Stripe, a payments start-up, is one of the most successful companies to emerge from Silicon Valley in a generation. Last year, its valuation reached $65 billion. But in the 15 years since its inception, there has been no way for most individuals to invest in it.
It’s a problem that has vexed private investors for years, as startups like Stripe, SpaceX and OpenAI soar to huge private market valuations. Only so-called accredited high net worth investors are allowed to invest in private technology startups. 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 new 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 in 100 startups.
Sohail Prasad, chief executive of Destiny XYZ, the fund’s parent company, said his goal was to let anyone own a piece of the tech industry’s top private companies.
“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 the 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 larger parts of the overall investment landscape. Venture capital investment in private startups rose to $170 billion last year from $28 billion in 2009, according to PitchBook, which tracks startups.
The pandemic exacerbated this trend as more people chased risk and growth by trying to invest small amounts in startups, while marketplaces like Forge and Augment emerged to allow investors to buy and sell private tech stocks.
However, the initial investment is generally not available to most people. To qualify as an accredited investor, the Securities and Exchange Commission requires a net worth of $1 million or an annual income of $200,000 for the past two years.
Non-accredited investors can try to invest in private startups through break-even funds, which allow people to sell only a portion of their holdings each quarter, or mutual funds, which dedicate only a small portion of their total funds to private equity. companies.
Mr. Prasad founded Forge, one of the marketplaces for tech private equity, in 2014. He said he started Destiny in 2020 to give people like his father, a management consultant in Texas, access to high-growth startups.
Mr. Prasad has raised $100 million in funding from investors, including various start-up founders such as Fred Ehrsam, founder of Coinbase, a major cryptocurrency exchange. Charlie Cheever, founder of the question-and-answer website Quora. and Heather Hasson, founder of FIGS, a medical apparel provider.
Mr Prasad and a team of five traders have used their connections to gain access to the start-up shares Destiny has bought so far. Private companies can be selective about who they let hold their shares. But as they stay private longer, their employees and early investors may become frantic to cash out. The most valuable companies have held regular “offers” that allow employees to sell their shares, which is one way the Destiny Tech100 buys shares.
The fund has also bought shares in Stripe and Plaid, a financial technology provider, through “futures”. In these deals, startup employees can receive cash by agreeing to transfer their company stock to an investor when the company goes public or is sold.
Contracts are controversial. Stripe said it prohibits its current and former employees from entering into such agreements and that any forward contract is void. Mr Prasad said his fund was confident the deals were legal.
The Destiny Tech100 has a market value of approximately $365 million. After the companies it has invested in sell or go public, returns from those investments can be distributed to shareholders as a dividend or reinvested in the fund. Mr Prasad said the fund planned to hold shares for some time after a company went public. The fund charges an annual fee of 2.5 percent.
James Seyffart, a researcher 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’re accredited and can get into them, there are often very high minimums” required 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 tech startups for one 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 has become available as investors have pulled out of many technology investments. (Companies focused on artificial intelligence remain in demand.) Instacart and Reddit, well-known consumer tech 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.
