Retail investors want private stocks
Why are investors vastly overpaying to own shares of Destiny?
The median valuation of a successful tech IPO increased from $548M in 2010, to $815M in 2015, to an astounding $4.3B in 2020 as an abundance of venture capital and private equity funding has allowed companies to stay private longer.
The biggest losers from this trend? Retail investors. Accredited investor laws limit most private investments to institutional and high net worth investors. The exceptions such as crowdfunded vehicles may allow retail investors to legally invest in a startup, but the reality is investment minimums price them out of most deals.
But what if you could buy shares in a public company that then invested in a private company for you? Enter: Destiny Tech100.
After purchasing shares of 23 private companies such as Stripe, SpaceX, and OpenAI, Destiny listed on the New York Stock Exchange with plans to increase its holdings to 100 different startups. “Tens of thousands of individual investors” have invested in the new vehicle since its listing, according to CEO Sohail Prasad, and its stock price has soared from $9 on March 26 to over $50 today.
There’s just one problem: the fund’s assets are worth just $4.84 per share according to Destiny’s SEC filing, which notes its private company holdings are worth $54,307,219. And yet, the stock is trading for more than 10x that, meaning that investors are paying more than a 1000% premium to invest in these startups. As Matt Levine noted yesterday, more than 90% of what investors are paying for is the premium for Destiny, not the underlying companies themselves.
Why would someone overpay 1,000% for this? I have three hypotheses:
Investors are fully aware of the premium that they’re paying, and they believe that the companies, or the potential of the companies Destiny picks, are worth it.
Investors saw that they can invest in Stripe and SpaceX for $56, they have no idea what net asset value is and they really don’t care — they just want to be able to own hot, buzzy startups.
Some investors realize that $56 is overpriced, but they also realize that enough investors don’t realize the stock is overpriced and are bidding the price up. These investors begrudgingly decide that, in the context of a limited supply for a misunderstood hot asset, this is the best price they’re going to get, and they’ll just have to pay a premium for it.
This is not much different than, say, someone paying $300 for a share of GameStop at a $20B market cap or $60 for Trump Media at 1,500x revenue because they “like the stock.” The market, in the short-term, couldn’t care less about your “valuations,” and your ability to invest at a fair price is dependent on the rest of the market understanding what a fair price is.
