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Cryptocurrencies will disrupt traditional venture capital. This is an old topic, but it is always showing new trends.
In the past few months, preachers in the cryptocurrency world were still struggling to say, The prevalence of ICO will make traditional venture capital go away, allowing entrepreneurs to control the fate controlled by venture capital. However, the latest information from Silicon Valley is show,
Traditional investment institutions such as venture capital have not been revolutionized by the encrypted world, they have killed in their own way.
In fact, a real revolution has just begun, and it is likely to be a brand new way to subvert traditional venture capital.Welcome to the wonderful world of encryption!
Traditional investment institutions are not waiting to die, they have entered the pre-ICO private placement stage
A few months ago, traditional venture capital was disrupted by the menacing ICO, and it seems that blockchain projects have a new financing channel, and they can let venture capital go away. but,Recent data shows that the funds invested in the cryptocurrency field have begun to shift more to the private placement and pre-sale stages before ICOs, while the amount invested in ICOs alone tends to decline.
According to data from TokenData, in the ICO conducted in February this year, more than 60% of the funds in the entire ICO process were raised in the private placement and pre-sale stages, which is much higher than before.
In addition, the following figure produced by CBInsight also shows the new financing structure in the blockchain field: In other rounds, the proportion of venture capital participation has increased significantly. This figure
The so-called other rounds actually include the private placement round and token pre-sale stage before the ICO.For venture capital institutions, there are many things to learn.
A pre-sale of tokens is a sale prior to a large-scale public offering of tokens, usually without a fixed structure. In some cases, a pre-sale is a sale of tokens at a discount to early investors, both accredited and unauthorized. In other cases, the ICO team sells a small part of its equity in exchange for external resources to boost its ICO.
ICOs are often expensive, often involving legal, marketing and advisory costs.Only when venture capital-backed blockchain companies conduct ICOs can they afford to pay for these costs.
In other cases, venture capital institutions choose to participate in blockchain project investment in the form of private placement. In private placements, accredited investors buy tokens through a cryptocurrency purchase agreement, commonly a SAFT contract.
The SAFT contract acts as a token option contract, and once the blockchain network is deployed, the options can be redeemed into tokens.This way, the start-up does not need to sell its equity, but only some options on the tokens that are part of the blockchain project. Option vesting may not occur until several years after the ICO.
The increase in token pre-sales and SAFT contracts reflects that venture capital institutions do not want to be abandoned by the encrypted world, and they are eager to get a share of the encrypted currency economy.It is worth noting that, according to CBInsight’s statistics, for those start-up companies that went public in 2017, the average time from the first venture capital financing to listing was about 9 years. In contrast, tokens can be traded on exchanges very quickly, often before the mainnet goes live, bringing extremely fast liquidity.
The SAFT contract may realize token redemption within one to two years, bringing faster liquidity to venture capital institutions.
The asset entrustment agreement of many venture capital institutions restricts investment in specific asset fields, that is, unlisted companies.SAFT contracts and some pre-sales may become a way for these institutions to invest in tokens without departing from the entrustment of related assets. If they purchase tokens from exchanges or directly through ICO, there is a risk of violating this entrustment agreement.
Blockchain companies are less dependent on ICOs
At the same time that venture capital enters private placements and token pre-sales, it has become a clear fact that the ICO boom has cooled.According to CBInsights statistics, in April 2018, there were 125 ICOs in the market, raising a total of about US$600 million in funds, which has decreased significantly compared to December 2017. In December, there were 215 ICOs on the market, raising $1.2 billion. Calculated in terms of the scale of funds raised, there is also a downward trend. Of course, this has to exclude the private placement of Telegram and the one-year ICO of the EOS project.
These numbers are somewhat belated signals and should be taken as a warning.
As the most representative case of venture capital institutions favoring token pre-sales, Telegram raised a very high amount of funds through private placements, so that it gave up ICO. The encrypted messaging service raised $1.7 billion from 175 private investors in two rounds of private placements.They are selling cryptocurrency purchase agreements, not securities.
Another blockchain team, Basis, Basecoin, has raised $125 million from 225 investors through SAFT contract sales since the end of the first quarter of this year, which is also a typical case. Basis plans to create a stablecoin that it hopes will be less volatile than all current cryptocurrencies.
There are pros and cons to token pre-sales.
On the one hand, they are relatively risky, and regulators have not adequately regulated them. On the other hand, they transfer risks to qualified investors and venture capital institutions, which is a good thing for consumers and regulators.As regulators continue to crack down on public ICOs, industry players widely expect the trend of venture capital funds to move to token pre-sales and private placement stages to continue.
「Security tokens will be a new species that subverts traditional venture capitalIndeed, the token economy has arrived, and venture capital is adjusting its posture and actively participating in it. In the coming years, tokens based on blockchain technology will provide venture capital funds with new tools to raise capital and maintain control over their investor base.
Security tokens may be a new species that subverts the traditional venture capital industry.
Security Tokens are digital tokens that are fully compliant with regulatory requirements and can be used to represent ownership of any asset
, such as a fractional interest in a venture capital fund.
In venture capital, the usual contractual model between a fund and its limited partners is to lock up capital before cashing out. Since the assets of the fund are usually investments in start-up companies, their liquidity is low. If the fund needs to meet the redemption requirements, the fund will face extremely high costs. The characteristics are passed on to the limited partners.However, this illiquidity is clearly not ideal for either the fund or its investors. Blockchain technology has the potential to play a role in disrupting this model.There are already some cases in the market. In 2017, Blockchain Capital raised $10 million by issuing a blockchain token, BCAP; BCAP investors can cash out 10 years in advance by selling the tokens to other investors in the secondary market. Josh Stein, Harbors CEO, has found that this way, the fund can lock in capital without locking in investors.
In order for the company to be able to easily trade the fund “shares” it holds legally and compliantly, two major reforms must be implemented:
There are compliance protocols and regulated trading platforms.Neither of these aspects existed when BCAP was introduced, but are starting to emerge now.
The infrastructure to support the security token ecosystem is already in place
Security Tokens Will Completely Reshape Global Asset MarketsTaking the securitization representative start-up company Harbor as an example, McKeon analyzed some possibilities for the development of securities ghostwriting.
also,Harbor, a blockchain company that specializes in helping companies legally issue cryptocurrency tokens representing ownership of real assets such as real estate, art, company equity, and investment funds, hopes to launch the first client-side R-Token platform this summer. These tokens are ERC-20 compatible, so they can be sold on many cryptocurrency exchanges and stored in major wallets.Harbors R-Token protocol not only controls the compliance of the initial issuance, but also involves the secondary market.
also,
Security tokens need to have a trading venue, and regulated security token trading platforms are now starting to come online,Includes Open Finance, tZero, and Templum. These two aspects took shape, indicating that the first generation of infrastructure for this ecosystem is about to be in place.
McKeon said the future crackdown will see more funds bypassing the traditional limited partner model and instead raising money through crowdfunding via regulated security token offerings. This will be a new development model for venture capital institutions.
One stimulus for this “tokenized” fundraising is the concept of an “illiquidity discount,”
That is, under the same conditions, assets with higher liquidity are more expensive than assets with lower liquidity because investors demand a higher risk premium to compensate for the weakness of illiquidity.Market barriers are being removedSeeing these changes in the industry, venture capital fund managers and investors certainly have reason to have many questions. They usually have questions about the theft of cryptocurrencies, the management of shareholding structures involved in the use of security tokens, information disclosure and legality. worried.
As far as theft is concerned, in most cases,Security tokens cannot be hacked or suffer irreversible losses like bitcoin or ether.
Under U.S. federal law, tokenized securities are recognized legal securities subject to title protection. There will also be mechanisms for recovering funds, such as cancellation or reissuance.Another concern is losing control of the cap table. Some venture funds dont care and are willing to expand the investor base, for example, to all qualified investors. Other funds may want to retain some control over who can invest. Implementing an automated compliance program like Harbors might alleviate that concern, McKeon said. Someday, funds will be able to create custom whitelists, such as a list of accredited investors, or specific attributes that investors are required to possess. But there are pros and cons.
The more restrictive the whitelist, the fewer potential participants in the secondary market.For legality, the advantage of security tokens is that they are very easy to define. The previous ICO craze raised a lot of questions about the definition of a security, but if a VC fund that uses security tokens to realize tokenization does not have the problem of vague definition, it is a security itself. Therefore, any legitimate issuer will be subject to securities regulations, which in the US may opt for a different SEC exemption. There are pros and cons to each provision, but both security token exchanges and automated compliance protocols can be employed. Professor McKeon pointed out,
