Liquidity & Decentralization In VC Is Essential
Tokens are a powerful new way of funding companies. The ICO phenomenon presents a huge threat to the traditional Venture Capital (VC) model. They offer an opportunity for liquid investments and faster exits. In 2019 and 2020, funds raised by blockchain startups through ICOs surpassed VC investments in the sector. The primary reason for the rise of ICOs is the difficulty that start-ups face, when they try raise a VC round.
Tokenizing funds removes rigid positions of General Partners (GP) & Limited Partners (LP) and allows them to collaboratively map investment efforts, with more liquidity to invest in even more start-ups. Tokenizing venture capital is even more powerful, and lets early-stage start-ups, not only survive but thrive.
In the last four decades, VCs have helped create some of the greatest companies, like Apple, Microsoft, Google, Amazon and Facebook and in the process made tons of money for themselves and their LPs.
The biggest problem that Venture Capital industry faces is that VC funds are not liquid. Liquidity opens Venture Capital to new audiences, making funds more inclusive. This is a huge advantage because more investors can afford to participate, without the need to forget about their money for 7–10 years. Tokens will be easily tradable on cryptocurrency exchanges. While secondary markets exist for LP positions, they are illiquid and the process can be very slow. In a tokenized fund, an investors can enter, exit and re-enter a fund as many times as they want. If an investor decides they would rather invest elsewhere, they sell their tokens at the current market price.
The biggest problem that Venture Capital industry faces is that VC funds are not liquid. When it comes to investing in private companies, putting money into a venture is often the easy part. It’s getting the money out, hopefully more than what was originally invested, that’s the problem. LPs are locked in for several years and in most cases are restricted from trading or selling their investments to other parties. Invested companies are expected to execute flawlessly for 5–7 years, and provide appreciation on the invested capital, through multiple fundraising rounds. An “exit” through merger or an acquisition is usually the most common way startup investors are able to liquidate their positions. After an exit event, VCs pass back the returns to the LPs.
A VC partnership is a 10-year blind- pool, a long relationship in which investors have limited ability to exit, and no clarity of outcomes. Making VC funds liquid can and will transform the entire industry.
