Building the Destiny Tech100 (NYSE: DXYZ) - Sohail Prasad, CEO of Destiny
TLDRThe speaker discusses the challenges of creating an ideal, rules-based model for tracking high-growth venture-backed startups in private markets due to liquidity issues. They explain their approach of combining active and passive strategies, using a set of inclusion criteria to vet companies, and then applying a dozen metrics to assess their potential. The strategy involves participating in primary and secondary rounds and purchasing on the open market through platforms like Forge, aiming to provide the best execution for the fund and its investors.
Takeaways
- 🧪 Experimentation with various models at Forge and elsewhere reveals the challenge of creating an ideal, passive, rules-based model due to liquidity issues in private markets.
- 📈 The ideal model would be based on factors like market cap, company growth, etc., but liquidity constraints in private markets lead to forced buying and selling situations.
- 🔄 The inefficiency in tracking an index arises from the fluctuating prices of companies and their allocation weights, which affects the fund's performance.
- 🏦 Active funds are subject to the management team's discretion, which can introduce unpredictability in investment strategies.
- 🎯 The approach taken is a hybrid model, combining the best aspects of both passive and active fund management to optimize performance.
- 📝 A set of five inclusion and eligibility criteria has been established to filter out non-traditional high growth venture-backed startups.
- 🚫 Even if a company is excluded based on the first pass filter, it can still be manually included by the investment committee.
- 📊 The fund considers a dozen metrics, including growth rate, addressable market size, business model type (asset light vs. asset heavy), and executive turnover.
- 🛠️ The fund participates in primary rounds, secondary purchases, and open market transactions to provide the best execution for the fund and its investors.
- 🔄 Trading structures and market conditions are analyzed to identify potential opportunities for better pricing in the market.
- 💡 The process is not as straightforward as simply buying a company's shares; it requires a deep understanding of market dynamics and trading mechanisms.
Q & A
What is the main challenge in creating an index for private markets?
-The main challenge is the lack of liquidity in private markets, which makes it difficult to create a fund that can properly track the index without becoming a forced buyer when company valuations increase or a forced seller when they decrease, leading to inefficiencies.
How does the ideal model for investment work?
-The ideal model is a passive, rules-based approach that relies on a set of factors like market cap, company growth, etc., to determine investment decisions.
What does the speaker's team do to combine the best aspects of active and passive funds?
-They set up a set of inclusion and eligibility criteria to filter out non-traditional high-growth venture-backed startups and then use a committee to make further decisions, similar to the S&P 500 committee's process.
What is an example of a company that met the eligibility criteria but was not immediately included in the S&P 500?
-Tesla is an example of a company that became eligible for the S&P 500 but was not included until six months later.
What types of investment activities does the speaker's team engage in?
-They participate in primary funding rounds (Series C, D, E, F, etc.), secondary purchases from founders, management teams, employees, early investors, and buy on the open market through platforms like Forge.
Why does the speaker's team participate in both primary and secondary markets?
-They do so to provide the best execution for the fund and end investors, ensuring they get the best possible price and access to a variety of trading structures and market conditions.
What are some of the metrics the speaker's team considers when evaluating a company?
-They consider the company's growth rate, addressable market size, whether the business model is asset light or asset heavy, executive turnover, and execution in the secondary markets.
How does the speaker's team ensure they get a better price in the market?
-They analyze where the company has been trading, understand the structures used for trading it, and look for opportunities where they might be able to obtain a better price than what is currently offered in the market.
What is the role of the investment committee in the speaker's team's process?
-The investment committee has the ability to manually include a company that may have been excluded by the initial set of criteria, providing an additional layer of review and decision-making.
How does the speaker's team approach to investment differ from a purely active fund?
-Their approach combines the structure and objectivity of a rules-based system with the flexibility and discretion of an active fund, aiming to mitigate the risks associated with the whims of the management team.
What is the significance of the five inclusion and eligibility criteria set by the speaker's team?
-These criteria serve as a first pass filter to vet out companies that do not resemble traditional high-growth venture-backed startups, ensuring that the investments are focused on the most promising opportunities.
Outlines
🔍 Challenges in Creating a Liquid Index for Private Markets
The paragraph discusses the challenges of creating an index for private markets, highlighting the lack of liquidity which makes it difficult to establish a fund that can accurately track the index. The speaker explains that this leads to forced buying when company valuations increase and forced selling when valuations decrease, resulting in inefficiencies. To address this, the speaker's team has adopted a hybrid approach, combining elements of both passive and active fund management. They have established a set of five inclusion and eligibility criteria to filter out companies that do not fit the profile of traditional high-growth venture-backed startups. Companies that are excluded based on these criteria can still be manually included by an investment committee. The team also considers a dozen metrics related to company growth, market size, business model, and executive turnover to make informed investment decisions. Additionally, they participate in both primary and secondary market transactions to ensure the best execution for the fund and its investors.
Mindmap
Keywords
💡Experimentation
💡Liquidity
💡Index
💡Venture Backed Startups
💡Inclusion Eligibility Criteria
💡Investment Committee
💡Metrics
💡Executive Turnover
💡Secondary Markets
💡Primary Rounds
💡Execution
Highlights
Experimentation with various models at Forge and其他地方
理想的模型是被动的、完全基于规则的，基于市值、公司增长等因素
创建所谓的指数基金的挑战在于私人市场流动性不足
价格上升时成为强制买家，价格下降时成为强制卖家
尝试结合被动和主动管理的优势
S&P 500有一套入选标准和进一步决策的委员会
特斯拉有资格加入S&P 500但委员会延迟6个月才纳入
设立了五项入选和资格标准来筛选非传统高增长风险投资支持的初创公司
即使公司未通过初步筛选，投资委员会仍可手动纳入
考虑公司增长率、市场规模、资产轻重等因素的一系列指标
将高管更迭作为考虑的数据点
在二级市场上的执行情况
参与公司的主要轮次、CDEFG轮次等
进行二级市场购买，包括从创始人、管理团队、员工、早期投资者购买
通过Forge等公开市场购买
旨在为基金和最终投资者提供最佳执行
不仅仅是购买当前提供公司股票，而是要了解其交易情况和可能的市场最佳价格