A big reason not to invest through a venture capital fund pull

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Getting into a venture capital fund is easy. Go out? Not really.

Key points

  • Pull shares are illiquid and can only be redeemed in limited numbers by the company during redemption periods.
  • Sweater offers more liberal redemption than other VCs, but investors should not confuse Sweater shares with publicly traded shares.

Venture capital investment website Sweater allows users to invest in actively managed portfolios of start-up companies. With reasonable fees and a family of assets, the company seems like a great place for the average investor to invest in startups. The only problem? You could be stuck with your investment.

Lack of liquidity

The Sweater’s Cashmere fund offers the average American investor an easy way to invest in private start-ups. The fully managed fund does not require users to have accredited investor status and has a low minimum investment of $500. Buying stocks is easy enough, but selling them is a whole other story.

The Sweater’s Cashmere fund is not publicly traded, which means investors cannot freely trade their shares. Instead, the only buyer of Cashmere stock is Sweater himself, during certain buyback windows. Cashmere offers two share buyback windows per year, one in February and one in August. These are the only times of the year when shareholders can sell their investments.

In addition, Sweater reserves the right to redeem only a specific number of shares per redemption window. According to the fund’s prospectus, only 5% of the outstanding shares can be redeemed over a six-month period, ie during each redemption window. If shareholders request that more than 5% of all outstanding shares be redeemed during such period, the redemption is considered oversubscribed and shareholders may only be able to redeem some or none of their shares.

Cashmere versus other venture capital funds

To Sweater’s credit, the Cashmere fund is more liquid than other venture capital funds. Many venture capital funds lock in new investors for up to 10 years before they can liquidate some or all of their shares. On the other hand, Sweater allows investors to cash out during the first redemption period following the purchase of shares. New investors should be aware that the Cashmere fund charges redemption fees on shares redeemed before 18 months, which can be as high as 2% in the first six months.

Cashmere vs Mutual Funds

Investors should not confuse the Pull’s Cashmere fund with a mutual fund or an ETF. Although fees vary, the main difference in the structure of the fund is liquidity and what happens in the event of an exit rush.

Most investors are familiar with mutual funds and ETFs offered by top brokers. Like venture capital funds, mutual funds and ETFs generally charge annual fees and may or may not be actively managed. Unlike venture capital funds, mutual funds and ETFs have fewer restrictions on when they can be sold. Most mutual funds and ETFs are exchange-traded, unlike venture capital funds. The main difference is this: if you need or want to sell your investment in a mutual fund or ETF, you can do it quickly on an exchange. You may not be happy with the final sale price, especially if you’re trading based on recent bad news, but you can usually get some of your money back. Venture capital funds, like Sweater’s Cashmere, don’t always allow you to fully cash out, especially if a lot of investors are headed for the exits.

The Sweater’s Cashmere fund offers the average American a way to invest in early-stage businesses at a reasonable price. But investors should exercise caution and recognize that exiting a venture capital fund is more difficult than entering it. If in doubt, listen to Cashmere’s prospectus, which reads: “you should consider shares of the fund as an illiquid investment.”

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