Fundrise, a direct-to-consumer alternative asset manager, recently announced a $5 million investment in Theory Ventures, a new venture capital fund founded by Tomasz Tunguz, formerly of Google and Redpoint Ventures. Last year, Fundrise started its Innovation Fund with the goal of opening up venture-style investment to individual investors and a primary focus on areas like artificial intelligence and data infrastructure.
In Theory Ventures, the Innovation Fund has found a like-minded approach to venture capital in these areas, as Tunguz is investing in what he calls the “decade of data.”
“In our view, Tomasz ranks among the top 0.01% of emerging venture investors and has the potential to become one of the leading VCs in the coming AI and data revolution,” reads a letter to investors announcing the partnership.
“Theory’s stage and sector focus is a perfect fit with our approach. We’re aligned thematically but Theory will invest earlier than us, providing the Innovation Fund with exposure to a critical piece of the VC ecosystem,” it continues.
In a recent episode of the “Onward” podcast, Tunguz and Fundrise CEO Ben Miller laid out some big-picture ideas about how the evolution of AI and data infrastructure is affecting the venture capital space and how investors can approach the oncoming wave of AI innovation.
The Shift From Structured to Unstructured Data
One of the underlying innovations behind generative AI, the sort of AI that can generate novel content — such as text, images, or music — by learning from existing datasets, is its ability to make use of unstructured data.
Unlike structured data that’s easily searchable and analyzable — for example, a spreadsheet — unstructured data lacks a predefined format. It can include text, images, audio, and video, and it’s not as easily searchable, requiring more complex methods to process and derive meaning. But generative AI software, such as the large language model GPT-4, is able to identify patterns in this more abstract data and use those patterns to generate novel predictions and analysis.
“The big wave in the last 20 years has been making money by selling tools for structured data, like Snowflake and Looker and the [business intelligence] products,” Tunguz told Miller. “The next wave is about unstructured information. How do you make value from that? These machine learning models are supreme at that task.”
Both Theory Ventures and Fundrise are looking to invest early in companies that utilize the most advanced AI to make use of unstructured data in novel ways.
Tunguz highlighted several verticals where this sort of upheaval could already be in progress, and where startups can gain traction because of a general lack of involvement in the space from larger, established companies.
“We think that’s where the opportunity is. There were a couple of big waves for the first startups. One is legal. All of a lawyer’s information is unstructured. It’s Word docs. We’ve seen five or 10 different companies that are helping lawyers draft different kinds of agreements based on previous agreements, which makes sense, and that will change that industry,” he explained.
“Weather would be another example of it, where the incumbents aren’t there. There’s a lot of unstructured information where you can pull data that you couldn’t have before and analyze it in a useful way.”
Humans notoriously find it difficult to accurately predict weather based on the vast arrays of unstructured data that could be used, but AI is ideally suited for this sort of task.
‘The Reason Why Fundrise Exists’
The recent boom in AI looks like the next revolutionary innovation in tech, on par with the advent of the personal computer, the internet, smartphones, social media, and cloud computing.
Many experts even believe that AI could dwarf the economic impact of those game-changing technologies. An April 2023 report from Goldman Sachs predicted that generative AI could increase global gross domestic product by as much as 7%, or nearly $7 trillion, over a 10-year period, as well as increase productivity by 1.5% over that same span.
As was the case with previous tech booms in personal computing, the internet, and the cloud, there will be massive companies that emerge from the continued adoption of AI for personal and business applications. One need look no further than the nearly $80 billion valuation of OpenAI, the maker of ChatGPT, to understand the massive upside of AI startups.
Yet, as Miller and Tunguz noted, the average investor doesn’t typically have access to this next generation of unicorn investments. As private companies, early-stage AI startups are the territory of massive VCs, family shops, and institutional investors with hundreds of millions to spend. And to compound the issue for those who want to get in early, startups are now waiting much longer before they go public.
“Amazon went public after three years. Microsoft went public very, very early on. I think four years after its founding. Today, the average startup goes public after 12 years,” said Tunguz. “Instead of going public at year four, we’re now going public at year 12. Well, the money to finance that business to help it grow for those eight years has to come from someplace. It comes from the private markets now where it didn’t 20 years ago.”
This means that by the time a company goes public, the opportunity to buy in early has been exhausted by larger investors, but Miller sees Fundrise as a way to change that.
“That speaks to the reason why Fundrise exists, because all these people who are not investing through institutional channels or super-high-net-worth investors are not accessing those tech companies,” he said.
The Innovation Fund was designed to offer individuals access to pre-initial public offering tech companies, along with public companies, by buying in for as little as $10. Its other investments range from later-stage data infrastructure companies like Databricks to early-stage property tech companies like Jetty and Inspectify. Theory Ventures is its first investment in a VC.
While the Innovation Fund itself functions like a VC, by investing in Theory Ventures, it also gains access to Tunguz’s strategy and enables its retail investors to access a traditional VC, as its letter announcing the investment explained.
“Investing in Theory presents an attractive opportunity in its own right, and it also offers the potential to access subsequent Theory funds or co-investment opportunities for the Innovation Fund. We’re thrilled to be backing Theory Ventures from day one.”
