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.
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?
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.
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 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.
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.