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Invest in 33 Hot Startups With Just $500

August 14. 2024. 9 mins read

The ARK Venture Fund holds 33 hot startups, but is it a buy? Cathie Wood has a long track record of managing equity portfolios, and she’s now working to open up the world of private equity to retail investors. No longer do you have to be an accredited investor to access venture capital. These days all you need is $500 and a stomach for risk. Even though private equity gives the hope of superior long-term returns, it also bears a high standard deviation, and thus, more risk. We’re quite interested in the ARK Venture Fund for diversification purposes in our own portfolio, but there are a few issues. Let’s take a look.

Thumbnail showing OpenAI, Databricks, SpaceX

SpaceX and OpenAI are probably two of the hottest startups out there. Sure you can invest in names like these if you’re an accredited investor but what if I told you there’s a fund out there that holds both SpaceX and OpenAI that you can invest in? Not only that but also four of the hottest GenAI startups out there including Databricks? SpaceX got you feeling FOMO? OpenAI got you feeling YOLO? Yeah, me too. Let’s dig in. 

Investing in Startups

So let’s talk startups. We’ve been covering startups for over a decade now, probably covered a thousand names. 

Infographic: Let's talk startups

The basic idea is this: you have a Founder who has an idea, they convince VCs to invest. This typically requires traction, meaning they’ve proven that they have a product or service that people will pay money for and that it can eventually be profitable. Subsequent investing rounds help value the business. So every time somebody invests in a startup, it’s usually a collection of investors. They’ll ascribe a certain value to the business that goes up. If it doesn’t, that’s called a Down Round. 

And just remember, nine out of 10 startups are going to fail. So VCs invest, those are Venture Capital firms, invest with the intent of capitalizing on an exit even. That could be an M&A event or an IPO. Now SPACs bypassed this crucial valuation step and we see what happens when we let the market run amuck. 

Infographic: Ways to Invest in Startups

So there are ways to invest in startups. You can become a limited partner, what they call an LP, but you have to have loads of money and connections. Just being an accredited investor isn’t enough. Some funds out there hold startups, we’ve covered them, such as Baillie Gifford US Growth Trust, which allows you to purchase some shares in SpaceX. You have a Scottish Mortgage and their ilk. 

Secondary markets offer shares. These are typically platforms that require you to purchase equity and startups using large chunks of cash. You need to be accredited. Most retail investors can’t navigate this because even if you do invest in one or two startups then you typically won’t have that inside information that you need that most VCs get that tells them where the company is going. Note that plenty of startups today trade for less than the valuations they raised at.

And just a warning here: don’t get involved in equity crowdfunding. That always ends bad. 

Infographic: DXYZ for retail investors to buy SpaceX

So we did a piece recently on a firm called DXYZ. We said here that this might be one of the most ludicrous overvaluations since VinFast and since we did that video, what, just four months ago, shares have dropped 91%. Always make sure to compare the net asset value of a fund to the current price. This particular vehicle here, it’s a publicly traded fund, is likely still overpriced. We estimated the NAV to be around $532 a share. I think it trades around 10. So one of the reasons that this fund saw such an uptick in valuation is because you could get exposure to SpaceX. Now not only that but additional startups. 

You might say, well, why invest in startups? Well, here you can see the VC, it’s a venture capital, average return by vintage year for when they invested in startups. 

Bar chart showing the VC, it's a venture capital, average return by vintage year for when they invested in startups. 

You can see the S&P 500 return for these years and it should be obvious here the diversification effect that you’re receiving from holding equity in startups. And when you see here venture capital is an asset class plotted against other asset classes, you see that the standard deviation there is quite high for risk and also quite high for return. 

You see here venture capital is an asset class plotted against other asset classes, you see that the standard deviation there is quite high for risk and also quite high for return. 

So it’s certainly a risky asset class and when you look at the distribution of US Venture outcomes over the past decade, this is a great chart here, you could see that over half of all startups invested in either returned money or less than what you invested in. 

Chart showing the distribution of US Venture outcomes over the past decade

If you’re investing in just one startup, there’s a 50% chance that you’ll get your money back. Otherwise, you might get back less. You see here that the big wins are those the 5, 10x, 20x or greater than 20x. That’s these tailwinds are what give Venture Capital funds their real returns. 

Infographic: Things to consider when investing in Startups and Venture Capital

Now things to consider, VCs are going to throw money at anything that moves during peak hype. So valuations for anything generative AI right now are probably pretty rich. There’s a very high failure rate among startups, which isn’t really obvious unless you take a look at the hard numbers. And you need a subject matter expert to navigate this space. They’re privy to info you’re not, so institutional investors, in particular. 

Now SpaceX is probably one of the most visible startups out there. They’re fairly valued, if not richly valued. You can see that by their valuation timeline. 

Infographic: SpaceX valuation Timeline

So early in 2020, valued at $36 billion, $210 billion today. So that’s quite a rapid appreciation. 

Infographic: Basic takeaways regarding investing in a venture capital fund

Basic takeaways here: private companies are valued based on what investors were last willing to pay. We have no idea if $220 billion for SpaceX is overvalued or not without additional info like revenues, gross operating margins, cash flows. And the net asset value of a fund that holds startups is typically discounted to account for the valuation uncertainty. I think there’s three or four funds in the UK that just hold startups and they all exhibit that same trait. 

ARK Venture Fund

Now today we’re going to talk about ARK’s Venture funds, so it trades under the ticker ARKVX. You can invest in them on SoFi or invest in them on Titan. 

Infographic: How to invest in the ARK Venture Fund (ARKVX)

Now before we get into that, a word from our sponsors. Actually, Joe, we don’t we don’t have any sponsors. You said, “all they do is peddle rubbish.” Right, ok. Then, how about some ads then? We don’t run ads either. Got it. So I guess if you can just click the Subscribe button, we’ll move on then. Cheers! 

Screenshot: ARK's Venture fund Nanalyze article

So ARK’s Venture fund. We previously covered it last year. We didn’t find the public company exposure appealing at all. We would invest in that fund for exposure to startups as an asset class, not publicly traded firms, right? Because we want that diversification effect. 

Infographic: ARK Invest liquidity

Now when it comes to liquidity this should be obvious, right? So startups do trade on secondary platforms but when you’re talking a large fund there isn’t the liquidity you need to give everybody redemptions when they like. So there are windows and, for example, only 5% of assets can be liquidated in any given quarterly window and the fund will be closed upon the discretion of ARK Invest. So there’s certain caveats that come with investing in this fund that anybody can, I believe, with $500 or more. When it comes to fees, we’re going to talk about those in a bit. 

Infographic: ARK Venture Fund Fees

ARK Venture Fund Holdings

But I wanted to touch on the startups that were made in September of 2022 that we last look at that account for 13% of the fund weighting. 

Infographic: ARK Venture Fund Holdings

So at the bottom there you see MosaicML, they were acquired by Databricks at a six times multiple, it seems. 

Screenshot of article reporting Databricks piking up MosaicML

So ARK would have done well with that investment and you have the remaining names, as I said, accounting for 13% of the fund weighting. 

Now when we look at the top AI companies by Equity funding, you see the names here: you have OpenAI, of course, at the very top; then Anthropic; Databricks, Figure, Shield AI. 

Bar chart showing the top AI companies by Equity funding

ARK happens to be invested in all of these and they carry those in this fund with a weight of about 16%. Now what’s interesting about genAI startups is that it seems to be a race that is rather unpredictable. 

OpenAI vs Anthropic meme

And I think this meme that’s been floating around on Twitter pretty much explains that the person that was going to win the race started celebrating too early, OpenAI, and then Anthropic is catching up there. And this, I think, is based on one of the founders from OpenAI leaving for Anthropic. So the point is that spreading your bets probably isn’t the worst idea. 

So ARK’s fund so far. What do we know about it? 

Infographic: The ARK Venture Capital fund so far

Well, we pointed to those original five Investments of September in September 2022 at 13%: SpaceX, has an 11.5% weighting, so that’s meaningful, right, more than 10%; those five top-funded AI startups, that’s another 16%; publicly traded names at 15%. I think when we first looked at this fund, publicly traded names were somewhere around half and that just wasn’t acceptable. 

So what’s the 44.5% exposure left? Well, we can see all these names here. 

Infographic: The Names of the 44.5% exposure left in the ARK Venture Fund

So startups under 1% weighting account for 6% of the fund, so we’ll just skip those. The 14 names here that you see highlighted in green account for 38.5% of the remaining fund exposure. Let’s remove names we covered or we’re familiar with. So Discord and Twitter, I think we all know what those firms do. Zipline does drone delivery, we’ve covered them before in an article. The same holds true for Boom and the promise of SuperSonic flight. 

Infographic: The names of companies included in the ARK Venture Fund not covered by Nanalyze

That gives us the remaining names here. I’m not going to go through each one. I think the first one here: Relation Therapeutics is rather interesting, it’s new on our radar. We cover a lot of AI Drug Discovery startups. So that’s certainly one that’s interesting. I was surprised to see so much gaming stuff and platforms dependent on Roblox. I don’t think that’s a good idea when your entire business is dependent on the platform of another company. But ARK seems to think that’s a good thing, at least in several cases here. 

ARK Venture Fund Performance & Fees

So when you’re looking at the performance of this fund, and everybody’s inevitably going to want to look at that, it’s measured in net asset value. 

Line graph showing the Net Asset Value historical change of the ARK Venture Fund

How this works is that these startups, as I said, when there’s an investment round, then a new valuation is ascribed to them. Until then, the last investment round dictates the current valuation. So if there’s another round and it’s valued at less, they call it a Down Round, it’s bad. So this value of the fund, net asset value, is going to be a little bit outdated because there isn’t liquidity there. And also you have $64 million in assets under management for this. That isn’t a whole lot. So presumably, ARK’s going to try to push this a lot higher. 

Now, I wanted to touch briefly on fees. So you may not be familiar with how VCs work. There’s typically what they call a 2 and 20 structure. So there’s a fixed fee of 2% that’s charged to investors annually and then once everybody’s paid back the money they put in, provided that happens, then the firm takes 20% of all that upside. 

The 2 and 20 structure of Venture Capital fees

They call it the carry, right? So they’re getting compensated for doing well. 

Now ARK has taken a different approach here. There’s a couple things to note. First of all, they fixed their fees at 2.9% of the net assets through November 28, 2024. 

Fixed fee vs 2-and-20 structure of Venture capital fees

Now I don’t know what happens then but, presumably, these total annual fund expenses, those would then be charged to investors. So that seems rather steep. A 2 and 20 structure would sound more appealing but ARK’s argument is that, well, we’re taking the fees upfront at a fixed rate then that gives you more upside. Perhaps. 

Conclusion

Well, just some thoughts on this. 

Infographic: Nanalyze conclusion on the ARK Venture Fund and investing in Startups

We like the idea of holding a fund of startups. We always have. However, what’s out there isn’t overly appealing. ARK’s fees seem rather steep. After that rebate expiration, who knows if they’ll roll that rebate going forward. We don’t like the 15% exposure to publicly traded firms, that’s still high. Like to see that under 10%. Perhaps some not to exceed commitment. Cause the whole reason we’re investing in this asset class is for the diversification effect and, of course, the possible upside. 

Always put exposures into context. And in any fund that claims to hold SpaceX, what percentage of exposure are you receiving to the asset that you’re attracted to? So SpaceX, in this case, lots of investors will be attracted to that. Well, you get 11.5, well that’s not bad. OpenAI, a lot less, 1.57%; Databricks, 3.18% and, of course, these are startups that are in high demand. So it remains to be seen how much uplift there is. 

Don’t assume massive uplift at Exit when you’re coming in at late- stage rounds, right? So ARK doesn’t have to exit at IPO. That could be a good thing or a bad thing. But VC as an asset class is very appealing, it’s right up our alley. So it’s certainly something that we’re going to be considering going forward. 

Now how has ARK really performed with their other funds? That’s a topic, I think, that really merits further examination because they’ll- I know there’ll be a lot of people critical of ARK watching this video. 

Call to watch next video: Cathie Wood vs The Haters

So you ought to give this next video a watch because it really puts that into perspective. Thanks so much for taking the time to watch this video today.

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