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Simon Dawson/REUTERS; Samantha Lee/Business Insider<ul class="summary-list"><li>With 2020 quickly approaching, Business Insider is polling experts to find out what finance and real estate will likely look like a decade from now.</li><li>The public markets are no longer the kingmakers they were for legendary stock-pickers like Julian Robertson and Peter Lynch. The savviest discretionary managers are diving into the private markets to boost their returns. </li><li>Over the next 10 years, insiders, consultancies, and banks all expect this migration to less efficient private markets to accelerate.</li><li>With fewer public companies and an IPO slowdown, the private market opportunities for hedge funds like Tiger Global and Coatue have become more attractive, even as sky-high valuations have plagued investors that dove into companies like WeWork.</li><li>Investors, according to a recently released note from Carlyle, are leaving their public markets exposure to quant funds and passive indices, and searching for alpha in the less efficient private markets. </li><li>"The lines are blurring between hedge funds and private equity, and I expect the industries over time to converge," said Don Steinbrugge, founder of consultancy AgeCroft Partners.</li><li><a href="https://www.businessinsider.com/prime">Click here for more BI Prime stories</a>. </li></ul>The smart money is getting out of the public markets.Private equity, once an obscure part of the alternatives space, will have more assets than the better-known hedge fund industry by 2023, according to Preqin. Institutional investors, meanwhile, are shifting more of their portfolios to the private markets, according to EY, in part due to underperformance of active managers in the public markets.With 2020 quickly approaching, Business Insider is looking ahead and polling experts to learn what Wall Street will look like in 2030. Over the next 10 years, insiders, consultancies, and banks all expect this migration to less efficient private markets will continue and accelerate.Passive investing, which topped half of all mutual funds assets for the first time in 2019, will only continue to rise, they say, and finding an edge in the public markets will become nearly impossible thanks to advances in computing power and data-processing.We've already seen the effects of this sea change on value investors, who have struggled to make money using a strategy pioneered by legends like Benjamin Graham and Warren Buffett. In 10 years' time, nearly all big discretionary managers could see a public market void of obvious plays. <h2>Managers are already diving into the private markets</h2>Already top stock-picking hedge funds - managers who made their names and their billions with concentrated bets on well-known, public companies - are seeing the light.Viking is growing its private markets team after putting <a href="https://www.businessinsider.com/viking-global-invested-107-million-in-druva-in-recent-round-2019-8">more than a half of a billion dollars to work in the private companies during the first half of this year</a>, while Tiger Global and Coatue have become some of the biggest early-stage investors. Point72 and Two Sigma have built out venture capital arms, and Lone Pine <a href="https://www.businessinsider.com/lone-pine-just-told-investors-that-its-sticking-to-growth-stocks-2019-11">is opening up another of its funds to private investments</a>.One of the top-performing hedge funds this year, Mudrick Capital, can thank its large stake in Juul for its success, though that may be in peril thanks to the rash of <a href="https://markets.businessinsider.com/news/stocks/vape-bans-threaten-hedge-funds-800-million-investment-in-njoy-2019-9-1028555785">vaping-related deaths in the United States</a>. Billionaire Joseph Edelman's Perceptive Advisors closed its first venture capital fund with $210 million from institutional investors and family offices, the firm announced in December."The demand for less liquid securities will grow over time as more and more view it as an area that investment firms have an edge and where high returns can be generated relative to liquid markets," said Don Steinbrugge, founder of consultancy AgeCroft Partners."The lines are blurring between hedge funds and private equity, and I expect the industries over time to converge."Mutual funds are even getting in on the private market action, <a href="https://www.businessinsider.com/sec-steps-up-scrutiny-of-private-stakes-held-by-funds-2019-7?utm_source=feedburner&amp;utm_medium=feed&amp;utm_campaign=Feed%3A+clusterstock+%28ClusterStock%29">though with a close eye from the Securities and Exchange Commission</a>. Fidelity is in Juul, WeWork, and Airbnb, and T. Rowe Price and Franklin Templeton have invested in unicorns as well.Active managers have turned to the private space for several reasons - like exploding valuations and the shrinking roster of public companies - but the biggest is that it's just hard to make money in an arena that's becoming more efficient everyday.<h2>'It's much harder to beat a computer'</h2>Passively managed mutual fund assets have shot past their actively managed peers; an IMF report states that the total assets tracking an index reached $4.25 trillion this year.Beating the market is a zero-sum game for active investors, said Jamie Dinan, founder and chief executive of York Capital Management, at the Project Punch Card conference in December. The rise of passive, he said, has upped the competition because it took away clueless investors that didn't know what they were doing."It's much harder to beat a computer or a really intelligent person," he said. And quants are finding new areas to exploit much quicker now thanks to increased computing power, advancements in artificial intelligence and machine learning, and an explosion of <a href="https://www.businessinsider.com/hedge-funds-using-filters-buy-alternative-data-2019-7?IR=T&amp;_ga=2.154692795.2062023948.1575391370-661281114.1574274715">new, alternative data streams that have quickly become a necessary cost for managers</a> hoping to keep their heads above water.Investors in hedge funds are concerned that they're paying large fees to get the same type of returns that retail investors can get for free - and that hedge funds in the public space are simply following each other.Crowding has gotten worse the last three quarters, according to Goldman Sachs' hedge fund tracker. Amazon, Facebook, and Alphabet make up 5% of all hedge funds' long portfolios, Goldman says, and those three stocks have been among the top five positions in hedge funds for the last 14 quarters.And public market options are shrinking by the day, with mergers and buyouts - like Elliott and Francisco Partners <a href="https://www.bloomberg.com/news/articles/2019-12-11/francisco-partners-elliott-said-to-be-in-talks-to-buy-logmein">recent discussions</a> to take LogMeIn private for $4 billion - outpacing IPOs.The private markets are flooded with money, while the biggest unicorns have struggled out of the gate once public, or didn't even make it to the IPO, like WeWork. Now companies like Palantir are pushing back their public offerings.For underfunded pensions, the private markets are the only place to make eye-popping returns once common of hedge funds.A Natixis survey of 500 institutional investors managing more than $15 trillion found that 37% are increasing their allocation to private debt next year while 28% are bumping up their allocation to private equity. The top talent is going with the dollars too, as hedge funds are <a href="https://www.businessinsider.com/hedge-funds-and-private-equity-battling-over-each-others-talent-2019-6?IR=T&amp;_ga=2.128231567.2062023948.1575391370-661281114.1574274715">finding tough competition to reel in</a> for the smartest investors from the private side. <h2>'We aren't going back'</h2>Dev Kantesaria, CEO and founder of stock-picking hedge fund Valley Forge Asset Management, believes the story of the next ten years will be the impact of "relentless market share gain by passive strategies."The bloated hedge fund industry - which has thousands of funds chasing similar trades - is expected to shrink, and Kantesaria expects those assets from closed hedge funds to flow into passive products."Once you're indexing, you don't get those investors back very easily," he said knowingly: Kantesaria serves on the board of a hospital that recently put a good chunk of its endowment into a Vanguard index fund, and "we aren't going back."The size of individual hedge funds that are used to beating the overall market may be holding them back, says Chris Walvoord, global head of hedge fund research and portfolio management at Aon."A lot of traditional hedge fund firms are becoming more institutionalized. They can't do the things they used to," he said."Investors are still in the process of getting heads around what hedge funds are able to do at certain sizes."Walvoord is not completely dismissing active managers trying to outperform in equities - "there will still be opportunities for people to look in the nooks and crannies" - but in 2030, it will be tougher.A recent note from Carlyle's global head of research Jason Thomas states unicorns' preference of private money over the public markets and the lack of young, growing public companies have created a "new paradigm for portfolio management.""Investors rely on private markets for 'alpha,' while passive allocations deliver more efficient and targeted 'beta,'" he wrote.This shift might force investors to rethink the term alternative investments."Rather than an 'alternative' asset class, private capital represents the 'active' portion of institutional portfolios, responsible for diversification, excess returns, and important signals about changes in the broader investment opportunity set," Thomas wrote. <h3>NOW WATCH: <a href="https://www.businessinsider.com/bill-gates-warren-buffett-billionaires-donate-money-2017-10">On Giving Tuesday, see how Bill Gates and Warren Buffett are changing the world like no other humans in history</a></h3>

By 2030, the machines running a huge chunk of public markets will only be smarter. The top human stock-pickers are moving away, and private equity and hedge funds are heading for a collision.

<div class="KonaFilter image-container display-table"><div><div class="image on-image">DropboxDropbox cofounders Drew Houston and Arash Ferdowsi celebrated a long awaited IPO at the NASDAQ in New York City on March 23, 2018.</div></div></div><ul><li>Dropbox went public on Friday, and is now worth $20 billion.</li><li>In 2007, Houston was just trying to get his startup off the ground as a solo founder, and applied to the presitigous Y Combinator program for his first funding. </li><li>On the application, he says he would have sold Dropbox for $1 million after taxes in the first six months, if someone had made the offer. Now, his stake in Dropbox is almost certainly worth billions.</li><li>Read Houston's full application below.</li></ul>In 2007, an MIT graduate named Drew Houston was trying to get his startup, Dropbox, off the ground.He didn't have another co-founder because the person who had agreed to work with him had to back out. Houston had been programming since age 5, and he was trying to get Y Combinator to invest in his file storing and sharing startup.Y Combinator is one of Silicon Valley's premiere startup incubator programs, offering early-stage companies some of their first investment funding, and access to mentors and experts. For Houston, it was one of Dropbox's best bets to make it big.He told Y Combinator he was determined to see the idea through...although if someone offered him $1-2 million for Dropbox after six months of work, he'd have trouble walking away.It's a good thing no one made Houston that offer, because now he's worth much more than that. On Friday, Dropbox held its long-awaited IPO, and had a huge pop in first-day trading. Now, it's worth about $20 billion - and Houston's 25.5% ownesrship of Dropbox almost certainly makes his stake in the company worth billions.Here's the application Houston submitted to Y Combinator's Paul Graham back then. <a href="https://dl.dropboxusercontent.com/u/27532820/app.html">From Dropbox</a>:Y Combinator Funding Application Summer 2007 Application deadline: 12 midnight (PST) April 2, 2007. Please try to answer each question in less than 120 words. We look at online demos only for the most promising applications, so don't skimp on the application because you're relying on a good demo. We don't make any formal promise about secrecy, but we don't plan to let anyone outside Y Combinator see these applications, including other startups we fund. We recommend you save regularly by clicking on the update button at the bottom of this page. Otherwise you may lose work if we restart the server. # Username: dhouston # Company name: Dropbox # Company url, if any: http://www.getdropbox.com/ # Phone number (preferably cell): [Redacted] # Usernames of all founders, separated by spaces. (Please have all founders create YC accounts, or create accounts for them.) dhouston # Usernames of all founders who will move to (or already live in) Boston for the summer if we fund you. dhouston # What is your company going to make? Dropbox synchronizes files across your/your team's computers. It's much better than uploading or email, because it's automatic, integrated into Windows, and fits into the way you already work. There's also a web interface, and the files are securely backed up to Amazon S3. Dropbox is kind of like taking the best elements of subversion, trac and rsync and making them "just work" for the average individual or team. Hackers have access to these tools, but normal people don't. There are lots of interesting possible features. One is syncing Google Docs/Spreadsheets (or other office web apps) to local .doc and .xls files for offline access, which would be strategically important as few web apps deal with the offline problem. # For each founder, please list: YC username; name; age; year, school, degree, and subject for each degree; email address; personal url (if any); and present employer and title (if any). Put unfinished degrees in parens. List the main contact first. Separate founders with blank lines. Put an asterisk before the name of anyone not able to move to Boston for the summer. dhouston; Drew Houston; 24; 2006, MIT, SB computer science; houston AT alum DOT (school i went to) DOT edu; --; Bit9, Inc (went full time to part time 1/07) - project lead/software engineer Although I'm working with other people on Dropbox, strictly speaking I'm the only founder right now. My friend [redacted], a great hacker, Stanford grad and creator of [redacted] is putting together a Mac port, but can't join as a founder right now as a former cofounder of his started an extremely similar company. My friend and roommate i from MIT is helping out too, but he works with me at Bit9, and a non-solicit clause in my employment contract prevents me from recruiting him (and the VP Eng explicitly told me not to recruit him.) In any case, I have several leads, have been networking aggressively, and fully intend to get someone else on board -- either another good hacker or a more sales-oriented guy (e.g. the role Matt fills at Xobni). I'm aware that the odds aren't good for single founders, and would rather work with other people anyway. # Please tell us in one or two sentences something about each founder that shows a high level of ability. Drew - Programming since age 5; startups since age 14; 1600 on SAT; started profitable online SAT prep company in college (accoladeprep.com). For fun last summer reverse engineered the software on a number of poker sites and wrote a real-money playing poker bot (it was about break-even; see screenshot url later in the app.) # What's new about what you're doing? Most small teams have a few basic needs: (1) team members need their important stuff in front of them wherever they are, (2) everyone needs to be working on the latest version of a given document (and ideally can track what's changed), (3) and team data needs to be protected from disaster. There are sync tools (e.g. beinsync, Foldershare), there are backup tools (Carbonite, Mozy), and there are web uploading/publishing tools (box.net, etc.), but there's no good integrated solution. Dropbox solves all these needs, and doesn't need configuration or babysitting. Put another way, it takes concepts that are proven winners from the dev community (version control, changelogs/trac, rsync, etc.) and puts them in a package that my little sister can figure out (she uses Dropbox to keep track of her high school term papers, and doesn't need to burn CDs or carry USB sticks anymore.) At a higher level, online storage and local disks are big and cheap. But the internet links in between have been and will continue to be slow in comparison. In "the future", you won't have to move your data around manually. The concept that I'm most excited about is that the core technology in Dropbox -- continuous efficient sync with compression and binary diffs -- is what will get us there. # What do you understand about your business that other companies in it just don't get? Competing products work at the wrong layer of abstraction and/or force the user to constantly think and do things. The "online disk drive" abstraction sucks, because you can't work offline and the OS support is extremely brittle. Anything that depends on manual emailing/uploading (i.e. anything web-based) is a non-starter, because it's basically doing version control in your head. But virtually all competing services involve one or the other. With Dropbox, you hit "Save", as you normally would, and everything just works, even with large files (thanks to binary diffs). # What are people forced to do now because what you plan to make doesn't exist yet? Email themselves attachments. Upload stuff to online storage sites or use online drives like Xdrive, which don't work on planes. Carry around USB drives, which can be lost, stolen, or break/get bad sectors. Waste time revising the wrong versions of given documents, resulting in Frankendocuments that contain some changes but lose others. My friend Reuben is switching his financial consulting company from a PHP-based CMS to a beta of Dropbox because all they used it for was file sharing. Techies often hack together brittle solutions involving web hosting, rsync, and cron jobs, or entertaining abominations such as those listed in this slashdot article ("Small Office Windows Backup Software" - http://ask.slashdot.org/article.pl?sid=07/01/04/0336246). # How will you make money? The current plan is a freemium approach, where we give away free 1GB accounts and charge for additional storage (maybe ~$5/mo or less for 10GB for individuals and team plans that start at maybe $20/mo.). It's hard to get consumers to pay for things, but fortunately small/medium businesses already pay for solutions that are subsets of what Dropbox does and are harder to use. There will be tiered pricing for business accounts (upper tiers will retain more older versions of documents, have branded extranets for secure file sharing with clients/partners, etc., and an '<keyword id="6356323" type="UNKNOWN" weightage="100" keywordseo="enterprise">enterprise</keyword>' plan that features, well, a really high price.) I've already been approached by potential partners/customers asking for an API to programmatically create Dropboxes (e.g. to handle file sharing for Assembla.com, a web site for managing global dev teams). There's a natural synergy between Basecamp-like project mgmt/groupware web apps (for the to-do lists, calendaring, etc.) and Dropbox for file sharing. I've also had requests for an enterprise version that would sit on a company's network (as opposed to my S3 store) for which I could probably charge a lot. # Who are your competitors, and who might become competitors? Who do you fear most? Carbonite and Mozy do a good job with hassle-free backup, and a move into sync would make sense. Sharpcast (venture funded) announced a similar app called Hummingbird, but according to [redacted] they're taking an extraordinarily difficult approach involving NT kernel drivers. Google's coming out with GDrive at some point. Microsoft's Groove does sync and is part of Office 2007, but is very heavyweight and doesn't include any of the web stuff or backup. There are apps like Omnidrive and Titanize but the implementations are buggy or have bad UIs. # For founders who are hackers: what cool things have you built? (Include urls if possible.) Accolade Online SAT prep (launched in 2004) (http://www.accoladeprep.com/); a poker bot (here's an old screenshot: https://www.accoladeprep.com/sshot2.gif; it's using play money there but worked with real money too.) # How long have the founders known one another and how did you meet? There's a joke in here somewhere. # What tools will you use to build your product? Python (top to bottom.) sqlite (client), mysql (server). Turbogears (at least until it won't scale.) Amazon EC2 and S3 for serving file data. # If you've already started working on it, how long have you been working and how many lines of code (if applicable) have you written? 3 months part time. About ~5KLOC client and ~2KLOC server of python, C++, Cheetah templates, installer scripts, etc. # If you have an online demo, what's the url? Here's a screencast that I'll also put up on news.yc: http://www.getdropbox.com/u/2/screencast%20-%20Copy.html If you do have a Windows box or two, here's the latest build: http://www.getdropbox.com/u/2/DropboxInstaller.exe # How long will it take before you have a prototype? A beta? A version you can charge for? Prototype - done in Feb. Version I can charge for: 8 weeks maybe? (ed: hahaha) # Which companies would be most likely to buy you? Google/MS/Yahoo are all acutely interested in this general space. Google announced GDrive/"Platypus" a long time ago but the release date is uncertain (a friend at Google says the first implementation was this ghetto VBScript/Java thing for internal use only). MS announced Live Drive and bought Foldershare in '05 which does a subset of what Dropbox does. Iron Mountain, Carbonite or Mozy or anyone else dealing with backup for SMBs could also be interested, as none of them have touched the sync problem to date. In some ways, Dropbox is for arbitrary files what Basecamp is for lightweight project management, and the two would plug together really well (although 37signals doesn't seem like the buying-companies type). At the end of the day, though, it's an extremely capital-efficient business. We know people are willing to pay for this and just want to put together something that rocks and get it in front of as many people as possible. # If one wanted to buy you three months in (August 2007), what's the lowest offer you'd take? I'd rather see the idea through, but I'd probably have a hard time turning down $1m after taxes for 6 months of work. # Why would your project be hard for someone else to duplicate? This idea requires executing well in several somewhat orthogonal directions, and missteps in any torpedo the entire product. For example, there's an academic/theoretical component: designing the protocol and app to behave consistently/recoverably when any power or ethernet cord in the chain could pop out at any time. There's a gross Win32 integration piece (ditto for a Mac port). There's a mostly Linux/Unix-oriented operations/sysadmin and scalability piece. Then there's the web design and UX piece to make things simple and sexy. Most of these hats are pretty different, and if executing in all these directions was easy, a good product/service would already exist. # Do you have any ideas you consider patentable? [Redacted] # What might go wrong? (This is a test of imagination, not confidence.) Google might finally unleash GDrive and steal a lot of Dropbox's thunder (especially if this takes place before launch.) In general, the online storage space is extremely noisy, so being marginally better isn't good enough; there has to be a leap in value worthy of writing/blogging/telling friends about. I'll need to bring on cofounder(s) and build a team, which takes time. Other competitors are much better funded; we might need to raise working capital to accelerate growth. There will be the usual growing pains scaling and finding bottlenecks (although I've provisioned load balanced, high availability web apps before.) Acquiring small business customers might be more expensive/take longer than hoped. Prioritizing features and choosing the right market segments to tackle will be hard. Getting love from early adopters will be important, but getting distracted by/releasing late due to frivolous feature requests could be fatal. # If you're already incorporated, when were you? Who are the shareholders and what percent does each own? If you've had funding, how much, at what valuation(s)? Not incorporated # If you're not incorporated yet, please list the percent of the company you plan to give each founder, and anyone else you plan to give stock to. (This question is as much for you as us.) Drew # If you'll have any major expenses beyond the living costs of your founders, bandwidth, and servers, what will they be? None; maybe AdWords. # If by August your startup seems to have a significant (say 20%) chance of making you rich, which of the founders would commit to working on it full-time for the next several years? Drew # Do any founders have other commitments between June and August 2007 inclusive? No; I've given notice at Bit9 to work on this full time regardless of YC funding. # Do any founders have commitments in the future (e.g. have been accepted to grad school), and if so what? No. Probably moving to SF in September # Are any of the founders covered by noncompetes or intellectual property agreements that overlap with your project? Will any be working as employees or consultants for anyone else? Drew: Some work was done at the Bit9 office; I consulted an attorney and have a signed letter indicating Bit9 has no stake/ownership of any kind in Dropbox # Was any of your code written by someone who is not one of your founders? If so, how can you safely use it? (Open source is ok of course.) No # If you had any other ideas you considered applying with, feel free to list them. One may be something we've been waiting for. One click screen sharing (already done pretty well by Glance); a wiki with version-controlled drawing canvases that let you draw diagrams or mock up UIs (Thinkature is kind of related, but this is more text with canvases interspersed than a shared whiteboard) to help teams get on the same page and spec things out better (we use Visio and Powerpoint at Bit9, which sucks) # Please tell us something surprising or amusing that one of you has discovered. (The answer need not be related to your project.) The ridiculous things people name their documents to do versioning, like "proposal v2 good revised NEW 11-15-06.doc", continue to crack me up.

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