In the recent past, an exciting dynamic between venture capital (VC) and blockchain technology has developed. VCs went from ignoring digital currencies to being left out of the ICO action, to repossessing the throne, and finally, starting to link in interesting ways in the crypto space.
Venture capital funds are one of the main ways that startups can secure funds from accredited investors, such as investment banks and other financial institutions. Although monetary investments are the common form of VC, technical and managerial expertise can also be offered.
Why should investors decide to invest their money into a business that has only been in existence for a few years, even months? The answer is that there is always the potential of above-average returns, and any long time investor would rarely say no to profits of three or four times the initial investment.
Besides, investors are often given equity in businesses they have ventured into, giving them some privileges of participating in the business decision-making process to ensure their investments are well utilized.
For startups, venture capital investment is mostly the only option for funding, especially if the firm does not have access to other means of raising capital, such as through capital markets and bank loans. With more and more startups seeking capital from big VC companies, standing out from the crowd can be a challenge.
Timing is everything regarding VC funding, and startups must offer a product or service that proves it can create revenue at a rapid growth rate. According to Crunchbase, July 2018, “set a record for the number of nine-figure rounds to raise globally, with $15 billion in venture capital deal flow.”
Traditional VC funds naturally have a less democratic nature. Investing is often limited to a few elites that fulfil certain conditions. However, the VC sector has experienced an exciting change as a result of blockchain technology in the last few years (particularly concerning openness and inclusion).
Blockchain opens up the world of VCs beyond banks and accredited investors, making it easier for more investors to join. With ICOs, many companies have raised funds from the public but with zero regulation and more than zero scammers, and the imminent future of STOs seems much promising.
Tal Elyashiv, Co-Founder and Managing Partner at SPICE VC, says that blockchain has made it possible for some new funds to accommodate thousands of investors, compared to the tropical ten to twenty LPs of a traditional VC. “It allows investors to enjoy the benefits of investing in a VC fund while risking much smaller amounts than required for taking part as LPs in a traditional VC fund.”
When investing via a traditional VC company, there are high chances that the business you are investing in will have a functional product and/or market strategy, assuring investors that there will be an actual return on their investments.
Nevertheless, this is not always the case, and some investors encounter low liquidity for their investments. The length of time taken to see an actual return on investment can be a deterrent for investors; but, if a business fails to secure adequate funding, their performance will be below average, with profits following suit. Just like in any other investment, there is always a risk.
According to Alexander Tkachenko, Founder and CEO of VNX, a platform for tokenized VC assets, traditional VCs are known to be illiquid. “They normally lock up an investor’s capital for 10 to 12 years, and coupled with other restrictions deny access to this asset class for the majority of the world-be investors.”
Since 2017, most high-end startups have been connected to some top tier VC, thanks to blockchain technology. Most of these projects launched with VC funding, but without an actual product or service, just a whitepaper. This is contrary to how VCs traditionally operated with the mind-set of ‘prove me your product, and I will venture on adoption.’
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