Payments startup Stripe is one of the most successful companies to emerge from Silicon Valley in a generation. Last year, the corporate value reached $65 billion. However, for 15 years since its founding, there was no way for most individuals to invest.
This is a problem that has plagued retail investors for years, with startups like Stripe, SpaceX, and OpenAI soaring to enormous valuations in private markets. Only so-called accredited investors with high net worth can invest in private technology startups. By the time a company goes public, more than 10 years after its founding, growth has often slowed and valuations have risen.
A new fund, Destiny Tech100, is trying to change this with new solutions. It offers a publicly traded fund containing stocks 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 stocks of 100 startups.
Sohail Prasad, CEO of the fund's parent company, Destiny
“We now have tens of thousands of individual investors who are 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, have become a larger part of the overall investment landscape. Venture capital investment in private technology startups increased from $28 billion in 2009 to $170 billion last year, according to PitchBook, which tracks startups.
The pandemic has further accelerated this trend, as more people seek risk and growth by making small investments in startups, and marketplaces like Forge and Augment have emerged to allow investors to buy and sell private technology stocks.
However, startup investing is generally not available to most individuals. To qualify someone as an accredited investor, the Securities and Exchange Commission requires a net worth of $1 million or annual income of $200,000 over the past two years.
Non-accredited investors can invest in private startups through interval funds, which allow them to sell only a portion of their holdings each quarter, or mutual funds, which invest only a small portion of their total funds in private companies.
Mr. Prasad was the founder of Forge, one of the private technology stock markets, 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 startup founders such as Fred Ehrsam, founder of Coinbase, a large cryptocurrency exchange. Charlie Cheever, founder of question-and-answer site Quora; and Heather Hasson, founder of medical clothing supplier Figs.
Mr. Prasad and his team of five dealmakers used their relationships to gain access to startup shares that Destiny has purchased so far. Private companies can be picky about who owns their stock. But as it stays private for longer, employees and early investors may become anxious about cashing out. The most valuable companies have regularly conducted “bid offers” for employees to sell their shares, which is one way the Destiny Tech100 buys stock.
The fund also purchased shares of financial technology provider Stripe and Plaid through a 'forward contract'. In this arrangement, startup employees can earn cash by agreeing to transfer company stock to investors when the company goes public or is sold.
The contract is controversial. Stripe said it prohibits current and former employees from concluding such deals and that all forward contracts are void. Mr Prasad said his fund was confident the deal was legal.
Destiny Tech100 has a market cap of approximately $365 million. After the company you have invested in is sold or listed, the proceeds from that investment may be distributed to shareholders as dividends or reinvested in the fund. Mr. Prasad said the fund plans to hold on to the shares for some time after the company goes public. The fund charges an annual fee of 2.5%.
James Seyffart, a research analyst at Bloomberg Intelligence, said these funds are the only way for many investors to gain exposure to these companies, especially in small amounts.
“Even if you can get certified and get in, the minimum amount required to invest is often very high,” he said.
He added that the biggest risk for investors in the new fund is whether stock prices reflect the value of the underlying assets.
Here's why the SEC is restricting who can invest in private technology startups. These investments can be risky. Private companies are not required to share information about their operations and valuation can be difficult. Many tech startups are also not very profitable.
The Destiny Tech100 fund became available as investors exited many technology investments. (Companies focused on artificial intelligence are still in demand.) Instacart and Reddit, two popular consumer technology companies that recently went public, are trading below their recent private valuations. Destiny Tech100 owns shares of Instacart, which it purchased before the company went public.