00:00Charlie, I want to start with you, and it's a special treat to have you on the program because our
00:04afternoon program often means that you can't join us because it's so late where you are.
00:08You're diving into what's happening with retail traders who have been exposed over the last few years to funds that
00:20have traditionally only been given access by, let's say, accredited investors, people with over a million dollars in investable assets.
00:30But increasingly, you have funds from the likes of Cathie Wood or Robinhood or others that do offer what they
00:38say is exposure to private companies.
00:40How does that work?
00:42Yeah, it's really interesting, Tim, because basically we're at this moment where we're kind of getting all this fervor and
00:48excitement about IPOs.
00:50And then we also have this kind of evolution of retail trading, right?
00:53We know that's been kind of stacking up over the past five years.
00:57We've seen an increase in retail volumes, significant increase in retail volumes from about 15% to about 20%.
01:04And then you also have the fact that companies are just staying private for longer.
01:08So you get this kind of trio of facts coming through and then some products that are hitting the market
01:13or that have really been hitting the market over the past couple of years that sort of give that everyday
01:18person who's not accredited,
01:19who doesn't have, you know, six figures, seven figures to invest, access to some of these pre-IPO companies, to
01:26some of these kind of venture-style firms.
01:29And there's a real fervor for them right now.
01:31And there's a lot of kind of Reddit conversation about this.
01:34There's a lot of social media conversation about this, about, you know, everyday people who want to get in, who
01:39want to kind of get access.
01:40They're talking at the water cooler about SpaceX, they're using Claude, they're using OpenAI, and they feel like the economy
01:49around them is changing.
01:50They want to get in.
01:51And so a lot of these funds, a lot of them are closed-end funds, kind of give them a
01:55way to do that.
01:56And Charlie, tell us about kind of what your reporting has uncovered about some of the limitations of these funds.
02:05Because, of course, there's no such thing as a free lunch on Wall Street.
02:10What? What do you mean?
02:11No, you're totally right. You're totally right.
02:13And, you know, there were a lot of teachable moments in some of the investing activities of these people.
02:20So I think in the story that I wrote recently, I talked to a father and a son, and they
02:25started investing in one of these closed-end funds that gives people access to OpenAI, to SpaceX, to Anthropik.
02:32And basically, the deal with this fund was that there was a six-month lock-up period, right?
02:38So retail investors could get involved.
02:41They have to pay much higher fees than, say, to a standard ETF.
02:45And they also have to lock up their money for six months.
02:47And so there was a moment when this fund was just skyrocketing in value.
02:51And the 19-year-old son calls up his dad and just goes,
02:55Okay, wait, I put in 2K? I now have 76K? Am I rich?
03:01And the dad has to kind of remind the child, the kid.
03:03I think he's 19. He's not a child.
03:05No, like, you can't sell yet, right?
03:07And this is kind of, you know, a demonstration of the evolution of retail trading to kind of emulate the
03:13private markets,
03:14to emulate kind of institutional money a lot more than it has in the past.
03:18So this is kind of retail starting to learn what some of those limitations other investors deal with on an
03:25everyday level.
03:25Charlie, there's also fees, and you write a lot about personal finance and investing and the way that fees can
03:31eat into future returns.
03:33With a product, a closed-end fund such as this, and there are a few that you mentioned here, what
03:37do critics say about the fees?
03:39Yeah, I mean, the issue is that they would compound, right?
03:42And so there's this sense that, like, you know, if you're paying higher fees and kind of, you know, standard
03:46index fund,
03:48it's going to, over time, really compound.
03:50And I think that also kind of gets to the point of kind of risk-return, right?
03:54So I think one of the reasons a lot of retail investors want to get into these funds is because
03:58they feel like they've been missing out.
04:00They feel like a lot of these kind of VC-style investments have been gatekept.
04:04And this is a kind of extension of the democratization of retail trading.
04:08But then if you think about it, you know, you're taking on the risk of an earlier-stage company,
04:13and then you're also having some of the potential returns being eaten into,
04:17that kind of brings about questions about how much you're actually getting out of this.
04:21And then another risk that a lot of kind of skeptics brought up, kind of tying that again, as I
04:25was reporting this,
04:26was, you know, by the time these stakes are getting to retail,
04:31it's pretty late in the cycle of these companies that everyone is so excited about.
04:36So there's questions of, you know, have you kind of missed the boat?
04:38Yes, this is, you know, you're getting SpaceX.
04:41It's not publicly traded yet.
04:43That's cool.
04:44But it's also a lot later than, say, you know, what a VC would be getting and what they would
04:48be kind of, you know, getting the upside from.
04:51So I think that kind of has brought a lot of skepticism from people kind of outside the Reddit channels.
04:56Yeah, I'm glad you went there.
04:57And that's exactly where I want to bring in Ed Ludlow.
04:59He's the co-host of Bloomberg Tech.
05:01He's out there in San Francisco.
05:03It's just a short drive from Sand Hill Road, where many of those legendary venture capitalists,
05:08Ed, are based.
05:10And you're looking at this, I know, from the venture capitalist angle.
05:12We were just talking about the Series H.
05:14Was that right?
05:15Yeah, Series H round that Anthropic had raised.
05:18And the fact that, you know, they announced this just days ago,
05:21and now they're already on the path to having an IPO.
05:26What do you hear from venture capitalists about retail sort of trying to replicate their success?
05:31Because we hear about all the home runs and the grand slams that these VCs and these legendary VCs had.
05:38But they'll be the first to say, listen, there are a lot of duds for investments that we've made.
05:44And they're not all going to be a winner.
05:47Well, the capital approach of a VC is like across a curve.
05:55So you make lots of investments.
05:57And over the life cycle of those startups, many of them are net zero.
06:01They fail or they never amount to anything.
06:04They never achieve anything.
06:05Some of them are acquired very early by a bigger company.
06:08Some of them go on to do IPOs, where if you invested in a SpaceX very early,
06:14you're getting many, many X returns, your initial investment,
06:18especially if you invested early and then again over a series of rounds,
06:22either through the primary and secondary markets.
06:24You know, the retail investor consideration in a case like SpaceX,
06:29it probably isn't going to move the needle.
06:32For one, you know, there's a difference between economic ownership and then voting power.
06:37So in this case, pre-IPO, Elon Musk has 85.1% voting control of SpaceX anyway.
06:43And those names that are at the top of the cap table after him,
06:46Fidelity, Founders Fund, Sequoia, Google, they've been there for a long time.
06:53And so they participate in the IPO through the offering.
06:56But also you'll see like cornerstone investors come in, like BlackRock,
07:00someone like that who says, okay, I'm muscling into this IPO
07:03and I'm going to buy a few billion dollars worth of the offering up front, you know, on IPO day.
07:09That squeezes out the retail investor unless there's a very big specific allocation,
07:14which as we talked about before the break.
07:16In this case, we just don't know yet.
07:18Charlie, when you talk to the proponents of these funds,
07:23when you bring up, you know, the lockup period, the higher fees,
07:28the risk of, you know, investing in a company that's maybe more, you know,
07:34speculative than a company that's already public,
07:36what is their response to those limitations?
07:40Basically what they say is, look, you know, we're democratizing venture capital, right?
07:45We're bringing this to more people.
07:46Isn't that a good thing?
07:47And I think we could spend a lot of time talking about whether or not that's a good thing.
07:50But they basically say, look, yes, our funds are higher than if you were investing in like an,
07:54you know, S&P index fund, but our fees are still cheaper than, you know,
07:59someone would have to get in a very standard, say, venture capital fund.
08:02So they talk about that.
08:04They talk about the evolution, right?
08:05So some of the people will say, you know, this is early stages.
08:09We're in kind of the early innings of the kind of, you know, private era of markets.
08:13And as people learn more, as more investors, as more retail investors come in,
08:17there'll be more transparency, fees will come down.
08:19I think you could, you know, really dig into some of those questions.
08:22And I think others have said, and, you know, this was the head of Robin Hood Ventures,
08:26who, you know, they have a product out that is similar where you can get exposure to, say,
08:31open AI, talking about how, you know what, this could be risky,
08:35but it's less risky than, say, starting, you know, from, you know, day one of a startup,
08:39that like we are bringing people much later stage companies,
08:44and they're not going to get as much upside, but they're also not going to get as much risk.
08:47And so from the people who are kind of bringing these funds to market,
08:51you get this, you know, realization of, yes, these are different, they're more expensive.
08:55They're not going to give you those 10x returns that a VC is going to get,
08:59but you still get some exposure.
09:00And this is something new.
09:01Why don't we try this out?
09:02These are the whales right now, Ed.
09:04These are the ones that are getting all the attention.
09:06These are the ones that are getting a lot of the oxygen right now.
09:09But for venture capitalists who you speak to, where are they putting their money?
09:13What's the sort of, like, you know, second derivative of a public anthropic of a SpaceX and of an open
09:21AI?
09:23Well, the thing is that, you know, SpaceX in particular, but, you know, also anthropic and open AI
09:31are, like, very mature companies now relative to what's happened in the last 12 calendar months.
09:36You know, SpaceX was founded in 2002, is that right?
09:39And maybe prior to that, and, you know, people have been on this journey with them
09:45where they've just done a lot in the private market.
09:48So applying that thesis elsewhere, there are other companies that are looking at orbital data centers.
09:56But there is also an acceptance that you need to have a lot of capital and a lot of scale
10:00to make orbital data centers make sense.
10:02So, like, one of those companies is StarCloud, for example.
10:05They have an H100 NVIDIA GPU on board a satellite computing in orbit right now.
10:11But they're nowhere near the economic might of SpaceX.
10:14So, like, you can apply those.
10:16The frontier lab thing is getting very interesting because if we bring it back for one moment
10:21to the anthropic confidential filing today, and you compare and contrast.
10:25Anthropic is a customer of SpaceX AIs, right?
10:29They're renting compute for more than a billion dollars a month.
10:32In the end, they also compete with each other as two frontier model labs
10:36that want to sell AI software to enterprise companies.
10:40Open AI is exactly the same race.
10:42And so, like, somebody at some point is going to have to pick a winner.
10:45That doesn't really answer your question, how do venture capitals play the rest of the field?
10:48If you're like Sequoia, for example, with SpaceX, you've had to adapt and grow
10:53and raise funds to stay up there because the bigger phenomenon that's happening now in this game
10:59is it's the mutual funds, sovereign wealth funds, and those kind of legacy Wall Street
11:04private growth equity names that are coming in and muscling in in later rounds.
11:08So, that's a factor you've got to think about.
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