Investors looking for exposure to fast-growing startups are receiving an unfortunate and costly crash course in private investing: you don’t always get what you pay for.

The Fundrise Innovation Fund ($VCX) got off to a hot start in its market debut last week, with the closed-end fund quickly ascending from its $31.25 listing price as investors swarmed the fund seeking exposure to up-and-coming tech giants like SpaceX, OpenAI, and Anthropic. The three are all expected to IPO later this year.

But unfortunately for investors, they weren’t buying shares in the companies themselves. Instead, they were buying a stake in a vehicle that holds stakes in the underlying companies. Unfortunately for some, that means that has turned their wealth pursuit into a pretty hefty loss.

What happened to the Fundrise Innovation Fund?

Excitement around the new Fundrise Innovation Fund came in two flavors. The first, driven by investors looking for exposure to the fund’s underlying holdings, helped push the value of its shares well beyond its $31.25/share listing price. But the second, speculative traders looking to jump aboard a high-flying listing, ultimately drove it to a high of $600/share on Wednesday.

That speculation quickly defeated the purpose of the Fundrise Innovation Fund serving as anything other than a casino. That’s really saying something, considering the fund itself is a speculative investment; it requires confidence in the underlying private companies, which bear risks which could make their investments worthless.

But in $VCX’s cases, the investments were anything but. While the underlying investments in the vehicle were still priced the same, demand for the fund vehicle had taken off. In fact, the fund traded at a 1,200% premium to its net asset value (NAV), or the value of the underlying assets in the fund.

For speculative traders, that might not have mattered much. But for unknowing investors who were just seeking exposure to hot startups, the fund’s price meant they were overpaying for its underlying assets, which themselves have been appraised at steep valuations in the private market.

What came next hurt even more. The fund’s 1,800% surge fell apart on Thursday as speculative traders sold and a short seller report from Citron Research sent shares in the fund back to Earth. Shares in the Fundrise Innovation Fund fell over 45%, leaving unknowing investors who had overpaid with a haircut.

Why did this happen?

The Fundrise Innovation Fund is structured as a closed-end funds, similar to other private investments like the new Robinhood Ventures I Fund, the DestinyTech 100, and others. The funds all purport to offer exposure to private companies, but come with some quirks.

For one, they carry hefty fees. You’ll be paying a healthy sum to the fund’s custodians to gain exposure to private companies, which ultimately might not outperform an exchange-traded fund (ETF) invested in public equities.

But more importantly, the closed-end fund structure is considered dangerous because a buyer generally has to exist in order for you to sell your shares. That hasn’t been a problem for Fundrise, but in the case that willing buyers were to dry up, that could leave investors without an exit.

The 45% decline in $VCX on Thursday likely has a lot to do with the latter. As speculative buyers stopped buying into the fund, the fund started plummeting until more buyers were willing to step in.

The pitfalls of private investing

Americans demonstrate a unique sensitivity towards the potential of investing in private assets. That’s despite there being a laundry list of reasons why less experienced investors should steer clear.

The first, and perhaps most obvious, is that they’re speculative investments that could go to zero at any time. In closed-end funds like $VCX, the speculative novelty is compounded by speculative investors, who are thinking about short-term profits in their investment decision.

Sure, there might be viable ways to gain exposure to private assets. But for many investors, buying your comparatively boring S&P 500 fund is generally going to be a better choice. At least, in that case, you get what you paid for.