Democratizing the Private Markets — ft. Ben Miller
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Today's number, $33,000. That's the average cost of a wedding in the U.S. Ed Shustory, at my first wedding, I told my wife, listen, I've got to come clean. I've had a lot of prostitutes. And she looked up and said, I thought I'd recognize you. No, I'm not.

Welcome to Prop G Markets, Ed. Today, we're speaking with Ben Miller, the co-founder and CEO of Fundrise, the largest direct-to-consumer alternative asset manager in the U.S. This isn't a good segue. We speak with Ben about increasing access to the private markets, the merits of regulation, and gaining the trust of investors. Ben, welcome to Prop G Markets.

The democratization of these asset classes, I think it's a good thing. I used to be more of a, I don't know, have more of a paternal view. Now I'm kind of stop infantilizing these people. I'm beginning to think that regulation was nothing but an attempt to sequester these assets to institutions such that they wouldn't have access to more capital. Anyways, here is our conversation with the CEO of Fundrise, Ben Miller. Ben, thank you for joining us. Thanks for having me.

So I just want to start out talking a little bit about regulation. You know, we talk a lot about venture capital on this podcast. We talk a lot about alternative assets, but unlike the stock market,

these aren't the kinds of assets that regular people can invest in. And I know that your company is changing that. But before we get to that, could you just give us a brief summary on the landscape in regulation of private markets? Why haven't regular investors gone to access these types of markets historically? Well, the essence of the regulatory framework we have in America is that you can either regulate the offering or the investor.

So the way that public markets work is the offerings are registered and reviewed and regulated by the SEC. And in the private markets, the investor is regulated. So they have different investor qualifications like accredited or qualified purchaser or QIB. The premise is that if the investor is large...

that they are sophisticated. So that bar for sophistication, what actually is that? What does sophisticated mean here? Does it mean just rich or experienced? No, it's simply a wealth or asset value test. So meaning a net worth? That's how much their net worth is? Yeah. I mean, the technical definitions are a million dollars of net worth, excluding your home. For accredited investors and qualified purchasers, it's a $5 million hurdle.

And QIB is $100 million of assets. And my understanding is that with your launch of Fundrise and the Innovation Fund, that's generally beginning to change that. I mean, it seems like regular investors are

somehow able to participate? Well, so we did something novel. We created essentially the first public venture fund. So we took a venture fund and qualified it with the SEC. So it's a publicly registered 40-act fund, like a mutual fund. So instead of having to put qualifications or limitations on the investor, we have the offering or the fund itself is regulated. But the consequences of that is that it opened up venture capital for the first time to normal investors. And

And how did you come up with this idea? Well, so I co-founded Fundrise back in 2012 to democratize investing in real estate. So I've been working in this sort of intersection of tech, finance, and regulations for the past 12 years. And we sort of successfully democratized investing in real estate. We have like 2 million users, and I think we have $7 billion of real estate assets. So

When we sort of were thinking about the next hill to climb, we, you know, we work in tech, we have 100 software engineers, we have all the technology that a company at our scale would have. And, you know, we felt like it didn't make sense that venture capital should be barred for normal people. That just seemed antiquated.

And so he went to the SEC and spent a couple of years working with them to find a framework that they felt would work to sort of open up the industry. And that was also true of real estate? Yeah, I started and that took me about two years as well to open it up, maybe longer back in 2011, 2012. And the whole thing, people feel like regulators or government is this like

kind of like far off entity but if you walk in the front door and you talk to them and say this is what i want to do this is why i want to do it generally they're pretty open-minded it's slow i mean it takes it took us a couple years i mean i've generally found that you can get done what is logical as long as you're uh you're trying to do it for for good reasons

Ben, nice to meet you. So I love the idea of democratizing investing in certain asset classes that traditionally have been sequestered from, you know, black, better term retail investors. I would imagine that it would be an administrative and logistical nightmare for you, though, because some of these assets are illiquid and trying to figure out the entry point. And then when someone wants to redeem, how have you gotten past? Is it a use of technology? Is it, quite frankly, lockups that are

that are not onerous, but, you know, multi-year lockup periods. How have you gotten around not only the regulatory hurdles, but just the administrative and logistical hurdles of having someone place a small dollar amount into a private illiquid investment? I'll break your question up into two parts. One is a technology question, one sort of a business practice. So in the technology point, we, you know, we build a platform, we have

the same type of technology platform you'd see with a big investment platform like Schwab. We have 18 people doing customer service, investor relations. We have software that manages all the distributions and dividends and millions of people. So what we found, because we didn't start with a $10 minimum, we started with a higher minimum in thousands years ago. And as it became more and more automated, the marginal cost per

per dollar of software is zero, right? I mean, it costs nothing to make bits. So the technology platform at scale is what drove the access down. And then the question about liquidity and redemptions, that's been a really interesting dynamic in the market where I think you see this a lot in industries where something new is

People don't know what the best practices are. And there's a process of evolution. So we learned that you have these two worlds, public markets, which are 100% liquid, private markets, which are nearly 0% liquid. And if you're going to create a bridge between the two, you have to basically have a mix of liquid and illiquid assets. You can't be one or the other. And so our funds are typically liquid.

approximately 30% liquid. So our tech fund, for example, has lots of private investments and tech companies, as well as we hold liquid bonds, typically liquid tech bonds. So we bought tech busted convertibles and other kinds of bonds. It's really about recognizing that if you're going to be at this intersection, you have to be a mix of two models, liquid and illiquid. You can't be one or the other. I also just had a question about private credit. And

Can you, first off, define private credit and give it not a pitch, but an overview of the asset class and why

investors might be interested in having some exposure to private credit? All private credit is is non-bank lending. So banks are highly regulated because they take their money from depositors. And matching assets and liabilities is tricky because the deposits could be overnight liquidated, like we saw in Silicon Valley Bank, but the assets are illiquid. So as a consequence, because of the deposit insurance, the banks have become regulated and over time increasingly more regulated. And

And the more regulated they become, the more the lending environment needs other solutions. And so those other solutions can be different kinds of debt funds. There are mortgage REITs. There are all sorts of flavors of kinds of private credit. And what they're trying to do, you know, we have a private credit fund. You're trying to find places that are not getting funded appropriately. There's inefficiencies there.

And those inefficiencies can be cyclical or they can be structural depending on what's happening in the world. And so on one hand, I think this is a secular trend that's going to continue to become dominant because as banks can be more and more regulated, and actually I think

As banks get out of the lending business, actually, there's going to be a need for private credit. On the other hand, there are ebbs and flows, and sometimes there's too much money in the market, and sometimes there's not enough. I just want to go back to democratized access in investing, which I'm all for, and I've talked about on this podcast before. But I think that word, democratizing, democratizing access in the investment world, it's...

kind of getting a bad rap, I think because it's being used so frequently. I mean, we saw it with Robinhood, we've seen it with other financial products. So I'm just curious to get your view on what democratized access means at Fundrise and why do you think that investors should take it seriously? If you think about it in a longer timescale, like 100 years,

You know, the arc of financial history bends towards democracy and there's been ebbs and fits and starts. And so often when something's getting democratized, again, there's like periods of instability as the industry figures out the norms, right?

And now, you know, everybody invests in mutual funds. That wasn't the case before the 80s. Everybody invests in stocks and trading. So these trends have often gone through sort of booms and busts. And so we went through a boom and a bust with that because it democratized it. And then it got overvalued. But so...

One of the advantages of private markets or public markets is you can take a longer view. Typically, when you're investing in private markets, it's a seven to 10 year horizon, maybe five at the minimum. And so you can see past a lot of the short term volatility. So right now, we're probably, you know, coming through kind of a bust in that where people took advantage of it, I think. And some of the models really didn't hold up. But I think over time,

you know, people are figuring it out. I think we've figured out how to democratize real estate, venture capital, private credit. And just because of technology and information transparency, the difference between public and private markets is diminishing. I mean, the private markets are becoming more public, more transparent, more efficient. And that's just what happens to markets, thankfully, because of the system we live in. And I think that, you know, 100 years from now, 50 years from now, it probably won't be a difference between the two.

And it's just a question of who and how you win that. Yeah, I feel like the regulators...

has been that you need to protect investors from themselves in a way. Like if you're not registering with the SEC and you have people selling stock in private companies, then inexperienced investors won't really know what they're doing and they could get ripped off in some way. I think that's sort of the argument from the regulator side of things, which I get in a way, but it's a very paternalistic view. So I'd love to get your take on

on do you see the merits in protecting investors from themselves? Or do you believe that it should be more of a free-for-all, that anyone can go invest in whatever they want, and if you get burned on the downside, you should have done your diligence? My experience as a manager through 2008

was that you certainly can't trust anybody, big companies, big institutions, or small investors. There's a lack of good judgment when times are hot.

And so it's a constant balance, right? We've been dealing with this in probably every political discussion, how much you deal with protecting investors or regulating versus basically a free enterprise, growth-driven entrepreneurism. And you have to have a balanced approach. You have to basically have a nuanced approach. And at times, the pendulum swings too far one way or the other.

But it feels like we do make progress and we are making progress. I think venture capital, we're one of the first to open a venture capital, but I think 10 years from now, it'll be absolutely normal. Every major venture shop will have a seed fund, they'll have a series A fund, a growth fund, and they'll have a public crossover venture fund like we do. I mean, this is 10 years ago, there really weren't any growth funds of consequence and now they're totally normalized. So

It's a process and, you know, execution matters, but I think it's inevitable. You mentioned like in 2008 and the lack of trust. I would imagine that that's one of the main things that you have to focus on as a fund manager in this asset class is establishing that trust with consumers. I'd love to get your view on how to do that as a fund manager and also just how entrepreneurs can do that with their customers. My experience with investors actually is that, yeah,

They want to give you trust. They actually really do. But then you have to maintain it. And that takes basically time. We have investors who've been with us for over a decade. And that's a really strong relationship. And we have investors who invested at the top of the market. And now, like two years later, they're not as happy with us. What investors want are performance. They just really want outcomes. And that's how you drive trust. We'll be right back.

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Ben, what's the business model? Is it like a typical two and 20 or is it more like a mutual fund? How do you guys make money? So, yeah, it's only an asset management fee. We don't take a carried interest on our funds. They're registered 40 act funds. In some ways, you could argue the most disruptive thing you could do to the private equity or venture capital industry would be to remove their 20% carried interest. Yeah, just go straight fees. It's an extremely disruptive model in venture capital.

And we got rid of it back after 2008 because I always found it as a one-way option. So it's a risk incentive. So you get 20% of the profits if things go well, but you don't give back 20% of the downside. And so especially for normal investors, it's much more important to manage risk

And so I think it's better alignment, even though it's extremely different than the normal venture fund. And how do your fee—I just want to acknowledge there's more logistics and administrative expense when you're managing a million accounts versus going to, you know, Adia or Ottawa Teachers. But how do your fees, generally speaking, if I invest $10,000—

in your private credit fund or your real estate fund? What am I looking at in terms of annual fees? Yeah, I mean, it's 1% to 2% a year, depending on the fund. And so it's sort of ruthlessly tight fees. I mean, that's very, very low.

And so we are just getting breakeven this year. I mean, it's much, much lower fees. Considering our assets under management, we should be like 10x more profitable. But the internet doesn't reward high fees. And so we took a long-term view that if we could basically exist and win on tight fees...

that as we scaled, it would be a competitive advantage. Doesn't that imply that you needed to raise a lot of money to get to that point? We have to have scale. I mean, scale. So we got to about $3 billion of equity under management and software. I mean, you know, the majority of our team are software engineers and tech people. And so the more we automate, the lower the marginal cost. And do you track your fund's performance relative to benchmarks? And how have you guys done?

It depends on the funds. So I personally would think about Vanguard REIT Index as the benchmark for real estate. And we've pretty handily outperformed them for the last 10 years. And it's not that hard, honestly. Vanguard REIT Index had Office in it. It had a lot of really bad assets.

So in a way, like our outperformance isn't... It doesn't actually like... The thing about investing is that it's actually not that complicated intellectually, but it's really difficult sort of corporately because investors and the world, they want you to go all in when the times are hot and they want to flee to the hills when times are cold. And so it makes it really difficult as a fund manager to actually do what you know is the right thing because you basically get punished for it. Have you had any...

problems actually becoming an investor in these private companies? I mean, you mentioned democratizing access to retail investors, but it's also pretty difficult, even if you are a sophisticated accredited investor, to get on the cap table. But you've invested in OpenAI, Anthropic, Canva. How are you getting on these

That is definitely the hard part. That's interesting. It's been easier to raise money than get the right deal flow? Oh, yeah. That's really interesting. Oh, yeah. And we actually had like $50 million in cash when we started the fund and we didn't deploy it because it was so difficult. I didn't want to deploy it into the wrong companies. And so we sat on it for almost a year, which our investors were not that happy with.

But it takes time. And fortunately, because like when I go to approach company, like I, one of the companies you named plus other ones, it's funny because like 80% of the companies we invested in Fundrise is a customer of.

So we're a customer of Canva, a customer of Databricks, we're a customer of OpenAI, and we have a relationship there. Plus, I go into a room, there'll be five people from the company's IR team and maybe the CFO's office, and I'll say, okay, is anybody here in this room a Fundrise investor? Usually half the room is personally invested in Fundrise somehow. And so the credibility and connections we have has allowed us to have an opportunity to get into these companies.

And then lastly, we were lucky, right? This market is much more normalized. There's a lot less capital than there was two years ago. And so we came into the market at a good time and when we could get access to these companies. And just a final question. You are a successful founder. You started this company in 2012. It's now the largest direct consumer alternative asset manager in the U.S.,

I think we have a lot of entrepreneurs who listen to this show. Do you have any advice to them, any advice to any entrepreneurs who might be listening? What do you think it takes to build a successful company? Oh, man, it takes incredible...

I mean, just brutality. I got to interrupt you, man. I can't, I can just see it in your face. And when I think, I know enough about alternative investments. I worked with hedge funds. I think what you're doing is a fucking nightmare. I can't even imagine what it's like to take money from someone, take their 400 bucks and

And then start pinging customer service demanding that you get better returns for them. I would think that this would be literally like you are a masochist. I just imagine there's 2% of your customer base is what's the term? A fucking nightmare. Yeah.

And they're like emailing you personally and tweeting at me. Yeah, yeah. Anyways, I would think this would be just a 12 years of like hand to hand combat. But I feel like to be an entrepreneur is to be a masochist. You can't be successful and not be a masochist. You just have to love the pain. The pain has to be something that you somehow get gratification out of because otherwise you're

there's no way anybody could do this type of work. So what would the advice be then? Embrace the suck? I mean, it's hard because the real advice is that it's going to be harder than you possibly imagine as masochism. But because you don't really appreciate it, you're going to do it anyways. I did it anyways. And there's some sort of moment when you kind of accept the pain. There's a health crisis. You have all these things that go wrong. And you start to see them as normal.

Like the sort of the crazy drama that happens. It just makes no sense. And, and you're just dealing with like, you know, like when Silicon Valley bank exploded or, you know, literally COVID the kind of country shutting down. And, and you just, if you get to a place where you see those as like regular business, like, you know, normal, normal, uh, making payroll and things like that. If you get to a place where you actually, you no longer are phased by it. That's the, that's the emotional evolution, uh,

And so like trying to turn the pain into, into like, you know, spin it into gold is the, is really the psychological emotional journey. And, you know, that journey is like, I recommend that like people have empathy for themselves. How about that? Ben Miller is the co-founder and CEO of Fundrise, which is the largest direct consumer alternative asset manager in the US. Ben, thank you for joining us. Thanks for having me. Thanks, Ben.

This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our associate producer is Alison Weiss. Our executive producer is Catherine Dillon. Mia Silverio is our research lead and Drew Burrows is our technical director. Thank you for listening to Profiteer Markets from the Vox Media Podcast Network. We'll be back with a fresh take on markets on Thursday. Support for this show comes from Amazon Business.

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