Originally published August 10, 2015, the article below has not been updated but the ad is now rolling again and I’ve added some comments to the discussion following the article.

—from 8/10/15—

This latest pitch from Michael Robinson for his Radical Technology Profits (selling a $3,900 lifetime subscription) caught the eye of many of you over the past day or two, so I thought I’d comment on it briefly.

It’s not really a new ad — parts of it are new, and the description of the “private” deal he has to get you in as a partner in this VC firm for $2,600 is a bit different, but the investment is fundamentally the same.

He’s pitching what is one of the few “mutual funds” (it’s not quite that, but very similar) that are focused on late stage venture capital (maybe the only one, I don’t know of others), and the ad implies that getting in on this fund is a way to generate those massive returns you imagine that venture capital funds make — the 200X or greater returns when Uber goes from a crazy idea to a $50 billion company.

Here’s a bit from the ad:

“… the deal I’m recommending lets you become a ‘partner’ in one of the most successful ‘VC’ firms in the country.

“It’s located here in Silicon Valley…

“And run by a VC expert who’s profited from some of the biggest IPO and strategic acquisition “exits” of the decade, including Twitter, Lifelock, and FireEye.

“And he’s made billions in the process.

“His firm is currently invested in 26 of the most exciting and fastest-growing new technology companies in the world.

“Each is potentially anywhere from a few months to a few years away from an initial public offering – an IPO….

“It’s a special deal I’ve uncovered on your behalf with the potential to pay off in huge multiples.

“The kinds of returns that could grow your money 200-fold (or better) over time.

“That means a single $2,600 investment in this business deal today has the potential to transform into over $520,000.”

Now, of course the lawyers got to read through this ad, and you can be pretty sure they were double checking to make sure he put in the “over time” bit, and the word “potential” — otherwise this is a completely ridiculous promise. Even if this fund is run pretty well, and it gets in on some reasonably solid companies in the years before they “exit” the private markets (either by IPO’ing or getting bought out), they’re not going to post returns like that over any conceivable period of time.

Some of their investments, if they’re very fortunate and strike VC gold, might post fantastic returns. But the point of a venture capital fund is to distribute your investments across a large number of companies because most of them won’t go anywhere. Most venture-backed companies don’t end up being winning investments, but there’s a survivor bias in the media coverage because you certainly hear about the huge winners and imagine that they’re far more common than is really the case — in truth, you need those occasional huge winners to make up for the mass of mediocrity.

He gives a couple examples in the ad of companies that are among the 26 in this fund’s portfolio, and some of them are interesting and potentially exciting, and a couple have earned billion-dollar-plus valuations on the private market… though they mostly did that before this particular fund bought shares, since they’ve only been around for a year or so and they’re trying to be conservative and invest only in viable, revenue-producing pre-public companies where a lot of the risk (and a lot of the gain) have already been taken by other investors.

One of the examples is Jawbone, one of the better known companies in this fund’s portfolio….

“VC heavyweights were investing in a pre-IPO Jawbone back in 2007, when it was valued at just 18 cents a share.

“Today, it’s ranked number 22 on the “Billion Dollar Startup Club” at a $3.3 billion valuation… or $11.27 a share.

“That’s a 61-fold increase in value.

“And it hasn’t even gone public… yet.

“When it does, the returns could be off the charts.

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“And as a partner in this venture capital firm, you can be right there, when Jawbone goes public, as one of its pre-IPO investors.”

This particular fund has about $1.6 million worth of Jawbone shares in its portfolio, according to their latest SEC filing (they have to use judgement and private market financings to guess at a valuation, of course, since there is no public market price). The fund’s total size is about $32 million, so that means Jawbone represents about 5% of the fund, one of their largest holdings. If Jawbone triples in value in the leadup to and/or shortly following an IPO, which I would consider to be a little bit optimistic (that would be a $10 billion valuation, roughly), then those shares might be worth $5 million to the fund. Assuming no other changes in the fund, no other holdings that lost or gained value, then that would represent a 10% gain in the net asset value of the fund. Which is what matters to you, because you’re investing in the fund, not in the individual company.

A 10% gain in a fund is nothing to sneeze at, of course, and this fund has actually beaten the market for much of its short life. But it’s also not going to turn your previously underfunded retirement into a lavish music video shoot in St. Barts.

And other examples are given as well, the one that truly strains credulity is DocuSign, because no matter what the value of that company ends up being someday the fund’s stake today is so small, with a current valuation of $50,000 (out of that same $32 million), that even if DocuSign increases in value 100 times — almost inconceivable — that would still be only enough to boost the net asset value of the fund by about 15%.

What are we talking about here? I’ve buried the lead a bit but this is, of course, the SharesPost 100 Fund (PRIVX), which I made a minimal investment in several months ago when Michael Robinson was last touting a similar “private deal” to get in on this investment. I didn’t go through him, of course, nor do I subscribe to these newsletters whose ads I follow (that would take the sport out of the teaser solving, naturally), but I did put a few thousand dollars in to see what kind of communications I received, and to remind me to follow the fund and see what they’re doing. The basic information about the fund is available here on their website.

They’re not all that active, frankly — though the fund is doing decently well, up 5-10% or so since I bought in. They still have a huge cash allocation, and I assume that the main challenge remains finding decent private companies who are willing to sell them enough equity to make the investment worthwhile, or getting to participate in funding rounds with the larger private equity players. In many cases, they are not participating in big funding rounds — they have for a few of the investments in their portfolio, but many of their investments are so small that they are very likely just buying out insider shares.

This isn’t that unusual, of course — getting equity is a big part of working at a startup, particularly one in Silicon Valley or in the tech space, and if the company is still several years from an IPO then all the early hires, the engineers and office staff and sometimes even the founders, end up with decent-sized shareholdings but often without huge salaries… and no way to sell their shares so they can buy their boats and Teslas and whatever else is needed to gild their lives (or, given the crazy real estate market in Silicon Valley, even to buy a home). So that’s where Sharespost gets a fair number of the shares they buy, they provide liquidity for selling insiders — which might become a larger business over time, particularly since successful companies are finding it so easy to get venture capital financing that they hold off on going public for much longer than they used to. Indeed, for many companies, like Facebook, creating a liquid market for their shares so employees could value their options and share holdings was probably a major part of the reason for going public — they didn’t need new money, but they did need a way to recycle the capital a little bit and let some early investors and employees sell some shares efficiently… and to create a publicly traded stock that they could use as currency to make acquisitions of other companies (like WhatsApp).

And though it seems a bit odd for some investors who are accustomed to stories of venture capital riches, being an investor in a private company doesn’t always mean you get a windfall even when the company does well enough to go public — that depends not just on whether the company turns out to be successful and on how early and at what valuation you invested, but also on whether public investors find the IPO and the valuation appealing… and lots of IPOs are not all that stupendously successful. The one stock in the Sharespost 100 fund that has IPOd recently, for example, is Sunrun (RUN) — Sharespost bought in with a very small investment that they valued at about $250,000 almost a year ago, and the stock went public with a fizzle recently and Sharespost’s shares today are worth… about $250,000.

The fund is an interesting way to get access to a market that is not completely correlated with the broader stock market, diversifying a bit into venture capital investments, and the fund actually outperformed the market over its first year (its only been around for about 18 months), but it’s expensive and illiquid and it’s not going to make anyone wealthy in the short term.

The Sharespost 100 Fund has a minimum initial investment of $2,500 if you buy directly from the fund (not sure why Robinson’s deal is for a $2,600 minimum), carries a maximum front load of 5.75% (less if you invest more, and possibly less if you invest through someone like Michael Robinson if they’re getting a deal for bringing new investors to the fund), and annual expenses are 1.9% — both are very high for a mutual fund, but venture capital investing is more expensive than public market investing. And it’s illiquid because they don’t offer daily redemptions — they offer to redeem up to 5% of outstanding shares each quarter, but you’d have to request your redemption by that quarterly date and hope that not more than 5% of other shares outstanding are submitted for redemption (if too many folks want to redeem, they pro-rate). They do at least operate at net asset value, so both purchases and redemptions are made at whatever they assess the NAV of the fund to be on that day — you don’t have to worry about premiums or discounts like you do with some investment funds.

So as with most pitches that are teased as fantastical generators of 200X returns, the hype and ridiculous promise is foolish and based on ridiculous logic (one hugely successful company made 2,000% returns for early investors, so maybe you can do the same thing by buying tiny slices of a few dozen pre-public companies!)… but underneath it all there is a real investment, which has been making a little bit of money and might help (the fund is just over a year old, so we’re really just guessing) to further diversify a portfolio (at a fairly hefty cost).

Millionaire maker? Probably not… but real, and interesting for those who like to dabble in the small and unusual and take substantial risks, and not nearly as risky as buying into small individual pre-IPO companies. As the new JOBS Act rules for crowdfunding of investments become more widely understood and these small equity offerings are made direct to consumers instead of through the stock market, things should loosen up more in the private markets — and I expect we’ll begin to see more of the newsletters pitch genuinely private investments as a way to differentiate themselves from the pack even as we also see new waves of scam artists taking advantage of the new “micro-IPO” markets — should be interesting times, don’t forget to hold tight to your wallet when walking through the carnival.

P.S. If you read the ad and are impressed by Robinson’s past efforts to get investors in early on pre-IPO investments because of his spiel about an earlier offer last year to let folks buy in to the “living metal” company — don’t be. About a year ago he was pitching a way to buy that stock, Stellar Biotech (KLH in Canada, SBOTF OTC in the US) before it got a Nasdaq listing, offering a special “prospectus” deal for “round lots” for something like $1 a share… the stock never got that NASDAQ uplisting (which he guaranteed would happen by November), and the stock has since fallen to about 50 cents. Which would be fine, people make mistakes and get investments wrong sometimes, I sure have made my share of errors — but it irks me that he’s using the “success” of that Stellar Biotech offering to claim his bona fides and impress new subscribers.