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

0:00So I guess that would make one wonder why do this when you could create a private fund with these private individuals and take 20 % carry, if you had the 20 % gain or even a 10 % gain on 100 million, if that does turn into a billion dollars in shares, you would get 10 % of the 900 million gain, that'd be$90 million. So why go through all this to not get carry? And going through the process to actually bring this to market, I was reminded of that fact many times because it hasn't been an easy journey with the regulatory process with all the nuance of running a registered fund and now a publicly traded fund, we take on a lot more overhead than your average private fund or private VC for less reward.

0:44In terms of why we did this, I'm a little stubborn, but I really wanted to see this exist in the world. This Week in Startups is brought to you by Squarespace. Turn your idea into a new website. Go to squarespace.com slash twist for a free trial. When you're ready to launch, use offer code twist to save 10 % off your first purchase of a website or domain. Vanta. Compliance and security shouldn't be a deal breaker for startups to win new business. Vanta makes it easy for companies to get a sock to report fast. Twist listeners can get$1 ,000 off for a limited time at vanta.com slash twist. And the Equinix Startup Program offers a hybrid infrastructure solution for startups, including up to$100 ,000 in credits and personalized consultations and guidance from the Equinix team.

1:43Go to equinixstartups.com to apply today. All right. Welcome back to this week in Startups Today. we're going to talk about pre-IPO tech companies. Everybody is interested in owning tech companies before they go public. Don't I know it? I'm an angel investor in hundreds of companies, and I frequently have people say, hey, how do I get in on SpaceX? How do I get in on Uber or Airbnb before they went public? Well, the answer is it's very difficult. Only about 6 % of people in the United States are accredited investors. So it's been incredibly hard for the other 94 % to get access to private companies.

2:21Why? Because the SEC, the Securities and Exchange Commission, wants you to be an accredited investor, which means you have a lot of money,$200 ,000 a year in revenue income or a million dollars in net worth. There's a little bit of a higher standard as well called a qualified purchaser. That's$5 million in liquid net worth. Putting all that aside, if you were a professor at NYU teaching economics and venture capital or the economics of venture capital and you made$150 ,000 a year, you would be unqualified to buy SpaceX shares, let's say, or another private company, Stripe. That's very popular.

2:58But if you had a trust fund and your parents gave you a million bucks or you inherited an apartment in Manhattan across from this professor and you were a complete degenerate idiot, you could buy shares in companies. Why does this exist? Well, we'll talk about it today with our guest who has a publicly traded stock that you may have heard of in the news. It's called Destiny. And you can look at the ticker symbol. It's a DXYZ. And his name is Sohail Prasad. Welcome to the program. Sohail. Thank you for having me, Jason. Okay. I saw you on CNBC earlier this week. The stock has caught a little bit of attention, but I want to talk not about the sensationalistic stuff and it's been up and down and maybe it's caught a little bit of that meme heat that stocks sometimes do on the Reddit Wall Street that board or social media.

3:46Let's start from basics. What have you created with destiny 100? I think you I've heard you refer to it as destiny, destiny 100, DXYZ. So tell us about the name of the fund and the structure and why you created it. So the fund is called destiny tech 100. And we created it because I really wanted this to exist for my dad, my friends, everyone else in the world. Stepping back, I moved to Silicon Valley when I was 18. And I got to participate in building companies and investing in companies like you. And along the way, I realized when my dad asked me, he said, what should I invest in? And this was about five years ago.

4:25And, you know, it was this moment where he realized I wasn't full of it. And I had no good answer for him. I told him, you know, SPY or QQQ, because I didn't know how to recommend an angel investment or late stage secondary stock. And the idea that kind of came to mind is, why isn't there an SPY or QQQ for private tech? And what would it take to make that exist? And so that's really what we set out to create is a vehicle by which anyone with a brokerage account, from the convenience of their brokerage account, can invest in the companies they know and love the companies that are shaping the future across industries.

5:03And that are not yet public, just to be clear. And that are not yet public. These are private companies. And so you're going to put 100 names in there. You've, I think I understand, put maybe bought about 25 or so? Yeah, 23 right now. And we'll be growing that over time to 100. Okay, so what is this type of vehicle called? I've heard closed end fund. I've heard a couple of different names for it. What is this structure called? And then how does it work to set one of these up and go public? Look, we've heard of SPACs, we've heard of direct listings, we've heard of the traditional IPO. Somehow you've IPO'd and you're able to trade these shares on the market through your Robinhood account or your E-Trade account.

5:46So tell us about this structure and how you found out about it. And is it common? Because this is the first I've ever heard of it. Yeah. So the technical name for the structure is a listed closed-end fund. But effectively, it's an exchange traded fund. So it's listed on the New York Stock Exchange, like another equity security, maybe common stock in Uber, and anyone can buy or sell it from their brokerage account. In terms of kind of where it fits in to this ecosystem, a lot of what people traditionally know as ETFs are open ended funds, where and there's a slight nuance in terms of ours being closed ended, as we brought it to market, and we looked at what are the different structures people can create if we want to enable this.

6:32There have been folks in the past, like Kathy Woods, ARC Ventures that have created what's known as an interval fund. And that was pitched to us by many lawyers. And what it's also a form of registered fund. The challenge is, it doesn't have real liquidity, it has what I call fake liquidity. So you can they price a net asset value every day. You can invest every single day. But if you wanted to sell that stock, you can actually only sell once a quarter when they generally do a repurchase offer for about 5%. And so when I was thinking about it - And that's called an interval fund. That's called an interval fund.

7:11Interval funds. Yeah. I remember Kathy Wood raised one. And so you've raised a closed end fund. So you went out and you went to private individuals, to endowments, who gave you the money? And then how does it become a public stock? Is the step I'm curious about here? Yeah, so we went out a few years ago, to a number of individuals, actually solely individuals over 200 of them. And they were primarily founders of unicorn companies, founders of successful companies, there were a number of VCs personally, rather than on behalf of their funds, figures in sports and media and entertainment. And they were all, as you described earlier, qualified purchasers.

7:52And they have made money in tech. They've made money investing. And when we were talking to them, we asked, like, this is the world we see, a world where everyone can participate in these companies. Do you want to see that exist? And they all voted with their dollars. So we raised just under$100 million and set out to actually go and list this publicly. That second part. Yeah, that's the piece I'm sort of interested in. okay, you get 200 people to put on average 500k in, you get about 100 million. Now they own 100 % of the shares in the company. So if there were, let's just round it up to 100 million, if there was 100 million, and there were 100 million shares, they'd be trading at$1 each, or something to that effect.

8:34Am I ballpark correct? Roughly works. Yep. Yeah, then take us to the next part. Yeah, and how this works. Yeah. So to actually then list that, we did something really interesting, In our listing, we actually had zero banks or financial institutions involved as underwriters or financial advisors. And we almost took a DIY approach. And we went and we figured out, okay, this is what we need to do to get our registration paperwork out there. This is the process with the SEC. We spent over a year, almost a year and a half in that process with the SEC going through registration. We worked with the NYSE, who's been a great partner.

9:14And then, you know, one day after we got approval, it started trading and kind of went out with no fanfare. It went out. A few people heard about it. And over the last three weeks that it's been trading, as people discovered that this is possible for the first time for most people, it's kind of taken on a life of its own. One thing that drives me crazy is when I want to buy something on a website, but there's too much friction when I go to checkout. right i want to make the impulse purchase i'll be totally honest i see something i like i got these new reader glasses you know what it was so easy because there was no friction that's what i want i want to be able to have a smooth and easy payment experience but it's got to be safe and secure right i don't want people hacking my credit card and i like to have many different ways to pay i want to use my digital wallet obviously and then you know other people might be in the buy now pay later period of their life no judgments there if you want to be on a payment plan that might be a good idea for you if you're a merchant you got to be able to offer alternative payment methods APMs.

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10:39They study their customers, you and I, and they ask you, hey, how can we make this better? And when they make it better, they give it to you and it's for the same price. That's what I love about Squarespace. Every day I wake up with new features in that same affordable price. Squarespace.com slash twist for a free trial. So you pull together this pool of capital. Those people own shares in it. Now it goes public. Those individuals who put up on average, let's say 500k each, they can then sell their shares in this entity, correct? Exactly. So it looks like a direct listing that you mentioned earlier.

11:13And so that was the means effectively, we have these shares in this closed down fund, they start trading on the NYSE, you have early investors who are subject to a staggered lockup, who can sell some of their shares. You have members of the public, my dad actually finally closing the loop on the story, he got to buy in in the open market. And so that's kind of our journey there. And so it's been trading at a pretty high market cap when compared to the actual holdings. So you raised just under 100 million. So let's say it's 95 million. You bought how much in private company stock? These 23 companies equal 50 million, 25 million, something like that?

11:55Between 70 and 80 million, I believe. And then you still have cash reserves left. I understand. Yeah, we have some cash yep so it becomes public now it's become how many shares are outstanding ballpark and it's trading at so the the ballpark valuation they're about uh 10.87 million shares outstanding got it and you know i haven't looked at the closing price today but it's been 43 bucks so if it's at 40 bucks that's 400 million in value so it's trading at about four times and it was trading at more i think when it people started finding out about it so it's trading at about four times the book value of those private companies.

12:31And you would attribute that towards enthusiasm and the pent up demand to own SpaceX and whatever else is in there? Yeah. So one of the important things to note there is that we actually mark the net asset value on a quarterly basis. So given how private tech has, you know, suffered a brief pricing over the last few years, we were investing through 2022 2023. And so a number of our positions have been marked down. And so the net asset value is actually, as of December 31st,$4.84 a share. Got it. So it's trading at 10 times. Almost. Almost 10 times or ballpark. And again, is this not invested advice?

13:10We're doing some back of the envelope here. Math. So that means there's a lot of pent up demand here for those. And then people who put the original money and they must be selling. Yeah. So they must be taking some chips off the table having had made such a great investment. I'm sure we don't have direct visibility, but that is the kind of free market at work. So what happens now with, you know, this asset trading? Can you it's a closed end fund. So that sounds like it's kind of done. But could you sell secondary to another offering and say, Hey, this thing's worth, whatever it is 400 million in terms of the market cap of it.

13:50And we're going to just raise another 100 million and issue another, I don't know, 25 % of shares. So we're going to go to 12 million 500 shares or 13 million shares, whatever it is. And then we'll have some more capital to go then deploy in the next set of companies. Is that the plan here? Or is that a possibility? Exactly. It's actually very timely. Earlier on Tuesday, April 16, I posted a tweet about us filing a registration statement with the SEC for a shelf offering that once approved and if effective, would allow us to raise up to a billion dollars through a series of transactions. Got it.

14:30So you could raise by issuing more shares to the public. And then or you could do it, I guess, through private institutions. And then you go look for companies to purchase that are private and add to this. Exactly. Now you make money, my understanding is you don't get a like I do as a venture capitalist, other venture capitalists get 20 % carry, you just get two and a half percent every year of the value of the holdings. Am I correct? Something to that effect? That's correct. We have a management fee, you know, ours is two and a half percent annual management fee, no carry versus traditional venture, like you pointed out is traditionally a two percent management fee and 20 % carry.

15:11So where does that two and a half come from? I'm curious, do you issue more shares? Or do you have the cash raised ahead of time? Because if you raised 100 million, if you had enough cash for two and a half percent, you that would be 25 million to be 25 % of the principal that you deployed. So where does that two and a half come from? Because you're obviously not charging shareholders, right? Yeah, it's similar to other exchange traded funds in that the fees are coming from the assets of the fund every quarter. So every quarter, you get some amount of the shares, you either sell them, or not shares, it's paid in cash.

15:49So it's just a management fee from the available cash. Got it. So you have to in order to get that two and a half sell some shares every year. We generally aren't necessarily selling shares for that purpose, we have, you know, cash. And so based on whether it's exits based on the available cash, just like paying for audit costs, things like that. That's one of the expenses of the fund. So I guess that would make one wonder why do this when you could create a private fund with these private individuals and take 20 % carry, or maybe they in a secondary fund would only pay 10%, let's say, one in 10.

16:27So you could get 1%, which isn't that different than the two and a half, a million or 2 million a year, whatever it happens to be, probably not going to change your life or your team's life. But if you had the 20 % gain or even a 10 % gain on 100 million, if that does turn into a billion dollars in shares, you would get 10 % of the 900 million gain, that'd be$90 million. So why go through all this to not get carried? I guess is the question. I actually started Destiny almost four and a half years ago. And in going through the process to actually bring this to market, I was reminded of that fact many times because it hasn't been an easy journey with, you know, the regulatory process with all the nuance of running a registered fund, and now a publicly traded fund, we take on a lot more overhead than your average private fund or private VC, I would think so for less reward.

17:15And in terms of why we did this, I'm a little stubborn, but I really wanted to see this exist in the world. And I actually do believe that regardless of us existing, this would have been how the world goes towards. It might have taken another five or seven years, and we've kind of drove that and brought it forward. But I believe, you know, over the last decade, people have thought of different ways to let people invest in privates, you've seen crowdfunding and equity crowdfunding style approaches, syndicates, as you're well familiar with, you've seen, you know, ICOs, you've even seen SPACs. yeah, when you think about a spec, it's not necessarily a dream product.

17:58In my personal perspective, you know, you you find someone influential, give them a bucket of money. And then you say, Hey, I hope you go find a good deal. And take a good chunk of fees while doing it. You know, we saw the huge boom 2019 2021. And my view is a lot of people were investing in those because they recognize that by the time you're waiting until a company goes public, As an individual investor, you're last in line. And so the notion of a SPAC is, okay, there's an attractive deal potentially that the SPAC sponsor can go and find. And by investing in the SPAC, I'm getting to move forward one step.

18:36And so that drove a lot of demand. But, you know, as we've seen shake out, there are a lot of challenges with the model. And I'm totally biased. But I think if Destiny Tech 100 had existed, that is actually the product I think a lot of people have been looking for. Listen, a strong sales team can make all the difference for a B2B startup. But if you're going to hire sharks, you need to let them hunt and you can't slow them down with compliance hurdles like SOC 2. What is SOC 2? Well, any company that stores customer data in the cloud needs to be SOC 2 compliant. If you don't have your SOC 2 tight, your sales team can't close major deals.

19:12It's that simple. But thankfully, Vanta makes it really easy to get and renew your SOC 2 compliance. On average, Vanta customers are compliant in just two to four weeks. Without Vanta, it takes three to five months. Vanta can save you hundreds of hours of work and up to 85 % on compliance costs. And Vanta does more than just SOC 2. They also automate up to 90 % compliance for GDPR, HIPAA, and more. So here's your call to action. Stop slowing your sales team down and use Vanta. Get$1 ,000 off at vanta.com slash twist. That's vanta.com slash twist for$1 ,000 off your SOC 2. Well, you would get diversification built into it because you're doing$100, or even if you just did 10, you would get diversification.

19:51And you are not just buying one company. I mean, if you look, and obviously, my friend Schmaff did a bunch of these SPACs, some of them turned out great, some of them didn't. And some of the companies we had, I think, two companies of ours go buy SPAC, one of them Desktop Metal. We love the company, but maybe it was a little too early for it to be publicly traded. And my fear became realized, which was, hey, private companies, you got to really take a five, 10 year view of them. if you're a seed stage investor you're taking a 10 15 year review if you're a late stage investor you're probably taking a five year review and if you're somewhere in between you might be taking a 10 year review people started buying the spacks looking to flip them and trade them you know far too frequently you know day by day and became more like gambling like joby vertical takeoff and landing desktop metal 3d printed metal these are great ideas these are really amazing venture investments if you can sit on them and you've got 10 years of patience man if 3d printing of metal and, you know, other materials and vertical takeoff and landing vehicles.

20:51These are great, but I agree. Maybe people would like to have a little bit of diversification. Yeah, that's the main reason to do it in your format. Exactly. And so you get to have a broader exposure. And also, you know, 25 years ago, technology meant internet primarily. Today, some of the companies you just mentioned, it is across vertical. So it doesn't matter if it's AI or aerospace. enterprise SaaS or healthcare or finance, they're all impacted by and shaped by technology. And so now venture backed tech very much is driving a lot of growth across all industries. And so part of destiny existing is okay, with people who are whether it's ride sharing, or delivery, or many of these companies that people use every single day, you know, you might use Figma every single day, or you might use another tool.

21:44How do you actually, you believe in the company, you know it, you love it. How do you actually own a piece of these companies that are shaping the future? That's really what it comes down to. Yeah. And it's been pretty hard. I think there should be just a sophisticated investor test and you could let people prove that they understand the risks associated with these things. Let's talk a little bit about what it's like to have the stock not follow maybe logic or you know the the valuation and what that's doing to your day-to-day because i don't think anybody who's doing something like you're doing here wants to see it appreciate that quickly and then come down and have 20 30 swings that's what's happened the last couple of weeks so let's talk about the swinging nature of this and what's happening with it and then you know what your plan is to kind of get to normalcy here um and is that kind of a goal to have it be appropriately valued?

22:39Or do you just think, hey, if people want to overvalue it a bit, or they get super aggressive, that's just the market? Or are you concerned about, hey, maybe people are getting ahead of themselves here? Yeah, it's a good question. You know, people have been telling me over the last few weeks that, oh, this is very timely, what you're doing. Or they look at it, oh, it's a sign of the times. It's a sign of excess or froth in the market. And, you know, I always smile when I hear that, because in my perspective, I've been working on this for a decade. You know, I founded a company called Forge, which is the largest secondary market for private tech shares.

23:14You know, Destiny, we started four and almost four and a half years ago. And so this wasn't about, oh, today is a very opportune time to list. This is about kind of seeing a longer term view on how I want the world to look, what kinds of products should be out there and working hard to create it. So when I zoom into the last three weeks, I still think it's just a market discovery. You know, two years ago, most people hadn't heard of destiny. Today, many more people have two years from now, even more people will have. And so we take a very long term view on, you know, what does the world look like, whether it's for the tech 100, and what we need to do to achieve the goals there, or more broadly, and how do we go and shape and create that?

23:59Yeah, I mean, this is one of the aspects of having a democratized financial system is that people can make bets without doing any research. They can make bets with doing tons of research. They can miss things. They can catch things. They can figure out their own stories. And we've seen this happen many times with GameStop and AMC. And here, the majority of the fund is in SpaceX. I think that's the big winner, yeah? So I think maybe people who want access to SpaceX, this is just a convenient way to get in there, correct? So when we brought this to market, we had a really important decision, which is, okay, we have this idea of Destiny Tech 100 existing, I believe it can be done from everything I've seen in the market and help drive in terms of private market liquidity.

24:48Now we've raised the capital. But as we go through that process, are we going to go and list this publicly with an idea and zero companies in the portfolio? then you might, you know, we might be having this conversation, you would say, hey, it looks kind of like a SPAC, but for 100 companies, not one. On the flip side, if we'd waited until we had all 100, then by the time individual investors and the public were able to participate, they would, in effect, be last in line again. And so we had, you know, this tough decision to make. And what we decided to do is, okay, let's get 20 to 25 companies in the portfolio to start, in our case, 23, let's go bring this to market and list it.

25:27And let's build the rest in public while we're public. And so that does mean that even our portfolio composition, you reference SpaceX as one of the portfolio companies, but that's going to shift and change over time, as we keep building out the portfolio. So it's not meant to be anything more than a point in time representation of portfolio. And it also means, you know, as investors are learning more about private markets and late stage venture capital, as they're learning more about destiny and the destiny tech 100, they're going to kind of watch how we build it in public. And, you know, for some people, it might be the right investment for them today.

26:03Again, not investment advice. For others, it might be something to watch and follow and learn about and track over a year or two or five. Because we have a long way to go to deliver on the ultimate vision. Yeah, it does seem to me, you know, if it's trading at 10 times, whatever the book value is, it's probably not a great idea. But if it was trading at two times or three times, you didn't have access to it, hey, maybe you make the case for it. But you have to do your own math, as Chamath always says, do your own underwriting. And the price and the entry price is super important. There were people, you know, who didn't want to invest in Uber when it was a $300 million company that thought that was a ridiculous valuation.

26:38It turned out it was an okay valuation to get in at the Series B. Shout out to Shervin, who did that. Okay, one complicated issue here. And you, I guess when you were doing Forge, face this and second market could face it, a bunch of people. Private companies sometimes don't like people buying their shares and doing stuff with them. Now, Elon and SpaceX, according to my understanding of it, which is public knowledge, they have like an orderly process every six months, people buy and sell shares. But I do think they approve them. I did read that there were some people maybe who weren't happy with you buying some of their shares and putting them into the Destiny 100.

27:14Maybe you could speak to the laws around and the, you know, the what manners around manners might be around. I wouldn't say ethics, but manners like, hey, I want to buy your shares and then put them into this. And essentially, you become a proxy to a certain extent on some percentage for their shares trading publicly. So maybe you could talk a little bit about how you acquire the shares. And then when people get upset, how you manage that and then any legal issues around it. Sure. A number of questions there. So to start with, in terms of how we invest, how we acquire the shares, what we did is we set up a pretty flexible mandate.