This article was originally published as the Friday File for the Irregulars on April 3. Following the huge number of requests for info on this teaser, we’ve opened it up to free readers as of April 22 — it has not been updated or revised.
Michael Robinson has a lot of enthusiasm for startups and Silicon Valley. That’s kind of a prerequisite for someone who runs a newsletter focused on breakthrough technologies and the “next big thing” like he does (that’s his Radical Technology Profits, the newsletter he’s pitching today in the ad I’ll be explaining in a moment), so it’s no surprise that he often pitches “get in early” ideas for his newsletter… and in the past, he’s even gone so far as to organize investments by his readers into specific companies through a direct offering, which is a step beyond what newsletters typically get involved with.
It may be for good reason that newsletters don’t directly get involved in selling shares like this very often, perhaps, since the “pre-public” prospectus they touted last Summer was for a direct investment in Stellar Biotech (SBOTF), a company that was supposed to get uplisted to Nasdaq and become “real” but still has a very shaky share price and continues to have no basic economic underpinning as a biotech ingredient supplier (meaning, pricing of their product and current or anticipated sales don’t jibe at all with the size of the company or the investments they’ve made in creating production capacity… at least not yet). So far, that one’s still a story in search of a business — and it’s a story that Michael Robinson and Nick Hodge have sold to investors very well over the past couple years… and still are selling pretty well, if the email questions I still sometimes see from subscribers are any indication (I think Nick Hodge has been pitching it again within the last few months, our look at his “blue blood” pitch is here from last year in case you’re interested).
But that wasn’t really a “venture” funding opportunity — it was and is a fairly capital-intensive aquaculture company searching for sustainable demand for their product, and has been listed in Canada and traded over the counter in the US for almost five years. What is it that Michael Robinson is pitching now as his “get in early” idea that he’s calling a “Private IPO Slice?”
Well, it’s another sort of “direct” offering — but this time, for a venture capital investment in a bunch of different “late stage” companies that he seems to think might be the next Uber or Facebook (or whatever). My first impression was that he might be pitching one of the publicly traded Business Development Companies that invests primarily in startups and venture capital, like GSV Capital (GSVC) that has been repeatedly touted (and teased by newsletters) for its “get in early” access to Facebook shares, then Twitter shares, and now Palantir and Dropbox shares — but this one is something a bit different.
And maybe that’s good — GSV Capital has been profoundly disappointing for investors ever since Twitter (TWTR) came public in late 2013. TWTR is still GSV’s largest holding at about 15% of their portfolio, but even with Twitter up now 12% or so from the IPO price (it’s been down much lower in the past year, as you probably know) GSV is down about 35% since the TWTR IPO and down 50% from where they were during the Facebook pre-IPO enthusiasm. So much for “getting in early.”
Does this new idea he’s teasing have a chance to be better than that? Let’s see what he’s pitching, here’s the start of his latest ad:
“Your Private IPO Slice: The first ever ‘pre-IPO’ deal with terms exclusive to Money Morning members…
“With returns in this private market running as high as 32-to-1, it’s on fire.
“Now we’ve got a way for you to get an insider’s share…”
After that, and his impressive looking bar charts that indicate this market is exploding, it’s no wonder the questions have been piling up on the doormat here at Gumshoe HQ. So what is it? How do you get into this “private, pre-IPO market?”
Here’s some more from the ad to get you further tantalized…
“Nearly every day Bloomberg, The Financial Times, The Wall Street Journal, and The New York Times report on investors who made millions, even billions…
“Like Microsoft co-founder Paul Allen, who made $45 million in just 11 months after TrueCar went public in May of last year.
“Jeffrey Crowe, one of the top private investors in the world, made $762 million the day Lending Club went public this past December.
“Jim Goetz, the driving force behind Sequoia Capital, earned a whopping $3 billion when Facebook acquired WhatsApp last year for $19 billion…
“Of course these people have a lot of money to invest…
“But the multiples are the same no matter who you are.
“And that can mean BIG money for anyone who can gain access to these deals.
“And that’s why I’m here today. To show you how to do just that.”
The multiples are the same? What multiples are those? Did he tell us how much those investors put in to get their $3 billion or $762 million? Uh, no.
He gives a bunch more examples of now-private companies that are expected to “pay out” huge gains to shareholders, these are just a couple of them:
“Snapchat, the photo-sharing upstart, is getting ready to pay out $14.1 billion to a handful of private investors…
That’s a 1,600% return.
“Automattic, the company behind WordPress, could soon pay out over a billion dollars…
A 600% windfall.”
I don’t know what “soon pay out” means, though like many early stage companies Automattic says it doesn’t need to go public with an IPO — perhaps partly because they find plenty of willing private buyers whenever employees or earlier investors do want to sell their shares. Automattic was last valued in the private market at about a billion dollars, though private market valuations aren’t usually reflective of what a real “public” valuation would be. These days, companies who don’t specifically need genuinely huge amounts of capital to build a business, like billions or tens of billions of dollars, only really have to go public if they want to use their shares to make acquisitions, or if they have so many employees with vested shares and options that it becomes challenging to manage stock sales by employees. That’s why Facebook could wait so long before going public… long enough that many folks who bought into the company in their last year as a private firm may have paid more than the IPO investors later did.
And he gives one example of a company that you can own through this “unique deal” that comes with a subscription to Radical Technology Profits (which costs $1,950 a year, incidentally) …
“let me tell you about one of the companies you’ll own through this unique deal…
“One of dozens that could hand you a share of billions of dollars in new profits in the coming months alone…
“It’s a private company that could return early investors as much as $12 for every $1 invested when it goes public mere months from now.
“This is one of the fastest growing companies in the world right now.
“It’s already part of that Wall Street Journal “Billion Dollar Start-Up Club” I told you about.
“It’s extremely profitable today, and it’s bringing on new users at a rate of 50,000 a day… even faster than Facebook in its heyday.
“It controls over 70% of this already huge and ballooning market.
“The deal on the table today involves a late-stage, hyper-growth private company called DocuSign.”
DocuSign is the company that leads the “online signing” or e-signature business — I used it when I made a real estate offer a couple years ago and real estate companies seem to be the primary customers, it’s sure a lot easier than Fedexing signed documents back and forth and it seems like a great business if you can get to be the de facto standard and charge a small fee to everyone who licenses your authentication technology. As of their last funding round it was reported that they were being valued at $1.6 billion, and Michael Robinson lays out an argument (based on projected growth of the e-signature market to $2 billion in 2018, DocuSign’s 75% market share continuing to hold, and the company getting a similar price/sales valuation to Adobe systems of 8.5) for DocuSign being worth $12 billion as a public company (presumably in a few years, though he’s not very specific on that).
And he says that you can own DocuSign at that $1.5 billion valuation now, so more or less the valuation at which it last received private funding. And he says that…
“Should DocuSign go public within the next 14 to 20 months, as my research indicates…
“We could see gains ranging from 700% all the way to 2,900%!”
Is that possible? I guess it might be, for DocuSign shareholders who bought early, though I’d be a lot more conservative in my assessment of its public market value at this point (since we have no idea what their financials are like, how sales are trending, what margins are with expansion, etc.)…
… but, more importantly, Robinson is NOT talking about you picking and choosing and buying individual names like DocuSign individually, so you’re definitely not going to get 700-2,900% gains even if he’s right about DocuSign going up that much. This is just one name in the “basket” of companies that he’s trying to sell you access to. Here’s more:
“It’s a perfect example of a hyper-growth, late-stage company on a clear path to exit profits…
“Yet if you were to go out and try and buy a share in DocuSign today, you can’t do it.
“It’s a private company. It doesn’t trade on any stock market or exchange.
“But through the deal I’m recommending today, you can own a piece of DocuSign now…
“Without having to be an accredited investor…
“Without having to invest $100,000 dollars. (In fact, the minimum buy-in on our deal is a fraction of that!)
“And what’s more, as a Money Morning member, you can also do this without having to pay any sales fees.
“Just to be clear…
“Nobody else will have access to that last exclusive term.
“That benefit is exclusive to Money Morning readers only – and it can save you thousands upon thousands of dollars.”
He mentions some other companies involved in “this deal,” too, including Jawbone and ZocDoc and Jumio, and then he explains how he got involved with setting up this special deal…
“I’ve been working with one of the most renowned venture capital experts of our day to recommend a deal with terms designed exclusively for Money Morning members.
“He’s a person known throughout Silicon Valley for overseeing billions of dollars in exit profits in such companies as FireEye, Workday, LifeLock, Twitter, Ring Central, and others.
“You’ll recognize his name because he’s one of the people who ‘run the show’ here in the Valley.
“And he’s in on a lot of the most lucrative deals.
“For instance, this past September he took a stake in a late-stage private company called Datalogix when it was valued at “just” $650 million….
“Just four months later The Wall Street Journal reported that Oracle bought Datalogix… for a whopping $1.2 billion…
“A $550 million appreciation in about three months.
“That’s how fast these late-stage deals can move.
“And there are plenty of them.
“And often you don’t even have to wait for an IPO…”
So that tells me what investment he’s probably talking about — how about a few more specifics to make sure?
“It is one of the only investments in existence today that can get you into private, pre-IPO gains without needing a $1 million or $100,000 minimum.
“The only caveat is this:
“This is a “closed end” opportunity…
“Which means once the set number of ownership units has been taken, nobody else will be allowed in this deal.”
Ah, a clue and a push for urgent action, all in one! That’s some good copywriting. So what is this investment?
Well, I’m quite certain that what Michael Robinson is arranging for his subscribers is access to a public venture capital fund called the Sharespost 100 Fund — it has the mutual fund ticker PRIVX, but it’s not really an open-ended mutual fund like the ones you’re used to seeing from Fidelity, Vanguard and the like, and it’s not available directly in those mutual fund supermarkets. It’s a closed-end interval fund — and you can track the current price, self-reported by the company, but while the fund is open to most investors you can’t buy in today and sell tomorrow if you change your mind. The basic information is available on their website here.
And no, you don’t have to be a Money Morning or Radical Technology Profits subscriber to invest in the fund, to be sure, though it sounds like Robinson negotiated a discount for his subscribers, so they don’t have to pay the up front load (presumably in exchange for him marketing the fund to thousands of investors). The front load sales charge is based on the amount you invest, according to the prospectus, so up to $50,000 the sales charge is about 6%, then it scales down in increments and over a million dollars there is no sales charge. Most of that sales charge is probably credited to brokers who actually sell the fund to investors, so it’s kind of a ripoff if you have to pay the sales charge when buying direct — but presumably they were willing to give Robinson’s subscribers access without the sales charge because they’ll probably bring at least a million dollars altogether to the fund. And the fund needs more scale (more on that in a minute).
The SharesPost 100 Fund invests in some of the companies in the Sharespost 100 list (20 of them right now), which is essentially their proprietary “rules-based ranking” of the top venture capital opportunities — chosen because of the market opportunity, the financial performance, the pedigree of the other VC investors and other qualitative factors. This is what they say about what they buy:
“The investment team then seeks to acquire stakes in SharesPost 100 List companies via purchases from existing shareholders and participation in primary venture capital-led rounds. The Fund does not invest in all of the companies on the SharesPost 100 List, and up to 15% of the companies the Fund invests in may not be part of the SharesPost 100 List.”
They launched almost exactly a year ago, and their net asset value has gone from $20 at launch to about $26 now — we don’t know exactly why the value has risen without scouring their SEC filings to see what values they assign to each of their investments each quarter… and they’re investing in pre-public companies, so the valuations are all estimates anyway, presumably based mostly on what a company is valued at on its most recent funding round (and yes, there’s plenty of room for conflicts of interest throughout this process — valuing private companies is an art, not a science, and SharesPost also helps institutions invest in private companies — though they do try to keep some separation between those businesses and they have a code of ethics and other rules they have to follow).
This is a closed-end fund, meaning that they can only create 25 million shares (they’ve created less than a million so far, as of December), and the interval part of that fund description means that they are not maintaining an active market in the fund but do a quarterly repurchase offer for up to 5% of the shares. You can’t buy and sell shares at a whim — you send them the money, they sell you shares at whatever the net asset value is at that time (plus the sales charge), and then you have the option to request to participate in their quarterly repurchase offerings if you want to sell your shares. That means, effectively, that you can probably sell at NAV four different times during the year… unless more than 5% of all the shares outstanding are tendered for repurchase, in which case they can choose not to repurchase any or all of your shares from you. Here’s their description:
“The Fund has registered 25,000,000 Shares for sale under the registration statement to which this Prospectus relates. The Shares will be offered on a continuous basis at the Fund’s net asset value (“NAV”) per Share next calculated after receipt of the purchase in good order, plus any applicable sales load. The Fund has an interval fund structure pursuant to which the Fund, subject to applicable law, will conduct quarterly repurchase offers for 5% of the Fund’s outstanding Shares at NAV. Even though the Fund will make quarterly repurchase offers, investors should consider the Fund’s Shares to be illiquid.”
SharesPost started out as a marketplace for pre-IPO shares — essentially, as a way for employees of and early investors in non-public companies to sell their shares, and a way for outside investors to buy them. You used to have to be an accredited investor for this, and in some cases you still have to be, but rules have also been relaxed somewhat to enable “crowdfunding,” but that’s not really what SharesPost is doing (you can find a lot of those deals, often for local real estate or wildly speculative stuff, from “crowdvesting” places like EquityNet, WeFunder, CrowdFunder and the like) — SharesPost is still a private buyer and seller, beyond the SharesPost 100 Fund, but it looks like they steer all individual investors to the fund now and it looks like their direct private market transactions are all with and between institutions, and directly with companies who are seeking funding.
Is it worth it to you to go through Michael Robinson if you’re interested in this fund? Well, probably not unless you’re also excited about his newsletter and want his ongoing commentary on speculative stocks and on whatever it is that’s happening inside that SharesPost 100 portfolio — at $1,950 a year, that means going through him and saving the 5.75% sales load (assuming there isn’t some other way to bypass the sales charge, I haven’t checked but you could call SharesPost) would be worthwhile if you were investing $35,000 or more. If you’re investing a lot more than that, your sales load would also be smaller — if you’re investing less, your sales load would be smaller than Robinson’s subscription fee.
Is the SharesPost 100 Fund worth it at all? Well, on that I’m a little conflicted. The ongoing management fee is 1.9%, which is not terrible in this context — the high fee and the limitations on redemptions are also typical of hedge funds and venture capital funds, though VC funds in particular might tie up institutional money for ten years or more sometimes.
And they do have a connected and “known” portfolio manager in Sven Weber, who must be the “connection” Michael Robinson says he meets with — but I don’t have any idea whether or not Weber can get in at good prices on the best private companies. Venture capital is outlandishly more competitive now than it was ten or twenty years ago, and companies stay private much longer than they used to, and it’s hard to know what the risk/reward possibilities might look like for these companies that are, in many cases, larger than a lot of public companies you’ve probably looked at as investments. $1 billion private-market capitalizations used to be almost unheard of — so rare that they were gossiped about as “unicorns”, like Google when it went public at $20 billion… ten years after Google’s IPO, there are now at least 80 pre-IPO companies valued at over a billion dollars, led by giants like Uber, Xiaomi, SnapChat and Palantir… that should both cut some risk from this kind of “late stage” venture capital investing (“late” meaning the companies are already somewhat established, have working and accepted products, have real revenue streams even if they aren’t profitable), and reduce to some degree the “reward” that you would have gotten from, for example, investing in Facebook when Mark Zuckerberg still lived in Massachusetts and it was valued at less than a billion dollars.
But that VC world is very opaque to me anyway. So far the SharesPost 100 Fund has had two “exits” in their portfolio (Datalogix and Flurry), and there is one company in their portfolio of 20 current investments that has filed a S-1, Good Technology (that’s the form you file to get ready for an IPO)… but I have no idea how much they’ve invested in each company, whether they can invest more in those companies as more funds come into the fund, or what the valuation is based on in most cases… or even how much funding they’ve raised for the fund since they filed last (they can raise up to $500 million or so under their limit of 25,000,000 shares… but they also dilute the impact of their current investments on the return of existing shareholders each time they sell new shares… they’ve raised only $20 million as of last year) and though DocuSign and Jumio and Jawbone and ZocDoc and SoFi are all “names” in their portfolio that I’ve heard of, I don’t know whether those companies will be worth twice (or more) what they’re valued at in SharesPosts’s NAV calculations in a year or two. These are private companies, so the information available is pretty limited — it might be that SharesPost shares more detailed financials from these portfolio companies with shareholders, I don’t know, but there isn’t a lot that’s publicly available about them.
I did take a quick look at the annual report filed by the fund, which you can see here — and according to that, as of the end of December it looks like they’re losing quite a lot of money on this fund by eating the administrative expenses, so perhaps they’re pushing hard to be promotional (and making deals with folks like Money Map Press) to get more capital into the fund. They had only about $20 million in investments and assets, three quarters of which was invested (the rest in short-term investments, effectively in cash probably), and they had some small realized net losses on those investments (so apparently the two “exits” were not windfalls for them, though the Data Logix exit might have come after the end of 2014) and decent unrealized gains on the rest of the portfolio.
That means there’s probably not much of a rush to get in quick, they can sell plenty more shares in this fund before they run out. The investments they’ve made are tiny compared to the big VC firms, their two largest positions (Inrix and Kabam) are each currently valued at about $2 million in the fund… some of their investments, including “name” companies like Jawbone, are far, far smaller. Their investment in Jawbone is worth $200,000 right now, they say, and if we take it back to Robinson’s hyped example of the huge returns possible in DocuSign the reality hits a bit harder: their position in DocuSign is tiny, worth $50,000 as of the end of December — so if DocuSign goes public in a couple years at 10X the current billion-dollar valuation, that would single-handedly increase the value of a share of the SharesPost 100 Fund by $450,000, or 2.25% if I did my math right… assuming that the fund’s position in DocuSign hadn’t been diluted aggressively by big inflows of cash from new SharesPost Fund shareholders. Put differently, of the $26 net asset value per share in the SharesPost 100 Fund right now, DocuSign represents approximately five cents. It could go bankrupt or go up by 1,000% and not impact fund holders that much. That’s a far cry from the 700%+ gains Robinson teased as possible for DocuSign, of course. Even if they get a couple big winners every year, and they’re in early enough and in large enough scale on those winning positions, this is not going to provide you with 1,000% returns.
Assuming that they grow the fund to be large enough to be self-sustaining, and can continually find good deals as a very small player among the tall trees of venture capital, you could probably do a lot worse when it comes to venture capital-type investing — I’d much rather buy into a fund like this (and I don’t know of any other similar funds that are available to individuals at relatively low minimums right now) than participate in crowdfunding of some new App or nebulous idea. None of these investments are likely to provide you with earth-shaking 1,000% returns… but they probably also won’t be terribly correlated to the S&P 500, they have the chance to get some big wins that boost their NAV nicely if they get lucky on a stock that catches fire into an IPO, and the expense ratio and sales charge, while large, are not necessarily outlandish — there are some truly lousy plain-vanilla mutual funds out there that charge as much. If things spiral out of control and they have a bunch of terrible investments, and lots of shareholders want to get out, then the liquidity limitations might be problematic for some investors and the fund would lose the ability to make new investments if new capital didn’t come in… but that’s kind of part and parcel of the risks you take on when you’re investing in venture capital, you have to trust the fund managers, tie up your money for a long time, and hope that, on average, they can provide good returns that aren’t correlated with your other investments.
I submitted my info to the site to see what they send to potential new investors, I’ll let you know if I have any further thoughts on the fund in the future after I’ve read through it. But in general, there’s no reason at all to rush into this — even if one of their investments doubles in value next week, the NAV of the fund will not change drastically. My primary concern, assuming you can deal with the risk of tying up your money, paying fairly high fees, and losing money on venture capital in general, is whether they can scale up from a $20 million asset base, with such small investments in a small number of companies, without being stuck with lousy investments that the big VC firms don’t want. That’s a qualitative question that can only be answered with a high level of comfort with the portfolio managers and, to some degree, a leap of faith.
Sound interesting? Looking to be a VC investor? Let us know if you’ve got comments on the SharesPost Fund or have other “early stage” investments that get your motor running.