Tech FOMO prices at a disturbingly high level

Hot pursuit. Want to buy a $1 bill for $13? That is effectively what’s on offer from Destiny Tech100 and its stakes in closely held technology firms such as SpaceX, OpenAI and Stripe. The fund made its market debut last month with a net asset value of $53 million at the end of December, but those assets are now being valued by public investors at about $700 million. It imputes a disturbingly high price on the fear investors have of missing out on the next big thing.

Closed-end funds like Destiny’s own pools of assets, and shareholders get slivers of them. Changes in the market price do not directly affect the pool’s size. As the fund’s own prospectus warns, shares of closed-end funds frequently trade at discounts to net assets. In this case, they are being valued at a giant, head-scratching premium. The fund was worth as much as $1 billion on Monday, with the price exceeding $100 after initially listing on March 26 at about $5. The shares had slumped about 30% by early Tuesday afternoon.

The fund, whose parent company Destiny XYZ is led by Y Combinator alum Sohail Prasad, has acquired ownership in just 23 firms so far, 77 fewer than the 100 intended. Elon Musk’s rocket venture, last valued at some $180 billion, accounted for a third. Total annualized losses in the fund were 23% between its 2022 inception and Dec. 31. The best explanation for the valuation discrepancy is an overeagerness to get in early on hot firms before their initial public offerings.

In a bygone era, outfits like Epic Games would have gone public much sooner. But a cutthroat race to back promising startups led venture capitalists to cede power to entrepreneurs, who increasingly prefer to keep firm grips on their creations and limit disclosure as long as possible. Big portfolio managers, private equity firms and family offices have helped further postpone IPOs with later-stage capital that attempts to extract some value previously available to public shareholders.

It’s therefore understandable why smaller investors want to jump the queue, too. It makes no sense, however, to put a whopping premium on assets whose valuations are probably inflated already. One or two of the Destiny Tech100 holdings may generate a healthy return, but the more likely outcome is that investors are revealing an absurd level of exuberance. Silicon Valley should regard the situation differently: there’s value out there for companies to grab for themselves.

Context News

Destiny Tech100, a closed-end fund designed to hold stakes in 100 privately owned technology companies, made its New York Stock Exchange debut on March 26 at $8.25 a share, a 71% increase from its $4.84 reference price. As of 1430 GMT on April 9, they were trading at $63.82, a 37% decrease from the $100.84 peak a day earlier. The fund, created by investment firm Destiny XYZ, currently has positions in 23 firms, including OpenAI, SpaceX and Stripe.