My first venture capital investment was in 2007. I invested $70,000 in my college classmate’s gin company called Bulldog Gin, which ended up selling to Campari in 2017. Looking back, investing $70,000 in a single private company at age 30 was irresponsible!
I knew nothing about the spirits market. All I knew was the founder, his experience in investment banking, and his drive to succeed. In addition, $70,000 as a percentage of my income and my investments was way too high from a risk management perspective.
I’m thankful to have earned a return on my investment. However, since then, I’ve learned to be much more strategic and responsible with my private investment capital.
Based on my research and experience, I’m not a proponent of angel investing (investing in individual private companies) because of adverse selection. All the best deals go to venture capital funds with stronger connections and expertise. Hence, my focus is mainly on investing in funds.
Why I Invest In Venture Capital Funds
I’ve written in the past why I invest about 10% of my investable assets in private funds despite the fees.
One of the reasons is to diversify my investments away from public equities, public bonds, and real estate. Public equities are especially volatile, which can feel uncomfortable once you accumulate a certain portfolio value.
Another reason why I invest in venture capital funds is to gain access to companies staying private for longer. Instead of buying a company after it goes public, I’d like to invest in more private companies earlier to try and capture their valuation growth.
In my perennial search to find the next Google pre-IPO, I’m willing to continue to allocate a minority of my investable assets to private funds and pay a fee.
Unfortunately, with investment minimums between $100,000 – $250,000, not everybody has the capital to invest in private venture capital funds – until now.
In 2022, Fundrise launched its Innovation Fund (my review). A year later, the Innovation Fund has built a portfolio of promising investments.
With only a $10 investment minimum, Fundrise provides access everyone in private growth companies. In addition to a low investment minimum, Fundrise doesn’t charge a percentage of profits, only 1.85% of management. Traditional venture capital funds charge 2% of management and 20% of profits. Some charge 3% and 35%.
The Innovation Fund invests in five main areas:
- Artificial Intelligence & Machine Learning
- Modern Data Infrastructure
- Development Operations (DevOps)
- Financial Technology (FinTech)
- Real Estate & Property Technology (PropTech)
The Databricks Investment And AI
What really caught my attention was when the Innovation Fund recently invested $25 million in Databricks, one of the most innovative software, data, and AI companies today. The company grew out of the AMPLab project at my business school alma mater, UC Berkeley.
Today Databricks is used by over 10,000 organizations worldwide. Databricks raised about $500 million from investors such as Andreessen Horowitz, Baillie Gifford, ClearBridge Investments, and NVIDIA.
Part of my goal over the next five years is to build out my investment exposure to artificial intelligence. AI is clearly a positive long-term investment trend. I also fear our children’s jobs will be crowded out by artificial intelligence, which is why I’m trying to hedge by investing in AI.
Here are some of Databricks’ financial highlights as of Q2 2023:
- Crossed $1.5B revenue run rate at over 50% revenue year-over-year growth with the second quarter representing the strongest quarterly incremental revenue growth in Databricks’ history
- Ended the quarter with more than 10,000 global customers, including >300 customers consuming at $1M+ annual revenue run-rate
- Achieved record Non-GAAP subscription gross margins of 85%
- Closed acquisition of MosaicML, a leading generative AI platform
- Delivered 20 product and feature releases at the sold-out Data and AI Summit in June with over 30,000 global attendees
Praise About Databricks
“Enterprise data is a goldmine for generative AI,” said Jensen Huang, founder and CEO of NVIDIA. “Databricks is doing incredible work with NVIDIA technology to accelerate data processing and generative AI models.”
“Data and AI have rapidly become the centerpiece of many business strategies. Databricks has not only pioneered the Lakehouse category with a world-class team and product, but it is now also at the forefront of Generative AI for the enterprise. We’re proud to extend our investment at such a pivotal time for the company, its customers, and the data and AI industry.” – Alan Tu, Lead Private Equity Analyst, T. Rowe Price Associates, Inc.
If Jensen Huang from NVIDIA is investing in Databricks, I want to as well. The guy is worth about $38 billion and clearly sees the future.
Living in San Francisco, I can’t help but hear about AI everywhere. I also don’t want my kids asking me in 20 years why I didn’t invest in nascent AI companies today. Even if I fail to invest in an AI winner 20 years from now, at least I can say that I tried.
I’ve had this same fear regarding real estate because I’ve questioned why my parents and grandparents didn’t buy more real estate when they were younger.
Podcast On How Venture Capital Works
The Innovation Fund is now open to all investors. I talked to Ben Miller, CEO and Co-Founder of Fundrise, about the details of his fund, how an evergreen venture capital fund works, and future investments his team is excited about.
Podcast Interview Topics Include:
- Why Fundrise got into private company investing
- How the investment process works to win deals and gain access
- The value-add Fundrise can provide with its investments
- Valuations of private growth companies today versus in 2021 and 2022
- The power law and how the top investments account for most of the gains
- Its Databricks investment, which currently accounts for 25% of the fund (the limit)
- How the returns work for an open-ended venture capital fund
- How Fundrise structured its fund to enable investors to get liquidity every quarter if desired
- The portfolio structure and how many investments the fund wants to make in the future
To learn more about the Fundrise Innovation Fund, click here.
Reader Questions About VC And AI
If you invest in venture capital, I’d love to hear about your experience. What are some wins and losses you’ve had? Are you putting new money to work in venture capital after the 2022 correction? Any artificial intelligence companies look like promising investments?
Fundrise is a long-time sponsor of Financial Samurai.