Thawing VC’s illiquidity problem…

As the current US stock market starts to enter G.O.A.T. territory and continues to steal the limelight, let’s not lose sight of how the venture capital side of things has performed.

VC is soaring, and investment records are being smashed quarter after quarter. Q2 brought with it another 1,110 deals representing $20.4 billion of capital pouring into US startups [4].

Of course, this phenomenon is not limited to America. And there is even evidence to say that the US market may well have slipped to second spot.

During the same quarter Chinese VC funding hit $40 billion across 1,155 deals representing 54 per cent of global investment [5].

Suffice to say, considering the onslaught of VC funding flooding the market, there has never been a better time be an entrepreneur with a good idea pitching the market.

Despite this, one can’t help but wonder, ‘could it be even better?’.

The nature of VC dictates that you are subscribing to a buy-and-hold strategy. As an investor, opportunities to convert your stake into cash are typically limited to an IPO or trade sale. Depending on at what stage in the fund-raising process the VC entered, this could take anywhere from 5 to 15 years during which time your stake is effectively frozen.

Such an investment horizon severely limits the pool of investors willing to partner with VC funds. When you take into account the geopolitical uncertainty that seemingly poses a threat to equity markets and the low rates that have plagued bond markets, the desire for alternative asset classes has never been higher. With better liquidity, it’s likely that VC would be desirable number one.

And with the pace and magnitude of innovation that is sweeping through tech companies around the world, VCs would almost certainly not face the problem of having too much money. If this ‘illiquidity problem’ had some sort of work- around, the potential size of the global VC market would be astronomical.

Keath Teare’s idea of VC tokenization, Venture Network, has the potential to be such a work-around. Though Teare is clear to say that his idea is “not a crypto fund, its bigger than that”, describing it as such is an easy way to explain it to the layman [1].

The Venture Network white paper summarizes the idea as follows: startup founders and investors are issued with ‘Venture Tokens’ in exchange for equity, which is facilitated through a smart contract. These issues follow a funding event where the value of a startup can be validated. A marketplace is set up where holders of ‘Venture Tokens’ can now trade for the ‘listed’ equity assets thereby enabling the provision of liquidity. This allows founders to diversify their holdings in a quicker and potentially efficient manner while also allowing investors to gain access to a wider array of opportunities without having to engage in a costly fund raising.

This idea remains a concept, though Teare is bullish as it addresses one of the perennial issues of VC investing for the masses. Venture Network is expected to kick start a token sale in the coming quarter.

Whether the idea is a success or not will be determined by the market’s faith in the platform and the integrity of the tokens. Perhaps more so than a traditional startup, convincing people to buy in will be the ultimate challenge.

There is no doubt, however, that Venture Network’s success would bring an entirely fresh layer to VC investing. Opening it up to a wider array for capital providers could very well be the second wave that keeps this bull market going.

 

[1] https://www.forbes.com/sites/rachelwolfson/2018/06/28/silicon-valley-vc-explains-the-tokenization-of-venture-capital-and-role-of-cryptocurrency/#2acb57c2675f

[2] https://www.venturenetwork.io/

[3] https://docsend.com/view/rsyqd3x

[4] https://www.pehub.com/vc-journal/venture-capital-hits-global-record-in-q2/#

[5] https://www.scmp.com/tech/article/2153798/china-surpasses-north-america-attracting-venture-capital-funding-first-time

[6] https://venturebeat.com/2018/06/09/how-security-tokens-are-going-to-disrupt-venture-capital/

[7] https://medium.com/s/understanding-venture-capital/if-you-take-venture-capital-youre-forcing-your-company-to-exit-fc08fcdb32cc

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