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How Do You Make A Private Company Angry? Make Them Public.

Destiny.xyz Vs. The Private Markets.


All Markets Are Equal, But Some Are More Equal.

For most Americans, access to the often opaque and secretive world of private markets has long been more theoretical than practical. These markets comprise not only privately traded companies but also private funds, including hedge funds, private equity, and venture capital. As the name implies, private markets are typically restricted to a limited circle of participants. These participants usually include ultra-high-net-worth individuals and billionaires, as well as large institutional investors such as pension funds and endowments. Within this realm, deals are commonly brokered in backrooms, characterized by handshakes and privately negotiated valuations, accessible only to an exclusive group.

However, a small yet determined cohort of startups, including our very own Medici Project, is striving to democratize access to these private markets. This initiative, though, appears to be unsettling the traditional private market elites.

DXYZ

Enter the “Destiny Tech100” fund (Ticker: DXYZ), a new publicly tradable fund created by entrepreneur Sohail Prasad. Unlike traditional public market funds that solely invest in existing public equities, Destiny targets equities of pre-IPO companies—those still entrenched in the private markets and thus typically inaccessible to the average investor. This approach provides Destiny's investors with access to notable companies such as SpaceX and OpenAI.

However, not all is smooth sailing. According to a report by Erin Griffith of The New York Times, several Silicon Valley companies included in the DXYZ portfolio are displeased with their involvement, with some even threatening legal action against Sohail Prasad. For a deeper understanding of this conflict, Griffith's article is a recommended read. In brief, the contention centers around allegations that some shares held by DXYZ may have been acquired illegally, or that the fund has misrepresented its ownership stakes.

Why The Confusion?

How is it possible for there to be such confusion over ownership? Unlike public ownership, which is meticulously registered with exchanges, brokers, and asset custodians, private ownership operates in a more ambiguous realm. Private companies and funds maintain their own lists of who owns what. However, if an employee decides to sell some of their stock options to DXYZ, the issuer—the company whose stock is being sold—may not be aware of the transaction. Moreover, many private companies and funds have contractual stipulations about who can sell their equity, to whom, when, and whether approval is needed. Although the legality of these contract clauses often resides in a gray area and is subject to various legal interpretations, they frequently result in civil court cases. Consequently, whether DXYZ legitimately owns the shares, from the companies' perspectives, may remain in question until potentially resolved in court, unless the companies concede ownership.

The more intriguing question is why these companies are so concerned about who holds their shares. Public companies like Tesla don’t typically fret over individual transactions—after all, it matters little who owns the shares, provided it's not an enemy of the people like Kim Jong Un or Abu Bakr al-Baghdadi. In the private markets, however, the dynamics are more complex, and not all motivations for concern are commendable.

Why The Concern?

Let's begin by examining the more justifiable reasons for concern. In the private markets, companies and funds are responsible for tracking their own shareholders, a task that grows increasingly complex with each new investor. This not only adds significant regulatory and reporting burdens but also heightens compliance risks for private entities. Additionally, dealing with a larger group of investors can be cumbersome from a management and reporting standpoint. Essentially, leadership must now consider a broader array of opinions, and in the case of a fund like DXYZ, these were initially unwelcome. It's important to remember that these companies chose to remain private specifically to avoid public scrutiny and influence.

However, there's a potentially more troubling reason behind the resistance, which likely forms the core of the objections from companies mentioned in the New York Times article: the issue of valuation. Private companies and funds are often touted for their superior returns, a claim supported by solid data. Destiny.xyz's website highlights this by comparing the impressive returns these companies achieved while private to the more modest gains post-IPO. This discrepancy underscores a critical concern: the influence of public investment might not only expose but also potentially diminish the perceived value of these privately held assets.

But Why?

In the realm of private markets, companies are priced without the usual market mechanisms—there are no investment bank analyses or broker/dealer recommendations to guide buying, holding, or selling decisions. Instead, valuations are largely based on private investors' judgment calls, leading to a scenario where many private companies are significantly overvalued. This isn't immediately problematic when transactions occur infrequently among like-minded private investors. However, once these companies transition to public markets, their stock prices often experience a sharp decline, a trend that worsens the longer they remain private.

Consequently, today’s private companies are opting to stay private for extended periods, and any efforts to pry open their financials for public scrutiny are met with firm resistance from management. Is this situation ideal? Far from it; it’s precisely why initiatives like Destiny and our own Medici Project are fiercely committed to enhancing transparency and accessibility in these opaque markets. While resistance from private companies and fund managers is expected—they’ve enjoyed a lengthy and lucrative era of minimal oversight—they are understandably reluctant to see it end. But for the health and fairness of the financial ecosystem, end it must.

All Is Not What It Seems.

In summary, the next time you hear private fund managers extolling the virtues of their superior returns, remember there’s more to it than meets the eye. While it’s true that private companies and fund managers are often adept at what they do—identifying unique and overlooked deals, deeply understanding the businesses they invest in, and conducting thorough groundwork in their industries—their success is not solely due to investment acumen. There is significant value in early-stage investments that yield substantial returns when they succeed. However, it's important to acknowledge the extensive use of smoke and mirrors that can artificially inflate these returns. This includes private dealings between private equity managers, hoarding of shares by early-stage venture capitalists, and other tactics designed to enhance stock appearance.

So, let’s commend Destiny for their efforts to bring transparency to this sector, and let us each do our part to help break down the barriers between public and private markets.

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