Stripe, a payments start-up, is one of the most successful companies to emerge from Silicon Valley in a generation. Last year, it amounted to $65 billion. But in the 15 years since it was founded, there has been no way for most individuals to invest in it.
It’s a problem that has plagued retail investors for years, while start-ups like Stripe, SpaceX and OpenAI have soared to massive valuations on the private market. Only so-called accredited investors with high net worth are allowed to invest in private tech start-ups. By the time companies go public a decade or more after they started, 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 a publicly traded fund that contains shares of 23 private tech 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 stock in 100 start-ups.
Sohail Prasad, the chief executive of Destiny XYZ, the main fund company, said his goal is to let anyone own a share of the tech industry’s leading private company.
“We have 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 a bigger part of the overall investment landscape. Venture capital investments in private tech start-ups rose to $170 billion last year from $28 billion in 2009, according to PitchBook, which tracks start-ups.
The pandemic has accentuated that trend as more people chase risk and growth by trying to invest small amounts in start-ups, while marketplaces like Forge and Increase sprung up to let investors buy and sell private tech stocks.
However, initial investment is usually not available to most individuals. To qualify a person 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.
Unaccredited investors can try to invest in private start-ups through interval funds, which only allow people to sell a portion of their holdings each quarter, or mutual funds, which allocate only a small share of their total funds in private companies.
Mr. Prasad was a founder of Forge, one of the marketplaces for private tech stocks, in 2014. He said he started Destiny in 2020 to give people like his father, a management consultant in Texas, access to high-growth start-ups.
Mr. raised Prasad’s $100 million in funding from investors including various start-up founders such as Fred Ehrsam, a founder of Coinbase, a large cryptocurrency exchange; Charlie Cheever, a founder of the question-and-answer site Quora; and Heather Hasson, a founder of FIGS, a medical apparel provider.
Mr. used Prasad and a team of five dealmakers leveraged their relationships to gain access to the start-up shares that Destiny has bought so far. Private companies can be selective about who they let own their shares. But as they stay private longer, their employees and early investors may be busy cashing out. The most valuable companies hold regular “tender offers” that allow employees to sell their shares, which is a way for the Destiny Tech100 to buy stock.
Funding is also available buy shares to Stripe and Plaid, a financial technology provider, through “forward contracts.” In these agreements, startup employees can get cash by agreeing to transfer their company shares to an investor when the company goes public or is sold.
The contracts are controversial. Drawing said that it is forbidden its current and former employees to strike such deals and any forward contracts are void. said Mr. Prasad that his fund is confident that the deals are legal.
Destiny Tech100 has a market valuation of approximately $365 million. After these invested companies sell or go public, the profits from the investments can be distributed to shareholders as a dividend or reinvested in the fund. said Mr. Prasad said the fund plans to hold stocks for some time after a company goes public. The fund charges an annual fee of 2.5 percent.
James Seyffart, a research analyst at Bloomberg Intelligence, said such a fund is the only way for many investors to gain exposure to these companies, especially at smaller amounts of money.
“Even if you’re accredited and can get into them, there’s usually a very high minimum” required to invest, he says.
The biggest risk to investors in the new fund is whether the stock price reflects the value of the underlying assets, he added.
The SEC limits who can invest in private tech start-ups for one reason: Such investments can be risky. Private companies are not required to share information about their operations, and their valuation can be difficult to assess. Many tech start-ups are not profitable either.
The Destiny Tech100 fund became available as investors pulled back from many tech 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 last private valuations. Destiny Tech100 owns shares in Instacart, which it bought before the company went public.
