Venture Capital Done Differently.
VCs are an exciting investment class enabling new technologies to disrupt how we live. But, the door to VCs remains basically shut to non-millionaires. Can we change it?
In the last 3 years, the hype around blockchain has made it into something of a digital messiah. Anything, or so it seems, can be improved or resolved with blockchain ... the magic formula … the unique solution to everything. And so, you will be forgiven for doubting me, if I tell you that venture capital industry could be improved with blockchain.
Blockchain is not intuitive. It is (as well as the growing number of professed use cases for it) difficult to understand, but also very exciting, which in combination turns it into a dangerous investment proposal. Many ICOs are little more than phantasies with no real business basis behind.
Blockchain can actually make simple things harder. Some whitepapers describe complex multi-tiered token models to solve relatively simple problems in the real world. It is surprising, then, that some very complex areas can actually be simplified with blockchain. One of them are alternative investments.
Alternative investments is a class of investment that is accessible only to a few super-rich. Think, premium real estate development, private bond placement, private equity or venture capital. The idea that various types of alternative investment can be liberalized through tokenization is gaining momentum.
Tokenization is the process of representing real-world assets on the blockchain. It is one of the most intuitive and provocative use cases for blockchain that is expected to vastly broaden access to and tradability of investments for smaller investors.
Think of it as securitization made far more efficient by elevating it onto the blockchain. In essence, tokenization means to take real assets, and issuing a tradable tokens that give its holders rights over these assets on the blockchain. The expectation is that this process can make traditionally inaccessible and illiquid assets (read those ones that offer most attractive returns) available to a much wider pool of investors.
In the traditional financial world, offering alternative asset investments to investors is a complex and work-intensive process. Preparation of offering and subscription documents, often required to be shaped to the needs of each individual investor, and the vast number of operational tasks such as Know Your Customer (KYC) and Anti Money Laundering (AML) cost time and money.
The promise of tokenization is that this workload can be ‘automated away’ through the use of smart contracts, but also that it can make real-world assets decisively more liquid. Traditionally, alternative investments are illiquid by nature. They are placed privately and only to investors that qualify. They can only be traded (if at all) among investors that meet certain criteria. Managing differing holding periods for different investors, as well as assignment of the ownership rights from one investor to another are all work-intensive uneasy tasks. All these inefficiencies apply to traditional VC funds.
All of this may become streamlined with tokenization. Smart contracts built into tokens will assess the investors and the underlying asset and transfer ownership only if the transaction qualifies. The benefits are obvious. Suddenly, a much wider investor group could enter, but also easily exit these alternative asset classes. A middle class investor could own 1% of a premium real estate property in Manhattan.
Venture Capital Liberated.
With its booming (and sometimes spectacularly crashing) tech sector, U.S. has infected the rest of the world with its love for technology. Venture Capital is an attractive asset class. Some VCs have made astronomic returns for their investors, betting on the giants of today, including naturally the famous FAANG complex. Being invested in one of the disruptive and cool companies of tomorrow can also be a mark of prestige for some investors.
It is therefore understandable that many smaller individual investors would also like to invest in VCs and have a share in that ‘next Google’. Unfortunately, the door to VCs remains basically shut to non-millionaires. The biggest limitation of the VC model from the perspective of smaller investors is that VC funds are illiquid. They usually require a 7–10 year lock-up period, which basically drives out any non-institutional or middle-class investors. In other words, VCs are restricted but to a few who can afford to ‘forget’ their money for more or less a decade.
Can we change it?
Tokenizing a VC fund does:
- allow investors to trade their stake in the fund, so they can exit whenever they like;
- give investors the assurance that the token they own is a regulated and approved investment product subject to the applicable laws.
We are not alone. Fund tokenization is a nascent but promising new sector. As pioneers in this space, we at bardicredit pursue a regulated and supervised approach.
bardicredit is a member of the Alternative Investment Management Association (AIMA), a global association of hedge funds, private equity and VC funds with more than $2 trillion under management.