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ARK Venture Commentary, 5/23/2023

May 23, 2023 | Venture Fund

ARK's Venture Commentary is meant to provide ARK's thoughts on the current state of the Venture Capital space.

Software Abundance: Replit Raises ~$100 Million

Replit, an AI-driven coding platform and software marketplace in ARK Venture Fund’s portfolio, raised ~$100 million at a valuation of more than $1 billion.[1] A16z led the round.

ARK’s Take

We believe artificial intelligence (AI) is poised to transform the software-related world completely. It’s all happening on Replit. By eliminating back-end friction and providing AI coding assistance to developers, Replit is expanding the developer market. 22 million software developers currently work on the Replit platform,[2] a community which formerly contained around 30 million people globally.

Traditional Venture Fund[3] Returns Are Beginning to Reflect Reality

Pitchbook’s 2023 Fund Performance report suggested that venture funds are seeing their worst 1-year rolling performance since 2009:[4] -6.7% 1-year rolling internal rate of return as of third quarter of 2022, with preliminary fourth quarter reporting suggesting rolling returns of -16%.[5]

ARK’s Take

The situation is likely to look worse over the next few quarters. Venture fund performance reporting tends to recognize write-downs at a 6-month smoothed lag to public market performance, as shown below. This indicates that several investments made during the market’s peak in late 2021 have not yet been reflected in the performance data.[6] This is further emphasized by data indicating that additional funding rounds for venture capital are happening at significantly lower valuations compared to previous high points.[7] If its correlation with public markets were to hold, that number likely will deteriorate toward -30% through the first half of this year 2023.


Source: ARK Invest, Capital IQ, Pitchbook Global Fund Performance Report, as of May 2023. Lagged Nasdaq returns are represented by the 3 month trailing average Invesco QQQ Trust Series 1 (QQQ, which tracks the performance of the Nasdaq-100) year over year performance, lagged by 3 months.

Source: Past performance is no guarantee of future results. The performance data presented is for illustrative purposes only, does not represent returns of the ARK Venture Fund, and should not be used to form the basis of any investment decision. Nasdaq performance is of the Nasdaq 100 Index, which is unmanaged, does not reflect the deduction of fees or expenses, and is not available for direct investment. Pitchbook Venture Fund data is based on the aggregated Internal Rate of Return (IRR) of 39,059 tracked venture funds.

More Context, Please

Anthropic, a generative AI company that competes with OpenAI, upgraded its flagship language model’s context window, enabling the AI system to “read” 100,000 tokens (roughly 75k words) at a go.[8] This follows on the heels of MosaicML open-sourcing a model that could take in 65k tokens,[9] and OpenAI’s GPT-4 32k, released in March.[10] Available context windows for AI models have increased 50-fold over 3 years.


Source: ARK Invest, OpenAI, Anthropic, MosaicML, as of May 2023.

Source: For informational purposes only and should not be considered investment advice or a recommendation to buy, sell, or hold any particular security. An Application Programming Interface (API) is a set of defined rules that enable different applications to communicate with each other.

ARK’s Take

AI system performance is improving at an astounding rate. Broader context windows allow users to feed more information into an AI model at runtime, which enables the AI model to analyze longer documents or engage in lengthier interactive dialogues and problem-solving sessions. Until this year, the cost of expanding context windows was estimated to scale as a square of context window size. A 100k context window should cost 2,500x more than a 2k context window. Anthropic’s 100k context window costs as much per token as GPT-3’s 2k context window of 3 years ago, suggesting—based on that measure—that AI costs are declining at 90+% per year. Though cost declines are unlikely to continue at that blistering pace—we think 3x per year is a reasonable forecast through 2030—the discontinuous improvement suggests plenty of opportunity for further engineering optimizations amongst AI model providers. Both Anthropic and MosaicML are ARK Venture Fund portfolio companies.

Investors should carefully consider the investment objectives and risks as well as charges and expenses of the ARK Venture Fund before investing. This and other information are contained in the ARK Venture Fund’s prospectus, which may be obtained by visiting www.ark-ventures.com. The prospectus should be read carefully before investing.

To view the top 10 holdings in the ARK Venture Fund, click here. To view the most up to date portfolio, click here.

An investment in the ARK Venture Fund is subject to risks and you can lose money on your investment in the ARK Venture Fund. There can be no assurance that the ARK Venture Fund will achieve its investment objectives. The ARK Venture Fund’s portfolio is more volatile than broad market averages. The ARK Venture Fund also has specific risks, which are described below. More detailed information regarding these risks can be found in the ARK Venture Fund’s prospectus.

The Nasdaq 100 Index is designed to track the performance of the 100 largest companies on the Nasdaq exchange.

Foreside Fund Services, LLC, distributor.

ARK Investment Management LLC (“ARK Invest”) is the investment adviser to the ARK Venture Fund.

ARK’s statements are not an endorsement of any company or a recommendation to buy, sell or hold any security. ARK and its clients as well as its related persons may (but do not necessarily) have financial interests in securities or issuers that are discussed. Certain of the statements contained may be statements of future expectations and other forward-looking statements that are based on ARK’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance, or events to differ materially from those expressed or implied in such statements.

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