Stripe, a payments startup, is one of the most successful companies to emerge from Silicon Valley in a generation. Last year, it reached a valuation of $65 billion. But in the 15 years since its founding, most people have not been able to invest in it.
It's an issue that has vexed retail investors for years, as startups like Stripe, SpaceX and OpenAI reach huge valuations in the private market. Only so-called high net worth accredited investors can invest in private technology companies. By the time companies go public a decade or more after their inception, their growth has often slowed and their valuations are high.
A new fund, Destiny Tech100, is trying to change that with a novel solution. It offers an exchange-traded fund containing shares of 23 private 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 include shares of 100 emerging companies.
Sohail Prasad, chief executive of Destiny
“We have tens of thousands of individual investors who are now shareholders in these companies,” he said.
The fund is part of a convergence of public and private markets that has accelerated in recent years, as investments in private “alternative assets” – including private equity, hedge funds and venture capital – become key pieces. most important in the general investment landscape. Venture capital investments in private technology startups rose to $170 billion last year from $28 billion in 2009, according to PitchBook, which tracks startups.
The pandemic fueled that trend as more people pursued risk and growth by trying to invest small amounts in startups, while markets like Forge and Increase It emerged to allow investors to buy and sell private technology stocks.
Still, the initial investment is generally not available to most people. To qualify someone as an accredited investor, the Securities and Exchange Commission requires a net worth of $1 million or an annual income of $200,000 over the past two years.
Non-accredited investors can try investing in private startup companies through interval funds, which only allow people to sell a portion of their holdings each quarter, or mutual funds, which dedicate only a small portion of their total funds to private businesses.
Prasad co-founded Forge, one of the private technology stock exchanges, in 2014. He said he founded Destiny in 2020 to give people like his father, a management consultant in Texas, access to high-growth startups.
Prasad raised $100 million in funding from investors, including a variety of startup founders such as Fred Ehrsam, founder of Coinbase, a large cryptocurrency exchange; Charlie Cheever, founder of the question and answer site Quora; and Heather Hasson, founder of FIGS, a medical apparel provider.
Prasad and a team of five dealmakers have used their relationships to gain access to the initial shares Destiny has purchased so far. Private companies can be picky about who they let own their shares. But as they stay private longer, their employees and early investors may be eager to cash out. The most valuable companies have held periodic “public offerings” that allow employees to sell their shares, which is one of the ways Destiny Tech100 buys shares.
The fund has also shares purchased at Stripe and Plaid, a financial technology provider, through “forward contracts.” In these deals, startup employees can raise cash by agreeing to transfer shares of their company to an investor when the company goes public or is sold.
The contracts are controversial. Stripe has said that it prohibits it its current and former employees to enter into such agreements and that any term contract is void. Prasad said his background was confident the agreements were legal.
Destiny Tech100 has a market valuation of about $365 million. Once the companies you've invested in are sold or go public, the returns from those investments can be distributed to shareholders as a dividend or reinvested in the fund. Prasad said the fund planned to hold the shares for a while after a company went public. The fund charges an annual fee of 2.5 percent.
James Seyffart, a research analyst at Bloomberg Intelligence, said such a fund was the only way for many investors to gain exposure to these companies, especially with smaller amounts of money.
“Even if you are accredited and can access them, you often need very high minimums” to invest, he said.
The biggest risk for investors in the new fund is whether the share price reflects the value of the underlying assets, he added.
The SEC limits who can invest in private technology startups for a reason: Such investments can be risky. Private companies are not required to share information about their operations and it can be difficult to assess their valuation. Many tech startups are also unprofitable.
The Destiny Tech100 fund became available as investors pulled out of many technology investments. (Companies that focus on artificial intelligence are still in demand.) Instacart and Reddit, well-known consumer technology companies that recently went public, are trading below their latest private valuations. Destiny Tech100 owns shares of Instacart, which it bought before the company went public.
