Evolution Of Venture Capital Structure In The Age Of Blockchain

Venture Capital funds are one of the primary ways that startup companies and small businesses can earn financing from accredited investors, including investment banks and other financial institutions.

While monetary investments are the primary form of venture capital, technical and managerial expertise can also be provided.

Why would investors choose to put their money into a company that’s only existed for a few years, even months?

The simple answer is that there is always the promise of above average returns, and any long time investor would have trouble saying no to profits of three or four times the original investment.

Additionally, investors are often given equity in companies they are investing in, giving them some power and say in important business decisions so that they can make sure the money they gave is well spent.

For newer companies, investment from venture capital is usually the only choice for funding, especially if the company does not have access to other means of raising money, such as through capital markets or bank loans. With more and more startups seeking capital from large VC firms, standing out from the crowd can be a challenge.

Timing is everything when it comes to VC funding, and startups must have a product or service that will prove it can generate revenue at a rapid growth rate.

According Crunchbase, July 2018, “set a record for the number of nine-figure rounds raise worldwide… [with] $15 billion in venture capital deal flow, July was a good time to raise $100 million or more.” And while VC firms will continue to be a popular, if not the go-to means for startups to raise funding, there has been a noticeable shift in the industry in the last few months.

Traditional VC funds naturally own a less democratic nature. Investing is not open to all, but rather a few elite that meet certain criteria. The VC industry has undergone an interesting year because of blockchain technology, especially when it comes to openness and inclusion.

Blockchain technology opens up the world of VCs beyond financial institutions and accredited investors, making it so that more people can invest and join. With ICO’s, thousands of companies have raised from the public but with zero regulation and more than zero scammers, and the upcoming future of STO’s actually seems much more promising.

Tal Elyashiv, Co-Founder and Managing Partner at SPiCE VC, tells me that thanks to the blockchain, some new funds are able to accommodate hundreds of investors, compared to the tropical ten to twenty LP’s of a traditional VC.  “It allows investors to enjoy the benefits of investing in a VC fund while committing much smaller amounts than required for participating as LPs in a traditional VC fund, allowing for much more participation of investors in the fund.”

When investing through a traditional VC firm, chances are the company you are investing in will have a working product and/or market strategy, giving investors the promise that there will be an actual return on the money they are spending.

However, this is not always the case, and some investors struggle with the lack of liquidity for the investments that they provide.

Lack of liquidity is a catch-22. The length of time required in order to see an actual return on investment can be a deterrent for investors; however if a company does not receive enough funding, their performance will be low and with profits following suit. As with any investments, there is always a risk.

“Traditional VC’s are known to be illiquid, ” tells me Alexander Tkachenko, Founder & CEO of VNX, a platform for tokenized VC assets, “They usually lock up an investor’s capital for 10-12 years, and together with other restrictions limits access to this asset class for the majority of would-be investors.”

In order to gain funding from traditional VC’s, an actual product or viable MVP is required to gain the necessary attention from credible investors. Who wants to invest their money in a company with just the promise of a product eventually being delivered?

This is a main reason why the ICO trend has caught everyone by surprise. With the scams and distrust associated now with ICOs in particular, many VCs in the crypto age are hesitant to promote companies that are just a promise rather than a proved success.

“Since mid-2017 most high-end projects have been connected to some top tier VC. Several of these projects launched with VC funding, but without the simplest form of technology and only a whitepaper,” adds Daniel Schwartzkopff, CEO of Invictus Capital, “This is contrary to how VCs traditionally functioned with the mindset of ‘prove me your product, and I will speculate on adoption.”

VC funds have continuously evolved over time, as new changes emerge in the financial landscape. And while the blockchain does provide some important improvements, such as democratizing VC firms and opening them up to more investors than before, the question still remains what will happen to those VC firms if as some people predict, the crypto and blockchain market will not blossom once more.

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