Demystifying How Venture Capital Firms Invest in Blockchain Technology
Many individuals think that Venture Capital Firms (“VCs”) approach investing in Blockchain Technology in a new and novel way; however, in many cases these firms ultimately end up holding coins or tokens just as the average investor does.
In traditional venture capital investing, VCs provide capital for a stake in the pre-IPO startup they are investing in; however, in many cases the organization that creates a token is non-profit or a loose affiliation of programmers; therefore, VCs cannot always invest via their traditional methods.
Enter the SAFT, also known as a Simple Agreement for Future Tokens. In a SAFT deal, VCs invest a certain amount of money in a startup or organization in exchange for its promise to one day give the VC a set amount of tokens it sells in an ICO.
Typically, organizations creating a token for the first time will sell them in an Initial Coin Offering (“ICO”). ICOs are similar to initial public offerings (“IPOs”) in that they present a way for a company to raise money from the public. In an IPO, a company typically sells equity, or ownership stakes in the company to the public for this first time. In an ICO, a company sells its token. After an ICO, the public can buy, sell or hold the tokens in the same way that they can buy, sell, or hold the stock that they purchased in an IPO.
The SAFT allows VCs to invest in the success of the underlying technology, not the startup that is responsible for creating a particular token.
This distinction is an important one. When the organization that creates a token is a loose group of programmers, a non-profit, or in Bitcoin’s case an anonymous programmer or group of programmers, the only way to take a stake in the technology is to hold the token.
Additionally, in many cases, the group responsible for the token will hold the majority of issued tokens after the ICO. This is important because by holding a large share of the tokens, the group has a financial incentive to increase the price of their token through further development work and applications for their particular technology.
Therefore, by holding a token an investor is essentially aligning their interests with the company in an analogous way to how one would align their interests with the company by holding an ownership stake in it.
So the next time you think about purchasing and holding coins / tokens, don’t think of it as buying a speculative asset, but rather as you aligning your interests with the group or developer team responsible for the respective protocol’s success.