The Innovation(?) Fund: Paying More, Getting Less

As of February 25th, investors have committed over $2.5 million to the Innovation Fund, a private market offering from StartEngine. The pitch is simple: gain exposure to some of the most sought-after AI companies—including Perplexity, Groq, and Databricks—in a single investment. With a limited number of spots available, it certainly looks like an exciting opportunity.

But is it?

Private investments aren’t always what they seem at first glance. Understanding the true cost of an opportunity requires reading the fine print, evaluating markups, and factoring in fees. Investors in the Innovation Fund are buying into strong companies, but the real question is whether they are paying too much for the privilege.

In this breakdown, we’ll take a closer look at how the fund is structured, compare its pricing to the broader market, and help you decide whether this investment is truly worth considering.

Why this exists

Investing in private markets isn’t easy. Unlike public stocks, which trade on exchanges with transparent pricing, private company shares are harder to access, often requiring connections, high minimum investments, and long holding periods.

Funds like the Innovation Fund exist to make private market investing more accessible—at least on the surface. By pooling investor capital, these funds allow individuals to gain exposure to multiple private companies without needing to source deals themselves. For those unfamiliar with navigating private investments, this can seem like an attractive option.

But accessibility comes at a cost. Investors in private market funds often pay a premium for convenience, with markups on share prices, fees, and profit-sharing structures that can meaningfully reduce returns.

Private market funds aren’t as common as public market ETFs, and their structures vary widely. For a deeper look at how private market investment vehicles compare, see Cold Capital’s breakdown on private market indexes.

The Markup Problem: Paying Too Much

One of the biggest concerns with the Innovation Fund is how much investors are actually paying for their shares. The fund isn’t buying shares at current market rates—it’s marking them up significantly before passing them on to investors.

To see the difference, here’s a breakdown of how share prices compare at three levels:

• Affiliate Acquisition PPS – The price at which shares were originally acquired for the fund.

• Fund PPS – The price investors in the fund are paying.

• Notice’s PPS – The latest known market price for each company’s shares, based on Notice’s evaluation of private market trading platforms.

These numbers tell a clear story. Investors in the fund are paying between 40% and 246% more for shares than what they’re currently worth in private markets.

• ZocDoc investors are paying over 3.4x the latest market price.

• Groq and Avathon investors are paying double.

• Even high-profile names like Perplexity and Databricks have steep markups.

This premium could significantly impact returns. If one of these companies eventually exits at a strong valuation, fund investors would already be starting from an inflated price—limiting potential upside.

And it’s not just the individual share markups that matter. Only 60.45% of an investor’s money actually goes toward purchasing stock at the fund’s acquisition price. The rest is markup, meaning that nearly 40% of every dollar invested is lost to inflated pricing before any potential gains even begin.

But the markup isn’t the only issue. Next, we’ll look at the fees investors are paying on top of these higher share prices.

But the markup isn’t the only issue.

Fees: Another Hit to Returns

The high markups in the Innovation Fund already put investors at a disadvantage, but the costs don’t stop there. The fund also charges fees that further reduce potential returns.

One of the biggest issues is that only 60.45% of an investor’s money actually goes toward buying stock. The rest is markup, meaning nearly 40% of every dollar invested is lost to inflated pricing before any potential gains even begin. On top of that, the fund takes a share of any profits through a carried interest fee, and investors may also be subject to processing fees.

Here’s how these additional costs impact returns:

• Carried interest fee – The fund takes 20% of any profits before investors see a return. If the portfolio grows, this fee reduces the upside for investors. For example, if the fund triples in value, an investor’s share of the profits is reduced by 20% before they receive their payout. This model is common in venture capital, but those funds typically buy in at lower valuations rather than passing on significant markups to investors.

• Processing fees – StartEngine may charge a processing fee of up to 3.5% on investments. If this applies, it would be taken upfront, further reducing the amount of capital actually put to work. Investors should check the offering details carefully to confirm whether this fee applies.

To see how this plays out, let’s compare the Innovation Fund to a direct investment at Notice PPS, assuming a $100,000 investment and a 3x growth scenario:

An investor in the Innovation Fund, after all markups and fees, would see their portfolio grow to $156,091, resulting in only $56,091 in profit. Meanwhile, the same investment in these companies at market prices would have grown to $300,000, generating $200,000 in profit.

That’s a difference of $142,822 in lost potential upside—money that goes to the fund instead of the investor.

Even in a scenario where the portfolio performs well, fees take a substantial bite out of returns. Instead of capturing the full benefit of a 3x return, fund investors are left with significantly diminished gains.

Next, we’ll look at another key issue: liquidity—or the lack of it.

Liquidity: Can You Even Sell?

Investing in private market funds like the Innovation Fund presents significant liquidity challenges. Unlike direct stock ownership, where you might have the option to sell shares on secondary markets, fund investments are inherently more restrictive. Here’s why:

• Indirect Ownership: As an investor in the Innovation Fund, you don’t own shares of the individual companies directly. Instead, you hold a stake in the fund, which aggregates investments across multiple companies. This structure means you rely on the fund manager’s decisions regarding the underlying assets.

• Managerial Control: The fund manager has full discretion over the management and disposition of the fund’s assets. They are under no obligation to facilitate or approve the sale of your interest in the fund to another party. This lack of obligation can severely limit your ability to liquidate your investment before the fund reaches its planned exit events.

• Assumed Illiquidity: Given these constraints, it’s prudent to assume that your investment will remain illiquid until a significant event occurs, such as the sale of underlying assets, an initial public offering (IPO) of one or more portfolio companies, or the dissolution of the fund. The timing of such events is uncertain and can extend over several years.

Upon reviewing the Innovation Fund’s terms and conditions, it’s evident that there are no provisions guaranteeing liquidity prior to these events. The fund explicitly states that investors should be prepared to hold their investment for an indefinite period, as there is no established secondary market for these fund interests, and the creation of such a market is not anticipated.

This lack of liquidity is a critical consideration for potential investors. Before committing capital, ensure that you are comfortable with the possibility of having your funds tied up for an extended duration without the ability to access them.

The One Real Benefit: Diversification

While the Innovation Fund comes with steep markups, high fees, and uncertain liquidity, it does offer one advantage—diversification.

Investing in private markets usually requires a larger commitment. Many private offerings have minimum investments of $10,000 per company, meaning an investor who wanted to buy into all seven companies in this fund individually might need to allocate $70,000 or more. The Innovation Fund lowers the barrier to entry by offering exposure to multiple companies with a minimum investment of $25,080.

For investors who want access to private companies but don’t have the ability to make multiple direct investments, this fund provides a way to spread risk across a portfolio rather than concentrating it in a single company. If one or two companies in the portfolio fail, the impact is cushioned by the others that perform well.

However, diversification only helps if the underlying investment terms are favorable. While this fund makes it easier to invest in multiple companies, the high markups and fees significantly limit potential upside. In many cases, an investor may be better off making one or two direct investments at fairer prices rather than accepting the broad exposure that comes at a steep cost.

Final Takeaways: Is the Innovation Fund Worth It?

At first glance, the Innovation Fund looks like an exciting opportunity. It provides exposure to high-profile private companies in AI, offers a lower minimum investment than directly investing in each company, and has already attracted over $2.5 million in investor commitments. But a closer look reveals some serious concerns.

The biggest issue is pricing. Investors in this fund are paying anywhere from 40% to 246% more than the latest market prices for these shares. Only 60.45% of an investor’s money actually goes toward purchasing stock, with the rest lost to markups. On top of that, the fund takes 20% of any profits through carried interest, further reducing potential returns. A simple comparison shows that a $100,000 investment in this fund, even if it tripled in value, would return significantly less than the same investment made directly at market prices.

Liquidity is another key risk. Investors do not own shares in the underlying companies; they own a stake in the fund. The fund manager has no obligation to facilitate sales, and based on the terms and conditions, investors should assume they will not be able to exit until a major event like an IPO or acquisition occurs.

The one clear benefit of this fund is diversification. It allows investors to spread their risk across multiple companies while requiring a lower minimum investment than purchasing shares individually. However, diversification only makes sense when the investment terms are favorable. In this case, the combination of high markups, fees, and liquidity constraints raises serious questions about whether the fund is worth the trade-offs.

Before making any private investment, it’s critical to read the fine print, understand the true costs, and evaluate whether the terms actually benefit investors. If you’re considering investing in opportunities like this, Cold Capital can help you assess deals and determine whether they’re worth pursuing. Send a note to [email protected] for insights.

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