish on residential and industrial because of technology. The logic makes sense. But I bet there will be some repurposing of office and retail real estate that will provide positive returns for investors in the future.

You can explore all the real estate funds Fundrise has to offer here.

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