- Sweater shares are illiquid and can only be repurchased 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.
Getting into a venture fund is easy. Getting out? Not so much.
Venture capital investing website Sweater allows users to invest in actively managed portfolios of early-stage companies. With reasonable fees and a family of assets, the firm appears to be a great place for the average investor to invest in startups. The only problem? You might get stuck with your investment.
Lack of liquidity
Sweater's Cashmere fund offers an easy way for the average American investor to buy into private, startup companies. The fully-managed fund does not require users to have accredited investor status, and has a low minimum investment of $500. Buying shares is easy enough, but selling them is an entirely different story.
Sweater's Cashmere fund is not listed on an exchange, meaning that investors cannot freely trade their shares. Instead, the only buyer of Cashmere shares is Sweater itself, during certain share redemption windows. Cashmere offers two share redemption windows per year, one in February and one in August. These are the only times during the year when shareholders can sell their investments.
Additionally, Sweater reserves the right to only repurchase a specific number of shares per redemption window. According to the fund prospectus, only 5% of the outstanding shares can be redeemed in a six-month period, meaning during each redemption window. If shareholders request more than 5% of all outstanding shares be redeemed in that period, the repurchase is considered oversubscribed, and shareholders may only be able to redeem some of their shares or none at all.
Cashmere vs. other VC 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 a period of up to 10 years before being able to liquidate part or all of their shares. On the other hand, Sweater allows investors to cash out at the first redemption period following the share purchase. New investors should be aware that the Cashmere fund charges a repurchase fee on shares redeemed before 18 months, which is as steep as 2% in the first six months.
Cashmere vs. mutual funds
Investors should not confuse Sweater's Cashmere fund with a common mutual fund or ETF. While fees will vary, the key difference in fund structure is liquidity, and what happens in the event of a rush to the exits.
Most investors are familiar with the mutual funds and ETFs offered by top brokers. Like VC funds, mutual funds and ETFs typically charge an annual fee and may or may not be actively managed. Unlike VC funds, mutual funds and ETFs have fewer restrictions on when they can be sold. Most mutual funds and ETFs are traded on exchanges, while VC funds tend not to be. The key difference is this: if you need or want to sell your mutual fund or ETF investment, you can do so in short order on an exchange. You may be unhappy with the final sales price, especially if trading on recent bad news, but you can typically recover some of your money. Venture funds, like Sweater's Cashmere, do not always allow you to fully cash out, especially if many investors are heading for the exits.
Sweater's Cashmere fund offers a way for the average American to invest in startup stage companies at a reasonable price. But investors should exercise caution and recognize that getting out of a VC fund is harder than getting in. When in doubt, listen to the Cashmere prospectus, which reads, "you should consider Shares of the Fund to be an illiquid investment."
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