Destiny (D/XYZ) and the Buzz Around Public Access to Private Companies | E1933

Sohail Prasad of Destiny (D/XYZ) joins Jason. (00:00:00)

• Sohail Prasad, the guest on the show, is the founder of Destiny (D/XYZ).
• The discussion revolves around why Prasad chose to create a publicly traded fund instead of a private fund with a 20% carry.
• Despite the challenges and additional overhead associated with running a registered and publicly traded fund, Prasad was determined to make this vision a reality.
• Prasad explains that his motivation was not financial gain, but rather a desire to see his vision exist in the world.
• He acknowledges that the process of bringing a company to market is not easy, especially with the regulatory requirements and increased overhead.
• Prasad emphasizes that the reward for taking on these challenges is the satisfaction of seeing his vision come to life.
• Only 6% of people in the United States are accredited investors, which means they meet certain income or net worth requirements set by the SEC.
• This makes it difficult for the majority of people (94%) to access private companies before they go public.
• The SEC's regulations are designed to protect investors by ensuring that only those with sufficient financial means are allowed to invest in private companies.
• Prasad highlights the irony that a professor teaching venture capital and economics, despite their expertise, may not qualify as an accredited investor due to income limitations.
• In contrast, someone with inherited wealth or assets, regardless of their financial knowledge or experience, can invest in private companies.

Breaking down Destiny Tech 100 and why it was created. (00:03:46)

• Destiny Tech 100 was created to provide an investment vehicle for individuals to invest in private tech companies.
• The fund aims to make it convenient for investors to invest in the companies they know and that are shaping the future across industries.
• The fund will initially hold 23 companies and grow to 100 over time.
• Destiny (D/XYZ) is an exchange-traded fund (ETF) that provides investors with exposure to a portfolio of private technology companies.
• The fund is designed to offer investors the opportunity to invest in companies that are not yet publicly traded.
• Destiny (D/XYZ) is listed on the New York Stock Exchange and is available to investors through their brokerage accounts.
• The fund has a management fee of 0.75% and an expense ratio of 0.85%.
• Destiny (D/XYZ) is a new and innovative investment product that offers investors the opportunity to participate in the growth of private technology companies.

What is a closed-end fund and how does it fit into the ecosystem? (00:05:20)

• A closed-end fund is a type of exchange-traded fund (ETF) that is listed on the New York Stock Exchange.
• Unlike open-ended funds, closed-end funds have a fixed number of shares outstanding and are not continuously offered at their net asset value (NAV).
• Interval funds are a type of registered fund that offers limited liquidity, with investors only able to sell their shares once a quarter during a repurchase offer.

The DIY approach used to bring this to the market. (00:08:37)

• The company raised just under $100 million from over 200 qualified purchasers, primarily founders of successful companies, VCs, and figures in sports and media.
• The company took a DIY approach to listing the fund, without involving any banks or financial institutions as underwriters or financial advisors.
• The registration process with the SEC took over a year and a half, and the fund started trading after receiving approval without much fanfare.
• The fund has gained attention in recent weeks as people discover the possibility of public access to private companies through this structure.

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How Destiny Tech 100 works as a direct listing. (00:10:54)

• Destiny Tech 100 operates as a direct listing.
• Individuals who invested an average of $500k each can now sell their shares in the company after it goes public.
• Early investors are subject to a staggered lockup period, allowing them to sell some of their shares.
• The public can also buy shares in the open market.

Comparing the market cap to the actual holdings and the pent-up demand. (00:11:35)

• The market cap of D/XYZ is significantly higher than the actual value of its holdings.
• D/XYZ raised $95 million and invested $50 million in 23 private companies.
• The current market valuation of D/XYZ is around $400 million, which is four times the book value of its private company holdings.
• The high valuation can be attributed to enthusiasm and pent-up demand for ownership in companies like SpaceX.
• The net asset value of D/XYZ as of December 31st, 2022, was $484 per share, making it trade at almost 10 times its NAV.
• D/XYZ is a closed-end fund, but it could potentially sell secondary shares or make another offering to raise additional capital.
• On April 16th, 2023, D/XYZ filed a registration statement with the SEC for a shelf offering of up to $1 billion.
• The company could raise funds by issuing more shares to the public or through private institutions.
• The additional capital would be used to invest in more private companies and expand the fund's portfolio.

Looking at how Sohail and the company make their profits and why he does this instead of gathering higher carry. (00:14:46)

• Destiny Tech 100 has a 2.5% annual management fee and no carry, unlike traditional venture capital funds that have a 2% management fee and 20% carry.
• The management fee comes from the net assets of the fund every quarter, paid in cash.
• Sohail could have created a private fund with a 20% carry or a secondary fund with a 10% carry, but he chose not to.
• Sohail wanted to see Destiny Tech 100 exist in the world and believed it was the future of investing in private companies.
• He saw the huge boom in SPACs in 2019-2021 and believed that many people were investing in them because they recognized that by the time a company goes public, individual investors are last in line.
• Sohail believes that Destiny Tech 100 is the product that many people have been looking for, offering a strong sales pitch.

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• Destiny (D/XYZ) offers a diversified portfolio of private technology companies.
• Unlike SPACs, Destiny takes a long-term view of its investments, with a focus on companies that have the potential for significant growth over a 5-10 year period.
• Destiny provides investors with the opportunity to own a piece of companies that are shaping the future across various industries, including AI, aerospace, enterprise SAS, healthcare, and finance.
• There is growing interest in providing public access to private companies, allowing retail investors to invest in these companies before they go public.
• Some argue that this would democratize investing and allow more people to participate in the growth of these companies.
• Others argue that it would be too risky for retail investors, who may not have the knowledge or experience to understand the risks involved in investing in private companies.

The concerns of the swinging nature of the stock price and the long-term view. (00:22:05)

• Destiny (D/XYZ) aims to democratize the financial system by providing public access to private companies.
• Destiny's recent stock valuation fluctuations are due to market discovery as more people learn about the company.
• The company's long-term goal is to create a liquid secondary market for private tech shares and influence the tech industry's future.
• Destiny went public with an initial portfolio of 23 companies to allow early participation for individual investors.
• The portfolio composition is subject to change as Destiny builds its portfolio of private tech companies.
• Investors should research and consider their investment horizon before investing in Destiny due to potential valuation fluctuations.
• The price and entry point for investing in private companies are crucial, as illustrated by the example of Uber's valuation at $300 million during its Series B round.

How Destiny acquires the shares and how they manage both positive and negative reactions. (00:26:49)

• Destiny sets up a flexible mandate for the fund and end investors' best execution.
• They participate in primary rounds, bridge financing, convertible notes, and secondaries.
• They work directly with VCs and early investors looking to drive liquidity.
• They buy through secondary marketplaces or brokers.
• Destiny aims to access the best companies, prices, and efficiency in acquiring shares.
• The trend in venture capital is blurring the lines between VCs and secondary funds.
• Investors can buy secondary shares from founders, employees, or early investors.
• Companies doing series C or D can be participated in like any other VC.
• Destiny discloses publicly and has audited financials to ensure transparency.
• Destiny sometimes faces negative reactions from companies whose shares they buy.
• Destiny manages negative reactions by being transparent about their intentions and disclosing their holdings publicly.
• There are no major legal issues in owning convertible notes versus actual equity, as long as proper disclosures are made.

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• Destiny's position is that people should be able to buy and sell shares of private companies regardless of restrictions imposed by the companies.
• Some founders want the ultimate say over the sale of shares, while others are more open to liquidity and price discovery in the market.
• Destiny believes that the world is moving towards a place where private companies will become more widely held and traded.
• Destiny's role includes educating companies, founders, and VCs about the implications of being part of the Destiny Tech 100, including potential obligations and public disclosure of financials.

Destiny’s access to financials for companies in their portfolio. (00:34:10)

• Destiny does not pass along any company confidential information.
• Destiny sees itself as a bridge between private and public capital markets.
• Destiny wants to engage with individual investors before a company goes public.
• Destiny believes that companies voluntarily disclosing financials before going public is beneficial.
• Destiny helps educate companies on the benefits of disclosing financials.
• Destiny benefits from sharing information about companies in their portfolio because it increases awareness of those companies and can lead to more users and customers for those companies.
• For example, if Destiny shares information about Superhuman, it could lead to more people trying the software and potentially becoming paying customers.

Strategy behind exits for the fund and companies that then go public. (00:35:51)

• Destiny (D/XYZ) is a company that provides public access to private companies, such as Instacart and SpaceX.
• Destiny holds companies for a while before systematically divesting the position and distributing the capital to shareholders.
• SpaceX is currently the largest holding in Destiny's portfolio, having appreciated significantly in value over the last few years.
• Destiny has considered buying strips or secondary venture funds to gain earlier access to the next investment cycle but faces regulatory restrictions.
• The co-founder of Destiny shared a public tweet storm detailing a challenging breakup with his co-founder and best friend, emphasizing the personal and professional difficulties that can arise in such situations.

The size of the team needed to run Dest (00:43:13)

• Destiny has a full-time team of six.
• They are supported by a team of partners and service providers.
• The team is responsible for investing in 100 tech companies, ensuring they get into the top companies and opportunities, and negotiating the best possible terms.