Payments startup Stripe is one of the most successful companies to emerge from Silicon Valley in a generation. Last year, the company was valued at $65 billion. But in the 15 years since its founding, there has been no way for most individuals to invest.
It's a question that has puzzled retail investors for years, as startups like Stripe, SpaceX, and OpenAI soar to huge valuations in the private markets. Only wealthy so-called accredited investors can invest in privately held tech startups. By the time a company goes public more than 10 years after its founding, growth has often slowed and company valuations have risen.
A new fund, Destiny Tech100, aims to change that with a novel solution. It offers exchange-traded funds with shares in 23 privately held technology companies, including Stripe, SpaceX, OpenAI, Discord, and Epic Games. The fund, which began trading on the New York Stock Exchange last week, plans to expand its holdings to stocks of 100 emerging companies.
Sohail Prasad, chief executive officer of the fund's parent company, Destiny
“There are tens of thousands of individual investors who are now shareholders in these companies,” he said.
The Fund leverages public and private markets, which have accelerated in recent years as investments in private “alternative assets” including private equity, hedge funds and venture capital become a larger part of the overall investment environment. It is part of the fusion. Venture capital investment in private tech startups rose from $28 billion in 2009 to $170 billion last year, according to PitchBook, which tracks startups.
The pandemic has accelerated the trend as more people seek risk and growth by investing small amounts in startups, and marketplaces like Forge and Augment have sprung up to allow investors to buy and sell private tech stocks.
Still, investing in startups is generally not available to most individuals. To qualify someone as an accredited investor, the Securities and Exchange Commission requires that his net worth be $1 million, or her annual income for the past two years be $200,000.
Non-accredited investors may try to invest in privately held startups through interval funds, which allow them to sell only a portion of their holdings each quarter, or mutual funds, which allocate a small portion of their total funds to private companies. Can be done.
Prasad was the founder of Forge, a marketplace for private tech stocks, in 2014. He founded Destiny in 2020 to give people like his father, a management consultant in Texas, access to high-growth startups, he said.
Prasad has raised $100 million in funding from investors including founders of various startups, including Fred Asham, founder of leading cryptocurrency exchange Coinbase. Charlie Cheever, founder of the question-and-answer site Quora. Heather Hasson is the founder of FIGS, a medical apparel provider.
Prasad and his team of five dealmakers have used that relationship to gain access to startup stocks that Destiny has purchased in the past. Privately held companies may choose who owns their stock. However, if the company remains private for a long time, employees and early investors may become nervous about cashing out. The most valuable companies regularly hold “tender offers,” allowing employees to sell their shares. This is one way Destiny Tech100 can buy stock.
The fund's market valuation is approximately $365 million. After the companies in which we have invested sell or go public, the proceeds from those investments can be distributed to shareholders as dividends or reinvested in the Fund. Prasad said the fund plans to hold shares in companies for some time after they go public. This fund has an annual fee of 2.5%.
For many investors, such funds are the only way to get exposure to these companies, especially with small amounts of money, said James Seifert, a research analyst at Bloomberg Intelligence.
“Even if you can qualify and participate, there are often very high minimum investment requirements,” he said.
He added that the biggest risk for investors in the new fund is whether the share price reflects the value of the underlying assets.
The SEC limits who can invest in privately held tech startups for a reason: Such investments involve risk. Privately held companies are not obligated to share information about their business, and it can be difficult to assess a company's valuation. Many technology startups are also not profitable.
The Destiny Tech100 fund has become available as investors exit many technology investments. (Companies focused on artificial intelligence remain in demand.) Instacart and Reddit, two well-known consumer technology companies that recently went public, are trading below their last private valuations. Destiny Tech100 owns Instacart stock, purchasing it before it went public.
