ARK’s Cathie Wood is entering venture capital. That’s a problem

As I reported in June, ARK Invest—the investment manager known for its aggressive bets on innovative public tech companies—had been planning to debut a crossover fund that would experiment in the private markets, and it filed initial documentation with the Securities and Exchange Commission in February.

Now it’s go time. Yesterday, ARK Invest announced that the ARK Venture Fund, which will invest in anything from early-stage startups to mega-cap corporations, is live. And it’s seeking buy-in from none other than retail investors.

Sometimes there is a discrepancy when people use the word “retail investors.” Private equity firms often use that verbage to distinguish high-net-worth LPs from their institutional LPs. But make no mistake: Wood’s fund will accept retail investors, as in the Robinhood or Interactive Brokers-esque, $500-minimum-investment kind of investor, by using the fintech platform Titan.

Buckle up, because I have a lot of thoughts about this.

First, let’s go through some of the fundamentals of this new fund:

• It is an “interval fund,” meaning that, unlike a Fidelity or T. Rowe Price crossover fund, ARK Venture Fund is effectively illiquid. While ARK will repurchase about 5% of the fund’s outstanding shares every quarter, the capital is basically locked up.
• The fund has “substantial risks,” per its own disclosures. For private companies, and especially early-stage ones, valuations are uncertain, failure rates are high, and liquidity is limited. You can read through ARK’s 11-page list of risks here.
• The fund will primarily invest in genomic advancement, automation, energy transformation, A.I., “next generation internet”, and fintech companies.
• Management fees are 2.75%. The total expense ratio is 4.22%. There is no carry.
• ARK told the Wall Street Journal it is targeting a 70% allocation to private companies, and a 30% allocation to publics.

Personally, I think making this available to retail investors is a horrible idea. Yes, retail investors can be highly sophisticated (I’d argue that many of them are probably making much better investment decisions than accredited investors). Yes, retail investors deserve an opportunity to play in the markets, too. But if you, like me, aren’t worth at least $1 million and aren’t making at least $200,000 a year (meaning you qualify for accredited investor status), you probably don’t have any business investing in venture capital.

Let’s get into this. 

Right off the bat, you will be paying ARK 2.75% of the assets you invest every single year. That’s really expensive. Just for context, an investor could get passive exposure to a thematic basket of Nasdaq tech stocks for 0.10% in fees, or pay the all-in expense ratio of 0.75% for Wood’s flagship ARK Innovation ETF, which backs tech companies the asset manager believes will be transformative in the public markets. Of course, there’s way more potential upside investing in a company’s early days, and ARK is picking out the companies it thinks will end up winners with much less information to go off of. In general, investing in private companies is a lot more work, so you’ll pay for that. 

Early exposure is great—if the companies end up being successful. But most startups aren’t successful, meaning investors will take on a whole lot more risk, too. The investments could lose value and the portfolio companies could all go bust. I mean—90% of startups fail, and high-flying growth-stage companies are surely not immune from enormous swings in valuations, mismanagement, scandal, or ultimate failure. There’s also the matter of managing that risk, or diversification.

Traditional limited partners have a lot of money to play with. They are family offices, endowments, sovereign wealth funds, pension funds, etc. This means that they can diversify well. Let’s pull up the New York State Common Retirement Fund, for example, which has $272.1 billion in assets. As of March 2022, that fund had 13% of its assets in private equity, less than half what it allocated to domestic public equities. That capital was diversified across more than 50 different private equity and venture funds. 

Now let’s introduce a retail investor with, say, $50,000 of capital they feel comfortable investing in the market. Should they allocate 13% to the private markets, that would mean they have $6,500 to invest. They simply can’t diversify much with only $6,500, putting them at a disadvantage. If the individual only has $2,000, it’s even worse.

But the major issues are around liquidity. Wood’s fund is not only extremely risky—it is also illiquid. Sure, you probably shouldn’t be touching your investments all that much anyway. But should some sudden expense emerge in a retail investor’s life (i.e. a divorce, sudden layoffs, a death in the family), there is no accessing that capital. Here’s another scenario: In some bizarre situation, Wood leaves ARK and there is a leadership shakeup within the fund. An investor no longer agrees with the direction of the fund—too bad!

You could argue that retail investors already invest in startups via mutual funds at Fidelity or T. Rowe Price (their exposure to startups has been controversial as well), but investors can exit out of those investments as they see fit. Not here.

Wood, whose ETFs have suffered amid the broader tech rout, has historically seen extraordinary success investing in public equities, and she and her team have had an eye for spotting which public companies would be transformative early on, even when some on Wall Street had scoffed at ARK’s thesis. Who knows—maybe this crossover fund will end up being the best-performing fund we’ve ever seen on the private markets. That’s unlikely: The world of privates operates under a whole different set of rules, and her team is relatively new to it.

Even if the fund ends up an outlier, that doesn’t mean a retail investor should throw 50% of their investable assets in it and risk losing it all. Especially when you consider that Americans should have about $7 trillion more saved for retirement than they actually do.

Perhaps I’m just conservative with my own small pool of investable assets. I could also just be jaded from reading lawsuits filed by individuals who were late to realize the true meaning of their money being stuck in a closed-end fund somewhere. But either way, there’s plenty of places to take bold, well-informed bets on the market, and most of them don’t require that you lock up your capital with a fund manager who will use it to make extraordinarily risky bets in a highly-opaque industry for the next decade.

If you have the money to play with and want to risk it all for the sake of a fat return, that’s great. Most people don’t, and they’d be better off putting it somewhere much safer. 

See you tomorrow,

Jessica Mathews
Twitter: @jessicakmathews
Email: jessica.mathews@fortune.com
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Jackson Fordyce curated the deals section of today’s newsletter.

VENTURE DEALS

- Wasabi Technologies, a Boston-based cloud storage company, raised $250 million in Series D funding. L2 Point Management led the round and was joined by investors including Cedar Pine, Fidelity Management & Research Company, and Forestay Capital. 

- Ocelot, a Boulder, Colo.-based A.I. communications and student engagement platform, raised $117 million in funding from K1 Investment Management. 

- Moxion Power, a Richmond, Calif.-based clean mobile energy storage technology manufacturer, raised $100 million in Series B funding. Tamarack Global led the round and was joined by investors including Energy Impact Partners, Sunbelt Rentals, Amazon’s Climate Pledge Fund, Microsoft’s Climate Innovation Fund, Enterprise Holdings Ventures, Marubeni Ventures, Suffolk Technologies, and Rocketship.vc. 

- Unravel Data, a Palo Alto-based DataOps observability platform for data teams, raised $50 million in Series D fundiOpen in new tabng. Third Point Ventures led the round and was joined by investors including Bridge Bank, Menlo Ventures, Point72 Ventures, GGV Capital, and Harmony Capital. 

- MPCH Labs, a New York-based product and venture lab, raised $40 million in Series A funding. Liberty City Ventures, Animoca Brands, QCP Capital, Mantis VC, and others invested in the round.

- Tray.io, a San Francisco-based automation and integration platform, raised $40 million in funding. Canada Pension Plan Investment Board, True Ventures, GGV Capital, Spark Capital, Meritech Capital Partners, and Stepstone Group invested in the round. 

- Sudo Biosciences, a Menlo Park, Calif.-based TYK2 biopharmaceutical company, raised $37 million in Series A funding co-led by Frazier Life Sciences and Velosity Capital. 

- SINAI Technologies, a San Francisco-based decarbonization intelligence platform for reducing carbon emissions, raised $22 million in Series A funding. Energize Ventures led the round and was joined by investors including Stardust Equity, HighSage, Obvious Ventures, Valo Ventures, Afore, High Alpha, Presidio Ventures, NEC Translink Capital, and others. 

- DPL Financial Partners, a Louisville, Ky.-based insurance management platform, raised an additional $20 million in funding from Eldridge and Atlas Merchant Capital. 

- Woltair, a Prague-based decentralized heating and energy solutions platform for buildings, raised €16.3 million ($15.64 million) in Series A funding. ArcTern Ventures led the round and was joined by investors including Westly Group, Aternus, Kaya VC, Inven Capital, and Movens Capital. 

- Hofy, a London-based onboarding platform for remote teams, raised $15 million in Series B funding. CNP, Stride, 20VC, Day One Ventures, Kindred Capital, Activum, and TrueSight invested in the round. 

- Optellum, an Oxford, UK-based early-stage lung cancer diagnosis and treatment platform, raised $14 million in Series A funding. Mercia led the round and was joined by investors including Intuitive Ventures, Black Opal Ventures, and others.

- AIKON, a San Francisco-based Web3 onboarding solutions provider, raised $10 million in Series A funding. Morgan Creek Digital led the round and was joined by investors including Blizzard the Avalanche Fund, Up2 Opportunity Fund, Hestia Investments, Yugen Partners, Mighty Capital, Alpha Edison, and Think+ Ventures.

- FourKites, a Chicago-based supply chain visibility company, raised $10 million in funding from Mitsui & Co. 

- Penpot, a Madrid-based collaborative design and prototyping platform, raised $8 million in funding. Decibel led the round and was joined by investors including Athos Capital and other angels.

- Tavros Therapeutics, a Durham, N.C.-based precision oncology platform, raised $7.5 million in seed II funding. Piedmont Capital Investments and KdT Ventures co-led the round and were joined by Alexandria Venture Investments. 

- Climate Club, a New York-based carbon reduction platform, raised $6.5 million in seed funding. XYZ Venture Capital and Vestigo Ventures co-led the round and were joined by investors including Red Sea Ventures and MCJ Collective.

- Kaleidoscope, a New York-based research team performance operating system, raised $6 million in seed funding. Hummingbird Ventures and Dimension co-led the round and were joined by investors including Caffeinated Capital, SV Angel, Hawktail, and others. 

- BlooBloom, a London-based ethical glasses company, raised £3.7 million ($3.96 million) in funding. Pembroke VCT led the round and was joined by investors including DMG Ventures and other angels. 

- Block Green, a Züg, Switzerland-based decentralized lending protocol, raised $3.7 million in funding. Founders Fund led the round and was joined by investors including Coinbase Ventures, Dao5, Blizzard, New Layer Capital, 10X Founders, and others. 

- Papaya Technologies, a London-based electric fleet sourcing and management platform, raised $3.5 million in seed funding. Giant Ventures led the round and was joined by investors including Seedcamp, 20VC, FJ Labs, Flexport, and Cocoa. 

- Scout, a Los Angeles-based investing platform, raised $2.6 million in seed funding. Chingona Ventures led the round and was joined by investors including BDMI, OnDeck, OneTeam Partners, Reach Capital, Gaingels, Hustle Fund, Alive VC, Broadhaven Ventures, and others.

- Yonder, a Dublin-based health insurance and retirement benefits platform, raised $2.6 million in funding co-led by Northzone and Frontline Ventures. 

- Ovation, a Salt Lake City-based guest feedback platform, raised an additional $2 million in funding. York IE led the round and was joined by Branded Strategic Hospitality.

PRIVATE EQUITY

- Energy Capital Partners agreed to acquire Biffa, a High Wycombe, UK-based waste management company, for £1.3 billion ($1.4 billion). 

- Command Investigations, a Monument MicroCap Partners portfolio company, acquired  The Citadel Agency, an Orlando-based risk management firm. Financial terms were not disclosed.

- Industry Services, an Osceola Capital portfolio company, acquired Lonestar Sierra Industrial Services, a Tehachapi, Calif.-based refractory maintenance and mechanical services provider. Financial terms were not disclosed. 

- ​​Quad-C Management acquired a majority stake in Synoptek, an Irvine, Calif.-based business technology solutions provider. Synoptek will retain a minority stake. Financial terms were not disclosed.

- Tech24, backed by HCI Equity Partners, acquired Allied Service Group, a Jackson, Tenn.-based repair services, preventative maintenance, and installation provider for food service and HVAC equipment. Financial terms were not disclosed.

- Thompson Street Capital Partners and Endicott Capital acquired a majority stake in MediaRadar, a New York-based cross-media advertising intelligence provider. Financial terms were not disclosed.  

OTHER

- Prescryptive Health acquired Northwest Pharmacy Services, an Enumclaw, Wash.-based nonprofit pharmacy benefit manager. 

IPOS 

- SinoSynergy, a Foshan, China-based hydrogen fuel cell company, is considering an initial public offering in Hong Kong as soon as next year, according to Bloomberg.

PEOPLE

- Emergence Capital, a San Francisco-based venture capital firm, promoted Yaz El-Baba to principal.

- PAI Partners, a Paris-based private equity firm, hired Winston Song as partner. Formerly, he was with Vestar Capital Partners.

- Pathfinder Partners, a San Diego-based private equity firm, promoted Matt Quinn to managing director and Jeff Wurtz as CFO.