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THE SILICON VALLEY VENTURE FUND

HOW TO INVEST IN 51 OF THE MOST COVETED PRIVATE TECH COMPANIES IN THE WORLD

By Teeka Tiwari
THE SILICON VALLEY VENTURE FUND
HOW TO INVEST IN 51 OF THE MOST COVETED PRIVATE TECH COMPANIES IN THE WORLD
By Teeka Tiwari

Your local financial adviser is praying you don’t higher—return.


get your hands on this research report. He’s go-
That math works. Here’s an example:
ing to be deeply embarrassed he didn’t bring this
idea to you first… Hypothetical
Investment Return Balance
VC Portfolio
That’s because in the pages below, we uncover
Early-Stage Investment 1 $100 -100% $0
one of the best-kept secrets on Wall Street. And
Early-Stage Investment 2 $100 -100% $0
we call it the “Silicon Valley Venture Fund.”
Early-Stage Investment 3 $100 -100% $0
It’s a backdoor way to own the world’s most cov- Early-Stage Investment 4 $100 -50% $50
eted venture-backed private companies. Powerful Early-Stage Investment 5 $100 -50% $50
people trade favors in exchange for getting into Early-Stage Investment 6 $100 -50% $50
these kind of startup companies. They’re normal- Early-Stage Investment 7 $100 -25% $75
ly reserved for the very rich and influential. Early-Stage Investment 8 $100 -25% $75
What’s amazing is we’ve found a way into this Early-Stage Investment 9 $100 -25% $75
market on better terms than what even the Early-Stage Investment 10 $100 1,000% $1,100
wealthiest investors in the world can receive. Total $1,000 48% $1,475
It’s truly a unique investment with the power to
trounce typical stock market returns with just a As you can see, if a VC firm bags one huge win-
fraction of the volatility. ner, it more than makes up for a string of losers.

It’s an exceptional way to own the most promis- In fact, some of the best VC firms record returns
ing companies in Silicon Valley—for a fraction of greater than 10x. And some turn more than one
the price. So let’s get started… winner out of every 10 investments.

Venture capital (VC) investing isn’t for the faint Take Sequoia Capital, for example.
of heart.
Founded in 1972, Sequoia is one of the oldest VC
It involves using capital to back risky startup firms around. Headquartered in Silicon Valley’s
companies—and waiting over a decade to see Menlo Park, its core focus is technology startups.
how you make out.
Sequoia funded some of today’s most well-known
The odds aren’t good. Typically, nine out of 10
companies before they became famous: Apple,
startups fail.
Google, Instagram, Oracle, PayPal, Stripe, Ya-
Knowing those odds, VC firms look for early- hoo, and YouTube.
stage companies with hopes of landing a 10x—or

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And several of its investments have
recorded massive returns:

• Google’s initial public of-


fering (IPO) turned a $12.5
million investment into $4.3
billion. That’s more than a
344x return.

• Facebook’s acquisition of
WhatsApp turned a $60
million investment into $3
billion—a 50x return.

• Dropbox’s IPO turned three


seed rounds (the first fund-
ing stage) into an all-in aver-
age 467x return.

• Chinese online delivery VC investing is the perfect place to swing for the
service Meituan-Dianping’s IPO turned a fences.
$400 million investment into $4.9 bil-
lion—a 12x return. However, there’s one giant problem...

• Chinese shipment company ZTO Express’ Most people can’t invest with any of these VC
IPO turned a $60 million investment into firms.
$960 million for a 16x return.
Their funds are restricted for “accredited” inves-
But Sequoia isn’t the only VC firm cranking out tors and large institutions.
multi-baggers.
[To be an accredited investor, you must have a
Other top-notch VC firms—like Andreessen net worth of at least $1 million, excluding the val-
Horowitz, Kleiner Perkins, Accel Partners, Grey- ue of your primary residence. Or you must have
lock Partners, and Bessemer Venture Partners— an annual income of at least $200,000 for the
do it regularly, too. last two years (or at least $300,000 in combined
annual income if married) and have the expec-
As you can see in the chart above, the average tation to make the same amount for the current
VC fund (as measured by global investment firm year.]
Cambridge Associates) has crushed the returns of
public markets over the long haul... Now, you might check the accredited investor
box. But good luck meeting the required
Big “exits” (when VC investors sell their invest- investment minimums. They often range from
ments) add up to big-time outperformance over $5 million to $25 million. Sometimes, they’re
time. much higher. For example, Sequoia launched
a fund last year with a whopping $250 million
So if you’re an investor craving outsized returns,
minimum.

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Heck, even if you had the money, you’d still need brokerage firm and an investment management
to know someone important to get in. All the firm.
billionaires want to invest with the smartest VC
firms in the world, but even they can’t always get I’ll tell you why that’s important in a second. But
access. first, I want to acknowledge how skeptical we
were of its service.
Then, there’s the fees. Most VC firms charge a 2%
management fee, plus 20% of all profits. Some It sounded too good to be true. Why would a firm
charge as much as 3% and 30%, respectively. allow small investors into the very best private
deals? That’s why I insisted my chief analyst
The ugly truth is regular investors are blackballed Grant Wasylik fly to San Francisco to meet with
from these amazing opportunities to invest. the team members, look them in the eye, and
make sure they passed the “smell” test.
But today, we’re changing that.
We wanted to know what was motivating them
Through our extensive research, we’ve found a to make this product available to the everyday
unique way for Palm Beach Letter subscribers investor.
like yourself to access the VC space.
A few weeks ago, he flew out to SharePost’s office
You’ll be able to invest alongside the world’s best in San Francisco. From what he reported back,
VC firms, the largest institutions, corporate ty- the office takes up the entire 14th floor of a down-
coons, and billionaires. town high-rise, 16-story building.

We’ve found a way in that’s cheaper, safer, more


transparent, and more liquid than even the VC
funds offered to the uber-wealthy.

We believe it will outperform public equity mar-


kets by roughly two to six times over the next 10
years. That means we think you can make be-
tween 15% and 25% per year over the next de-
cade.

Here’s how you’ll do it…


The SharesPost office
The Silicon Valley Venture Fund
As mentioned, SharesPost is the parent company.
The name of the company offering access to these Its brokerage division is SharesPost Financial.
lucrative investments is SharesPost Investment What’s special about this division is it deals exclu-
Management. It manages the SharesPost 100 sively with finding buyers and sellers for shares of
Fund (PRIVX)—what we call the Silicon Valley private companies.
Venture Fund.
Being a trusted liquidity provider to Silicon Valley
Founded a decade ago, the San Francisco-based has given the firm an enviable list of contacts in
SharesPost has satellite offices in Menlo Park, the startup and VC community. That lead Grant
New York City, Dubai, Singapore, and Hong to his meeting with chief operating officer and the
Kong. The company has two main divisions: a fund’s portfolio manager—Kevin Moss.

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Why Launch a Startup Fund for the Masses? The fund was seeded with $100,000 from em-
ployees. Immediately, it collected $7 million to
Grant grilled Moss for two hours. $8 million in assets from interested parties.

Today, the fund has $193 million in assets. While


that sounds like a lot, in the fund world, it’s tiny.
So why isn’t it bigger?

The answer is simple: Moss and his team are


great investors... but lousy marketers. Most inves-
tors—both amateur and professional—still have
no idea this fund exists.

The fund isn’t offered on any full-service bro-


Grant with SharesPost COO Kevin Moss
ker-dealer platforms (Raymond James, UBS,
Moss joined SharesPost in 2012 to co-head its Wells Fargo, etc.). And it doesn’t appear in most
brokerage division. financial databases or screening tools.

He and his team organized deals between buyers This has made it virtually invisible.
and sellers of Twitter, LinkedIn, Facebook, and
That’s why—unless you eat, breathe, and sleep
other private companies. If a private shareholder
investment research the way we do at The Palm
or investor needed liquidity, Moss’ team found a
Beach Letter—you aren’t going to just stumble
matching buyer and orchestrated the deal privately.
upon an idea like this.
Moss realized SharesPost could buy startup com-
panies because of its experience brokering private Getting Diversification
market trades for years. The company had connec- As mentioned, the SharesPost 100 Fund invests
tions... knew the space inside and out... and had re- in a diversified portfolio of late-stage, ven-
lationships with lots of Silicon Valley’s big players. ture-backed private companies. It’s an actively
managed, closed-end, interval fund.
Here’s what Moss said on why he decided to cater
to the mass market instead of the uber-rich: It’s That’s a mouthful. So let me explain…
an untapped market with huge potential. Hun-
dreds of thousands of financial advisers didn’t • “Actively managed” refers to portfolio
have access. And hundreds of millions of ordinary managers Kevin Moss, Jonas Grankvist,
investors had no way to get in. and Maureen Downey. The trio has more
than four decades of collective experience
So why cater to the masses? Because Moss thinks in VC and private equity investing. They
his firm can make a fortune doing so. We can’t make all the decisions about where to in-
fault that logic. To him, this was a commercial vest the fund’s money.
decision backed by solid research.
• “Closed-end” means a fixed number of
And in 2014, Moss and his team launched the shares are issuable (25 million, to be ex-
SharesPost 100 Fund (PRIVX). The fund invests act). SharesPost can file for more shares
in a portfolio of l ate-stage, venture-backed pri- with the Securities and Exchange Commis-
vate companies. sion (SEC) if needed.

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• “Interval” means you can only sell the fund The fund must invest 80% of its assets in names
once per quarter. Typically, it’s the 25th on this list. The remaining 20% provides room for
day of the last month of the quarter. How- flexibility.
ever, it’s buyable at net asset value (NAV)
daily, just like a mutual fund. For example, let’s say a company outside the 100
list is really compelling. And the fund wants the
The fund’s mandate is to buy private shares and ability to move on it. With the 20%, it can start
have an exit just like a traditional VC fund. building a position, knowing that company will
hit the 100 list in a quarter or two.

How Does SharesPost Buy Private Shares? The fund’s strategy focuses on the VC “J-Curve”…

In two ways... You can see the curve on the second chart on the
• Primary market: A company is following page. The blue-shaded area in the chart
issuing new shares (seed round). marks SharesPost’s sweet spot.
Maybe a major VC firm leads a round.
SharesPost can participate, too. SharesPost’s strategy skips the riskier early ven-
ture capital stage… and zooms in on the growth/
• Secondary market: An employee
late-stage period. Companies in the late-stage
or early investor of a private company
phase tend to be more established and focus on
wants to sell their shares. SharesPost
revenue growth. They also have lower risk pro-
can purchase them.
files in technology, products, and markets.
Note: The secondary market can open
Plus, the fund owns stakes in the same startup
a path back to the primary market. For
companies that the best VC firms own, including
instance, once SharesPost buys shares on the
Uber, Lyft, Palantir, Pinterest, and Ripple.
secondary market, it often reaches out to the
CFO of that company. You can see a list of its holdings on page 8.
It’ll say: “As a shareholder, we’d love to
participate in your next round. We want to Since inception, the fund has had 29 exits—25
be partners with you. We’re passive (quiet of which have had positive returns (an 86% win
shareholders), not activists.” Sometimes, rate). The average return across its wins has been
SharesPost can gain access to future seed close to 2x, or 100%. And with each new invest-
rounds this way. ment, the fund seeks a 100% to 200% return over
two or three years.

According to SharesPost, its holdings are made To be clear, just like any other VC fund, it’ll have
up of the best, fastest-growing venture-backed some positions that go to zero… and some that
private growth companies. lose half their value. But that’s normal in VC land.
What’s not normal is SharesPost’s overall win
The firm also maintains the SharesPost 100 list, rate. As mentioned, it’s a stunning 86%. The av-
which serves as the fund’s shopping list. (See first erage VC fund’s win rate hovers around 10–20%.
chart on the following page.)
And not only has this fund been great at making
These holdings have a meaningful overlap with money, it’s been incredible at insulating its inves-
holdings of the top VC firms’ holdings. tors from volatility, too…

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The third chart on this page
shows it has outperformed the
S&P 500 and Dow Jones U.S.
Technology Indexes in nine of
their worst 10 months.

Although the VC/private eq-


uity approach is perceived as
risky, this fund isn’t volatile.
Remember, it doesn’t invest in
early stage companies. It invests
in the more conservative, late-
stage ones.

And with the quarterly liquidity


feature (shareholders can re-
deem up to 5% of the fund’s net
assets), it’s sticky money that
doesn’t run for the hills at the
first sign of a market pullback.

So far, it has an annualized


return of 7.2% since its incep-
tion, with less volatility than
you’d get from holding stocks.
Over the same period, the S&P
500 has returned 10.7% and the
Russell 2000 has returned 7.7%.

Now, a 7.2% return is nothing


to sneeze at. But you might be
thinking, “Why should I buy this
and not the S&P 500?”

• There are two reasons… The


first is diversification. We’re
big fans of helping you
create wealth outside of the
traditional stock market.
Having all your eggs in one
basket is never a good idea.

• Secondly, we think returns been on a tear over the last decade. (The S&P
will flip-flop over the next five years and be- 500 has an annualized return of 16.7% from
yond. Remember, public stock markets have February 2009 to February 2019.)

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*Holdings subject to change. Not a recommendation to buy, sell, or hold any specific security. Source: SharesPost

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But VC funds work over decade-long time horizons. Like other VC funds, the SharesPost 100 Fund
Recall our earlier chart… Over the last 20 years, gets big moves in its NAV from exits.
the average VC firm returned about 25% per year,
while the S&P 500 returned closer to 7% per year. For example, Lyft is the fund’s current biggest po-
sition. And the ride sharing app company recently
We think VC performance will take the lead filed for an IPO. It was last valued at $15 billion.
again. And the SharesPost 100 Fund will follow a
similar path. But if it gets a $25 billion or $30 billion valuation
in the public market—which is definitely possi-
Long-term shareholders should see 15% to 25% ble—that’s $10 million-plus in profit for the fund.
annualized returns over the next decade. That could result in a 5% move higher in NAV.

In terms of leading asset manager forecasts Other fund holdings with a strong chance of having
(4–5% annualized equity returns over the next 10 IPOs in 2019 include Palantir, Pinterest, and Uber.
years), we believe the SharesPost 100 Fund could
outperform public markets by 200% to 525% over Assuming they go public at the high end of esti-
the next 10 years. mates, that could add another 2–3% to the value
of the fund alone. And that’s just on three names
And even if we consider higher long-term averag- in the portfolio. Remember, it currently holds 53
es (the S&P 500 has returned an average of 9.8% investments and has a historical win rate of 86%.
per year over the last 50 years), the fund has
potential to outperform public markets by 50% to As you can see, there are many profit opportuni-
150% over the coming decade. ties ahead for the fund.

Buying the Fund and Choosing the Right Share Class

Compared to the average VC fund, the SharesPost 100 Fund is very cheap.

It has three share classes available:

• The main share class (PRIVX) is the load-waived A share. It can be bought via the Shares-
Post website. It has an expense ratio of 2.5%.

• The next share class (PIIVX) is the institutional share class. To buy this version, you must
have access to a financial adviser. It has an expense ratio of 2.25%.

• The last share class (PRLVX) is a broker-approved share class. Brokers would advise you
to buy this share class because they get paid off of it. It has an expense ratio of 2.75%. Do
not buy this share class.

These expense ratios might appear egregiously high. But remember, VC funds charge 2–3% in
management fees and another 20–30% for performance fees.

What’s special about the SharesPost 100 Fund is that it charges zero performance fees.

The good news is, there’s an expense breakpoint not too far away. Once the fund goes over $200

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million in assets, all three share classes will decrease by 25 basis points in expenses. For the two
share classes we’re interested in (PRIVX and PIIVX), that will result in roughly 10% and 9% ex-
pense cuts, respectively.

Here’s how to buy the fund...

1. If you have a financial adviser relationship, ask your adviser to buy PIIVX for you. It’s
accessible through all major platforms.

2. If not, go with PRIVX. It will be a little more work. You’ll have to fill out a new account
application and fund an account. You can get started right here.

3. If you have questions, you can contact the SharesPost team by calling 800-279-7754.
Make sure you’re inquiring about PRIVX and not PRLVX.

As for IRA accounts, PRIVX is only available to purchase in a self-directed IRA. Entrust Group
and Provident Trust Group offer access.

SharesPost will be offering the fund through an IRA with UMB Financial in the near future. You
can check in on that through a dedicated SharesPost/UMB line at this number: 855-551-5510.
I’m told to give it until April. Otherwise, you can buy PRIVX in a taxable account.

For PIIVX, you should be able to buy the share class in any taxable or non-taxable account man-
aged by an adviser.

Note: The minimum investment requirement is $2,500—whether you buy PRIVX or PIIVX.
(SharesPost has waived PIIVX’s $1 million minimum for financial advisers.)

Bringing It All Together back at this investment five to 10 years from now.

Venture capital and private equity funds are cor- That’s one of the reasons we’re not setting a stop
nerstone investments for endowments, pensions, loss on this position. Use position-sizing as your
and sovereign wealth funds. defense discipline. Do not invest money that
you’re going to need anytime soon.
As we showed earlier, that’s because VC investing
produces higher returns than all other asset class- Action to Take: Buy the SharesPost 100 Fund
es. While this asset class has usually been reserved (PRIVX).
for only the wealthiest investors, you can finally Buy-up-to Price: NAV
even the playing field via the SharesPost 100 Fund. Stop Loss: None
Position Size: 1–3%
This fund is the only legitimate way we’ve found Asset Allocation: Alternatives
for non-accredited investors to get exposure to
startups. Note: If possible, use your financial adviser to
buy the SharesPost 100 Fund Class I share class
Please understand... You must have a long-term (PIIVX) instead, as its expense ratio is 0.25%
time horizon with this approach. We want to look cheaper.

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Customer Care: Toll-Free: (888) 501-2598, International: (561) 921-8774, Mon–Fri, 9am–7pm ET, or email support@palmbeachgroup.com.

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