Editor’s note: Our three-day “guest essay” series with Dan Ferris concludes today…
Dan is a longtime editor at our corporate affiliate Stansberry Research. On Tuesday, he detailed why folks like us need to prepare for a wide range of possible outcomes. Yesterday, he talked about Ark Investment Management founder Cathie Wood’s latest endeavor.
And today, Dan explains why this new fund could wreck many unsuspecting investors…
Yesterday, I detailed Cathie Wood’s recent foray into venture capital (“VC”) investing…
The Ark Investment Management founder just launched the ARK Venture Fund. The fund will purportedly allow anyone to invest in illiquid private companies, no matter their experience or net worth.
While this might sound like a noble deed for the “little guy” at first, it’s far from that…
As I explained yesterday, the dubious structure of Wood’s new fund signals a last-ditch cash grab before the VC space crashes. And ultimately, it could wipe out unsuspecting investors.
Today, let’s take a closer look at this pending disaster…
I’m guessing that you haven’t heard a whole lot about the VC implosion lately. It hasn’t already been widely reported for a simple reason…
The companies are all private. That has two powerful implications…
Both of these implications lead to a “delay and pray” approach. By that, I mean VC investors hold off recognizing their losses in hopes that it will all blow over…
First, because VC investments are in private companies that don’t trade on public exchanges, their equity is highly illiquid. So there’s rarely any reason to tell anyone what their fair value is at any given moment.
It’s like owning a house you don’t intend to move out of for years. As long as you can pay the mortgage, you’re not too concerned with any estimated home values.
But as I mentioned yesterday, the VC bubble has already started blowing up. And as the Financial Times reported in July…
The venture capital bubble is facing a slow and messy unwinding. After a historic boom that puts even the tech bubble of the 1990s into the shade, an adjustment to more rational conditions has started. But structural factors and the psychology of private markets make it hard to tell how long this will take – or what will emerge on the other side.
One of the “structural factors” is the fact that raising money at a lower valuation than the last round is viewed by startup founders as a failure in the world of VC investing (and by previous investors as highly dilutive, just like in public markets).
So there’s always a powerful incentive to report the highest possible valuations.
And as long as private startup companies report high valuations, they can keep issuing stock to employees. That makes the management teams feel rich and keeps them feeling like they’re part of something great.
All of these incentives create an awful situation. They encourage private companies to deny the reality of what’s happening all around them.
Being rewarded to ignore enormous threats to your viability as a startup company doesn’t seem like a great incentive for management to prepare for hard times.
Let’s go back to the ARK Venture Fund. Remember what I said yesterday…
No matter what’s really happening to the private startups in Wood’s latest brainchild, its shareholders can only sit and watch the value of their investment evaporate as the industry is forced to confront the truth.
ARK Investment Management will keep investors’ money, no matter how badly they want it back.
That leads us to how we know the VC space is under serious pressure. And folks, this really ticks me off…
ARK Investment Management had to come up with a way to lure the least knowledgeable and most inexperienced individual investors into its plan and virtually guarantee that they will never see their money again – or at least not much of it.
You see, VC funds don’t normally let anyone in but wealthy people who agree to have their money locked up for an extended period (often 10 years). But that won’t cut it here…
ARK Investment Management’s flagship exchange-traded fund is down 77% over the past 20 months. So it needs to gather as much capital as possible into this new fund as soon as possible. It needs everybody’s money – not just that of a few rich people.
So the minimum investment required to participate isn’t what you typically expect from a VC fund. It’s not $50 million… $5 million… $500,000… $50,000… or even $5,000.
It’s $500.
ARK Investment Management partnered with a company called Titan. They created an app that allows anybody to get into the ARK Venture Fund with a minimum investment of just $500.
That’s right…
The company that invested in unprofitable, high-growth tech garbage that was virtually guaranteed to get destroyed at the first sign of trouble has now turned to risky, illiquid bets on the same type of garbage. And for all the folks who don’t know any better, it’s making it look like as much fun as buying fractional Tesla (TSLA) shares on Robinhood (HOOD).
For those folks, it might seem like just another way to go “to the moon.” But in reality, they’re not getting any closer than we’ve gotten to the lunar surface in 50 years.
Of course, ARK Investment Management says its VC interval fund is “not designed as a trading vehicle.” But I promise you…
That disclosure will be lost on all those $500-a-pop retail folks once they start losing money.
They’ll ask for their money back. And ARK Investment Management will offer to give them whatever the ratio will be given the enormous number of folks asking for it.
That leads us to the most important thing I want you to remember this week…
When the headlines really start to fill up with VC blowups, people with $500 to invest in a bunch of sketchy garbage won’t want to get anywhere remotely close to the stock market.
In fact, people with $500,000 and $5 million will find it really hard to put money into stocks at that point, too. That will be especially true if they’re anywhere near retirement age.
The vast majority of investors will swear off stocks and bonds forever.
That’s when the bear market will finally bottom. And that’s when the opportunity begins.
Good investing,
Dan Ferris
Editor’s note: Just 12 hours ago, Dan went on camera with an urgent market warning…
He believes the biggest investing event of your life is about to unfold. It will take most folks by surprise. And it will likely be worse than anything you’ve ever experienced.
The bottom line is…
You need to get out of the wrong investments – and into the right ones – immediately.
To help you do that, during last night’s event, Dan shared the names and tickers of two well-known stocks to sell immediately. There’s a good chance you own at least one of them.
If you missed the event, you’re in luck. For a limited time, you can still watch the full replay .
