VCs Need Capital Too: How You Can Get In On It

A Cooling Tech Market Since 2021

After reaching stratospheric heights during the pandemic, many tech companies have notched in a rough two to three years^1,2. We see it in the news -- Reddit’s IPO received much fanfare only to putter back down to earth after a market research firm put Reddit on its “short bench”, dealing a blow to hopes of a rebound in the tech IPO market³. More poignantly, we feel the ramifications reverberating through our professional network. From former colleagues’ slow job searches to fewer news of fresh funding from peers, the tech scene has seemed more eerily quiet (outside of AI and climate tech). The likes of Tesla and Apple have shown that even the monoliths are not immune to the shifting macro landscape. Tiger Global, a leading venture capital firm, took part in only 27 deals in 2023 compared to 288 deals in 2022⁴.

This makes founding, joining, or continuing in start-ups more risky than it has been in recent times. There are pockets of opportunity, but there are just as many, if not more, land mines waiting to explode. Even with the opportunities, the return on investment are no longer as rosy as the sky-high multiples we once saw.

Which is why the Destiny Tech 100 fund’s listing on the NYSE feels impactful.

What is Destiny Tech 100?

The Destiny Tech 100 debuted quietly on March 26, 2024 at $8.25 with the ticker symbol DXYZ⁵. In the two weeks since, it has ranged between $50 to $100, with high volatility day to day.

The reason that this listing is so fascinating is that it’s a closed-end fund with holdings on SpaceX, OpenAI, Stripe — ie some hot names in the tech space. By purchasing DXYZ, common investors are in many ways providing fresh capital for a VC-like firm to invest in more start-ups.

One of the allures of being in a start-up is the prospect of getting rich from the company’s equity. In decades past, for someone to gain access to such early stage equity is by being:

• An employee who received stock grants at cheap enough exercise prices to purchase without massive tax implications
• An investor who provided capital to the start-up before it got big
• An accredited investor who can purchase the equity on secondary markets

In essence, the private markets are for the rich and wealthy or tech talent. And this is where Destiny Tech 100’s has significant appeal. The fund is also capitalizing very well on this value proposition for its branding and marketing: allowing anyone, regardless of their net worth, to invest in private technology companies.

Why is this important?

We’ve been hearing about how challenging it has been for start-ups to raise new capital from venture capital, but that also implies that venture capital firms are having trouble raising funds from their investors with VC opinions ranging from “We are starting to see the great [VC] resignation” ⁶ to “The industry is getting right-sized” ⁷. The increased cost of capital driven by inflation is affecting everyone.

However, $5 trillion was injected into the economy by the Biden administration during the pandemic⁸. Per the New York Times, a lot of the cash has gone to individuals and businesses. That means somewhere people are sitting on cash.

The questions become:

1. How can the start-up economy tap into this capital?
2. Should individuals invest in high risk start-ups through new financial vehicles?

For late stage start-ups, tapping into this capital may mean trying out the lukewarm IPO market.  ARM, Instacart, and Klaviyo IPOs from 2023 have seen mixed results with ARM’s being the most successful bolstered by the interest and hype around AI and semiconductors.

The Destiny Tech 100 seems to provide an alternative solution to an IPO or a SPAC to get fresh capital. Because it’s directly listed on the NYSE, everyday investors can participate with small amounts of capital and a basic brokerage account. The Destiny Tech 100 wins here for its lack of barrier to entry, brilliant market positioning, and little transparency on the underlying financials.

Is the risk worth it?

This is probably where the fund stands on immensely shaky grounds. As a closed-end fund, one of the dangers of this asset has is how expensive it can get relative to the underlying assets being held. This bloomberg article breaks down the dangers of this fund very well, with key takeaways from the author are:

• DXYZ is a meme stock: “‘This is a way for ordinary investors to get access to hot startups’ is a good meme”
• At $99.79 per share, it is (or was) trading at 1961% premium. The punchline: “this fund gives ordinary investors access to startups at 20 times their current valuation”
• However, the final takeaway is that DXYZ is essentially raising capital like a venture capital fund from common investors, and its job is to deploy that capital to invest in start-ups such that at some point the stock price and underlying asset value converge in price

Buying this stock is like providing capital to a venture capital fund. This means there’s a very real and very high risk of losing a significant amount of money, especially when risk free interest rates on savings and money market funds top 5% annually. Beyond that, the common investor can’t do the level of diligence that is typically required to invest in a venture fund, but the flip side is that the investment made can be minimal.

Whether or not to invest in the fund is a tactical, individual question, the fund’s listing is pointing towards a more meaningful trend.

A paradigm shift: everyday people in power

What’s really fascinating about this fund is a demonstration of how challenging it has become to access capital, even for venture capitalists. Contrast this to the last decade and a half, where capital felt like monopoly money; that is a paradigm shift.

Further, the Destiny Tech 100 fund’s meteoric rise demonstrates that there is still cash in the market waiting to be tapped into under the appropriate circumstances; and that cash might be coming from everyday people like you and me. That gives the common folk immense investing power. Without working at a start-up and without being an accredited investor, every day people are gaining more access to new investment options because the people hold the cash. The question is now: how will they use it?

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References:

1 https://foundershield.com/blog/tech-ipos-2023/

2 https://stockanalysis.com/ipos/2023/

3 https://www.bloomberg.com/news/articles/2024-03-27/reddit-tumbles-as-hedgeye-names-it-a-short-idea-sees-50-slump

4 https://news.crunchbase.com/venture/tiger-global-2023-pullback-databricks/

5 https://investorplace.com/2024/04/dxyz-stock-what-to-know-about-the-new-destiny-tech100-fund-taking-over-wall-street/

6 https://www.forbes.com/sites/marenbannon/2023/12/19/14-predictions-for-venture-capital-in-2024/?sh=655ee19b5e2e

7 https://news.crunchbase.com/venture/startup-funding-steadies-exits-forecast-2024/

8 https://www.nytimes.com/interactive/2022/03/11/us/how-covid-stimulus-money-was-spent.html