Tokenized investment fund VC

Tokenized venture capital funds provide a new way to invest in early-stage startups. Ana Balashova explores how this brave new system works and maps the biggest players.

The boom of crowdfunding and Initial Coin Offerings (ICOs) demonstrates one thing. That ordinary people have enough passion, curiosity, and money to invest in newly-launched businesses.

Token distribution campaigns raised a whopping $21.5 billion in 2018 alone, according to Coinschedule statistics. 

That number is almost as high as the global average quarterly amount of venture capital investments, at least according to the reports put together by PricewaterhouseCoopers and CB Insights. 

Venture capital investments

Retail investors still don’t have access to investing in startups. Or at least not at the capacity they would like to do so. And even crowdfunding platforms being quite popular at the time are not usually intended to produce any return on investment for registered supporters.  Tokenized investment funds could provide an answer.

Traditional venture capital funds are off-limits for the average person

The average Joe is keen to invest in startups. But how do they get involved and reap their share of wealth?

In the traditional venture capital (VC) world, limitations exist to protect unaccredited investors from losing their savings. Accredited investors require a net worth of more than $1 million before investing in traditional VC funds. Most VC firms have their own minimums too, often in excess of $1 million.

Tokenized investment funds could bring about a change.

With digital securities, investor protections can be hard-coded into the token itself. By doing that, you eliminate the potential for scams and fraud, allowing regulators to potentially relax the limits on investors.

Solving the liquidity problem

Another problem with startup investing is how to get your money out. Investing in a startup could mean waiting years for the company to execute an exit strategy or float on the public market.

Private investment in early-stage companies is incredibly illiquid. But tokenized venture capital funds could also address that issue by providing a secondary market for tokens.

What is a tokenized venture capital fund?

spice vc tokenized fund

Carlos Domingo is probably the best expert on the subject. He is a co-founder and managing partner of SPiCE VC, the first fully-tokenized venture capital fund. He also is a founder and CEO of Securitize.io, the compliance platform for digitizing securities on the blockchain. 

The company contributed a lot to making tokenized securities possible. For instance, they issued securities for 22x Fund and SPiCE VC, and also upgraded the security of Blockchain Capital, another major fund in the industry. 

Domingo agreed that tokenized funds might be a real solution to democratize investing in startups: 

“It’s the regulations that limit issuers from soliciting retail investors. Until people stop defrauding retail investors with investment schemes and scams the regulatory bodies have little incentive to change the rules. Digital securities encode these protections into the token itself, making it virtually impossible for the security to be issued or traded in a non-compliant way. We think that this is a great first step to creating a world where investment schemes and scams are so rare that regulators will feel comfortable relaxing the rules to include retail investors.”

Mapping the biggest players in tokenized VC funds

Hack Fund is another example which invests in 5-15 startups per year. Hack Fund then issues “stock certificates” or tokens that represent ownership. The tokens are recorded on a blockchain and can be traded publicly, providing instant liquidity. Hack Fund just partnered with telecoms giant Vodafone with the goal of scaling the startups in its portfolio to $100 million in revenue.

Mentioned previously, Securitize.io is a platform that helps digitize securities, allowing the tokenization of funds and fractional ownership. Domingo explains more:

“Our biggest achievement in 2018 was the development and deployment of our Digital Securities Protocol (DS Protocol) which allows for compliant trading of digital securities (security tokens) on the blockchain via multiple marketplaces and exchanges. The DS Protocol was a big step in delivering on the promise of liquidity for traditionally illiquid asset classes.” 

Currently, the company works with Open Finance Network (OFN) and AirSwap to solve the riddle of providing a compliant digital assets trade. At the same time, they are negotiating with more projects for enhancing their token’s liquidity. Amongst the potential partners are Blocktrade, BnkToTheFuture, Tzero, SharesPost, etc. Soon Securitize.io will list more tokens, issued by the company beyond SPiCE VC.

blockchain capital vc token fund

Along with Domingo’s SPiCE VC, some projects are also doing it right. Among them is Blockchain Capital. The project’s security token, BCAP, was just listed on SharePost Marketplace. 

Another contender is Swarm Fund. The project’s blockchain allows real assets to be tokenized on SRC20 protocol. As explained on the company’s website, amongst the digitalized assets available for further investing and trading can be “real estate, renewables, agriculture, tech companies, crypto hedge funds, impact investments (development projects and post-disaster rebuilding), infrastructure, and any asset or project that the community of SWM token holders approves.”

The team just helped to raise funds for TheArtToken, digital securities backed by 100% carefully selected work of art. At the time of writing, more than $16 million has been contributed to the fundraising campaign, but the security token offering is still going. 

Digital securities are “very challenging”

However, this new industry is not without its challenges.

“Issuing and managing digital securities is very challenging from both a technical and compliance perspective. We are facing these challenges and having good success, but they are never easy. One big challenge for the present and future is helping the broader market understand the advantages of digitizing securities over traditional methods,” admitted Carlos Domingo. 

Many tokenized funds that popped up merely disappeared or went silent. Here are some amongst those that didn’t work out as intended: 

Token Fund

Token Fund was quite successful after its launch in 2017. The idea was to allow people to invest in a bunch of well-performing cryptos in several clicks. And the project got some traction. But the management decided to pivot. 

They dissolved the fund during the fall of 2018 and dedicated themselves to building a new product, called Tokenbox. “A multi-fund, which unites portfolio managers and investors, with lots of great perks including partnerships and integrations, an ability to white-label the strategies, etc.”, as Vladimir Smerkis, company’s managing partner told me once in an interview. 

That was done to avoid legal complications. Tokenbox will not manage the money anymore, but rather monitoring all the activities and developing a user-friendly ecosystem for launching your own fund and investing in crypto assets. 

Still, 2018 didn’t bring much success to the project’s roadmap, so they are currently stuck in the midst of cost-optimization efforts trying to make ends meet while building the product. 

22X Fund 

An exciting investment opportunity that was supposed to allow anyone to invest in top-notch Silicon Valley startups. The startups were graduates of The 500 Startup Accelerator program, known for accepting only 2% of all applicants.

The Fund intended to raise $35 million from accredited investors from the United States (minimum investment during the main sale starting from $50,000) and all the rest from the other countries ($5,000 minimum investment for the main sale). The security coin offering is over, but it’s not entirely clear how much money was raised. The last update from the corporate blog is dated by March 2018. 

I addressed some questions to Santiago Bibiloni, who was listed as one of the project’s co-founders at the time of researching this story. But he never reached back. A week later his picture was deleted from the team’s section. Bibiloni’s LinkedIn profile still lists X22 Fund’s co-founder position as current.

The future of tokenized venture capital funds

Carlos Domingo, from Securitize.io, has some positive expectations about tokenizations of assets: “We anticipate that more assets will be tokenized. As far as predicting, it’s possible that in the future every significant asset will be tokenized. We are ways away from realizing this possibility, but there will be a tipping point where tokenized assets outnumber non-tokenized.”

How soon will it happen in your opinion? Go ahead and share your best bet in the comment section below.

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cryptocurrencies

Legendary venture capital firm Andreessen Horowitz is preparing to launch a new fund that will invest exclusively in cryptocurrencies and other related endeavors.

Tech news outlet Recode reports that the prominent Silicon Valley firm is hiring staff for a “separately managed fund focusing on crypto assets,” which will be the VC’s first dedicated solely to this nascent industry.

That said, Andreessen is no stranger to cryptoasset investing. The firm has invested in cryptocurrency unicorns Coinbase and Ripple, as well as smaller ventures such as CryptoKitties, one of the most popular Ethereum-based decentralized applications (DApps). Andreessen has also provided backing to Polychain Capital, one of the larger cryptocurrency hedge funds.

Little else is known about the new fund, including how large it will be and whether “crypto assets” refers to cryptocurrencies and tokens exclusively or also includes cryptocurrency companies.

Notably, one of the positions for which Andreessen is hiring is a lawyer, who will be responsible for navigating the murky regulatory environment around cryptoassets. In particular, he or she will determine whether prospective investments are compliant with Securities and Exchange Commission (SEC) regulations.

In March, representatives from Andreessen Horowitz attended a meeting with SEC officials along with fellow members of an industry working group. Sources familiar with the meeting — which was also attended by representatives from Union Square Ventures — said that the working group pressed the SEC to provide formal guidance that ethereum and a number of initial coin offering (ICO) tokens are not securities under federal law, but the agency was hesitant to grant this broad exemption.

The other new hire, a finance manager, will assist the firm in collecting investments from its limited partners. He or she will also face the difficult challenge of assigning valuations to prospective cryptoasset investments — a tall order given the novelty of the space.

Andreessen has not yet announced the new fund publicly.

Featured Image from Pixabay

Blockchain

Venture capital firm Andreessen Horowitz and hedge fund company Polychain Capital are investing $61 million into a non-profit organization that wants to develop a decentralized ‘Internet computer’ using the blockchain.

Swiss-based DFINITY Stiftung has announced that $21 million of the $61 million will go toward the development of the network, with the rest of the funding allocated to DFINITY’s Ecosystem Venture Fund, reports Reuters.

According to its website, DFINITY is ‘building a new kind of public decentralized cloud computing resource,’ which ‘rests upon a new blockchain computer that is similar in concept to Ethereum but has vastly improved performance and, ultimately, unlimited capacity.’

The funding invested by Silicon Valley VC firm Andreessen Horowitz (A16Z) and San Francisco-based Polychain Capital brings the total project funding to over $100 million.

Speaking to Business Insider, Dominic Williams, DFINITY’s president and chief scientist, said that DFINITY’s next-generation technology will allow applications and companies to be built on a decentralized ‘cloud 3.0.’

We’re building a system that will enable the Internet to act as a giant computer, he said. It will be an open protocol, it won’t be supported by a company, it will be supported by whoever connects their computers to that protocol.

Williams states that the Internet computer is interesting for a number of reasons: it can host traditional business systems by acting as a cloud and it will provide an alternative hosting platform compared to Amazon or Google Cloud.

It will provide a different kind of technology stack, he added. The total cost of ownership of these business systems will be dramatically lower.

According to the website, supporting human capital required could see costs cut by as much as 90 percent.

In addition to businesses, Williams is hoping that decentralized applications will be built on the DFINITY network, such as Uber, Dropbox, or eBay, according to a company statement.

The DFINITY team is truly exceptional, said Ryan Zurer, Venture Partner at Polychain. What DFINITY is building represents one of the most important technological innovations that we have ever seen since the very creation of the blockchain.

Some of the funding is also expected to go toward creating a ‘NASA for decentralization.’

Williams explained that with millions of companies on the Internet computer it requires a ‘team of thousands of people’ to analyze the performance of the computer as well as search for security threats.

The team is hoping for a beta version of the network to be up and running later this year.

Featured image from Shutterstock.