Tokenization of VC Fund: Attracting the Initial Capital Through Tokenized Equity

May 18, 2020

The venture capital market is an ever-growing phenomenon. According to Crunchbase, between 2010 and 2019, over $1.5 trillion was invested in venture capital deals worldwide, with most of that coming in just the past few years.

In 2019 alone, roughly $294.8 billion was invested in nearly 32,800 deals.

VC funding is a fascinating landscape. There are early-stage funds, late-stage funds, specific technology focussed funds, corporate funds and so many more.

VC funding will still be a growing phenomenon in the next years. However, it’s not the gigantic numbers or success stories we are going to talk about today. But a daily routine of the most VC firms, especially new ones, we are going to talk about — finding capital to operate the VC fund and how tokenization can change the current approach.

Where the Money Comes From Now

Starting the new VC fund or a firm is never an easy task. Brilliant track record and expertise of the firm or fund managers are essential but like all funds, venture capital funds must raise money prior to making any investments.

As venture capital firms can be separated between the management company and the funds it raises. Each fund within one firm might be different with own timeline, investment goal, and management philosophies. So, VC founders have to pitch investors and raise money continuously.

VCs raise money from numerous entities: large corporations, banks, professionals, other venture funds, charities, government/corporate pension funds, high net-worth individuals, endowments, and insurance companies.

So a large part of the money (roughly 85%) for the VC industry comes from institutional (e.g. pension funds, endowment funds, etc) with only around 15% coming from ultra-high net worth individuals. Another problem for the emerging VC fund is that the large investors prefer to work with large VC funds which in turn invest in later stages startups. Basically, sources of funding for a certain VC fund are limited and there is not much room for new sources in the traditional system.

On the other hand, there is a growing retail investment market which is limited by only a few investment options. And when it comes to new businesses, they are limited to crowdinvesting and crowdfunding. Why VCs aren’t going for them? Unfortunately, current regulations in most jurisdictions don’t allow them to directly participate in VCs. Additionally, the number of participants is usually limited by regulation as well. With this in mind, we have prepared a solution that will benefit both parties.

How Tokenization Can Assist VC Funds in Attracting Funds

Tokenization allows retail investors to participate in such initiatives that weren’t available for them previously, and right now it is mostly applicable to long term investments. For example, Elevated Returns raised $18 million for Aspen Digital, a tokenized real estate offering that provided investors a small ownership stake in the St. Regis Aspen Resor in 2018. With such investments being previously unavailable for retail investors, it shows perfectly how tokenization can disrupt closed markets.

Now, let’s get back to VCs and our approach. As we see a growing demand for long-term investments among retail investors and a lack of new funding channels for venture capitalists, we would like to offer VC firms an opportunity to attract money in a whole new way.

First, we partner with a VC firm, discuss the amount of money that they plan to attract for a certain fund and then open an SPV that will later become a Limited Partner of the aforementioned VC fund. After that, in partnership with a VC firm, we issue tokenized equity of an SPV, help prepare a whitepaper and other marketing materials that will cover the exact plans of a VC fund, current track record, and background of a firm. Simultaneously, our legal partners help to prepare all the necessary paperwork including the subscription agreement that covers the relationship between the company and investors.

As soon as everything is ready, we start a campaign on Tokenomica and raise capital for the VC fund. After the campaign is over, equity holders become full-fledged beneficiaries of the SPV which now becomes the LP of a fund. In the future, when the fund becomes profitable, it pays profits to the SPV which are then distributed among equity holders. So in the end, we have a successful fund and retail investors that profited from a VC-type investment.

What are the Benefits?

First of all, equity holders are now able to profit from the activity of a VC fund — an opportunity that previously was never available to retail investors. But unlike traditional LPs, they will also be able to sell their assets on the secondary market. Additionally, it’s hard to ignore the fact that the investment will be managed by professionals, as the management of a VC fund is done mostly by a VC firm.  As for VC firms, they gain a whole new way to attract capital with minimum cost.

What do you think about our new concept? Share your ideas in our Telegram chat and we will be delighted to discuss it with you! If you planning on launching your VC fund, work for one or launched one, feel free to contact us at [email protected]!