THE LONG & SHORT OF IT: A BULL’S CASE FOR TOKENIZED VENTURE DEBT
Traditional Venture Debt v Tokenized Venture Debt
Startups and high-growth businesses are faced with the question of how to finance and plan for growth. Thankfully there is an abundance of funding options. Today there are many ways founders can finance growth, based on business model, strategy, goals, and timeline.
Enter venture debt.
Venture debt is a loan from either a bank or a fund to a company. There were only a few funds offering it in the early 2000s, as it looked more like mezzanine debt with high interest rates. Very few companies could actually benefit from it.
Today the venture debt landscape offers a founder friendly path to funding: light warrant coverage, mild to non-covenant agreements, and lower interest rates.
Today venture debt provides a very cost-effective way to raise non-dilutive capital. Venture debt term sheets are much simpler than an equity term sheets, companies pay down the debt with interest over time, just like an individual paying down a car loan.
Venture debt is a strategic tool for leverage, entrepreneurs can use it to extend runway and set themselves up for future equity raises. Venture debt can also be a post Series A insurance policy. Most companies don’t hit their projected targets in their business plan, venture debt provides capital incase they miss the mark.
Benefits of venture debt:
- Cheaper cost of capital compared to equity funding
- Investing firms won’t take a board seat
Downside to venture debt. If the company defaults, the venture debt fund can call in the loan and force liquidation of the company.
What benefits could blockchain technology add to venture debt?
Enter Dharma. (Whitepaper)
Dharma is a protocol that enables decentralized origination, underwriting, issuance, and administration of tokenized debt assets in a highly generic and unopinionated construction.
Using the Dharma Protocol companies can borrow money by issuing debt offerings as tradable tokens. Lowering the cost of capital for issuers and giving investors flexibility. A debt backed token represents a real world financial instrument and its operation within a specific environment.
This process of “tokenization”, will bring private debt markets more liquidity and corresponding economic benefits. Facilitating broader investment and trading in private debt markets as well as greater transparency in ownership and pricing.
Birch Global Lending harnesses the power of blockchain technology and the Dharma protocol to underwrite and originate the venture debt offerings of the future. Dharma’s pioneering use of blockchain technology has allowed the creation of tokens that establish ownership of a debt back financial asset and the information necessary to understand the asset’s history. This innovation overcomes the limitations of legacy finance creating a frictionless market for trading.
Underwriting debt offerings using the Dharma protocol, will reduce the cost of capital, while keeping a traditional venture debt deal structure intact. Using the combination of legally binding off-chain loan documents and on-chain collateralization schemes to mitigate default risk.
Where’s the value in tokenized venture debt?
- Issuers benefit from a global liquidity pool
- Issuers benefit from lower interest rates
- Issuers benefit from broad investor base
- Creditors own a tradable token
- Creditors benefit from on-chain collateral
These tokenized debt offerings will look similar to token sale crowdfunding.
Crowdfunding isn’t going anywhere.
The global adoption various forms of token sales fundraising structures has led to an explosion of new capital formation. Outpacing both the seed and venture capital investment markets with over $13 billion raised this year. Most of the tokens offered in these sales conform to the ERC-20 standard, which allows them to be traded on a number of online exchanges.
The tokenization of debt markets creates greater liquidity, and efficiency. These markets will grow due to the increased accessibility, ease and trustworthiness of data. Birch Global Lending will focus on the middle market debt space offering the benefits of tokenized venture debt to company owners seeking to expand or increase their runway.
About Birch Global
Birch Global and it’s origination business is in a unique position as a potential disruptor in the venture debt space. Unburdened by legacy finance, blockchain technology provides a differentiating strength that will save clients on the cost of capital.
Leveraging the Ethereum based Dharma protocol, Birch Global seeks to democratize venture debt funding, exposing our clients to a global liquidity pool. Emerging tokenization technology has the potential to disrupt global debt markets, Birch Global plans to seize this opportunity and capture market share.