When you ask us what are the main three challenges in VC funding, we would recall: VCs themselves, founders, and markets. Here is why.
“In the entrepreneurial world, startups are killed outright, very quickly, by the equivalent of low stock prices,” said Eliezer Yudkowsky. The author of Inadequate Equilibria book vigorously described how a VC model works: seed investors have a strong incentive to care about what Series A investors think so they choose projects that fit the current trend. For instance, if artificial intelligence is gaining traction, cash will flow to anything with “AI” in its name.
Furthermore, Bob Zider makes a sobering point that venture capital rarely plays a major role in funding the fundamental innovation. In the 1998 issue of the Harvard Business Review, he wrote that VCs invested more than $10 billion in 1997, but only 6% of that money — or $600 million — was dedicated to startups. Zider and his colleagues estimated that less than $1 billion of the entire VC pool went to R&D; the money was rather reinvested in the projects originally developed with a much greater support of governments and corporations. Both contributed $63 billion and $133 billion respectively.
Why should you care
This main problem leads us to the issue with founders and markets. Teams can take advantage of the hype and raise funds, although there is a tiny chance of success. When everyone is framed by “1 out of 10 success ratio” thinking, it leads to false expectations, unrealistic valuations, and, eventually, a vast post-mortem list of unicorns.
As a result, the third issue emerges as a consequence of behavior by VCs and founders: illiquid markets for private companies. Don’t get us wrong: the niche for venture capital exists explicitly due to the complex and overregulated structure of capital markets. Someone with an idea or an innovative product often has no other institution to turn to. However, the current VC approach focuses on the result not the process. This goes down to the teams who experience an incredible pressure and must pursue bigger rates of growth or, perhaps, an additional round of investment.
Digital securities offer an alternative and pragmatic approach possible by the available technology. Instead of funding a “trendy” project and inflating the valuation, we can support dozens of startup ecosystems with money inflow while giving the public investor certain rights, including the right for a dividend or vote. Below we discuss the available solutions.
To start with, there is a US-based Start Engine which allows two options to offering digital securities: Regulation A+ and Regulation Crowdfunding. The first option is often described as a mini-IPO allowing companies to raise up to $50 million in a given year. The second option has a less strict regulation and lets projects to collect up to $1.07 million while launching faster.
SPiCE venture capital was the first fully tokenized VC fund. Their token was also among the first cohort of digital security tokens, and pioneered on a regulated platform, the OpenFinance Network. This allowed SPiCE to create a spin-off project called Securitize to disrupt the US market of securities. Another project we found is SeriesOne. Although this firm has only started gaining traction, it permits the issuance of convertible promissory notes along the digital securities.
Finally, you can go for Israeli FutureBlock which has been developing an entire startup ecosystem: from incubation and acceleration of projects to supporting their growth. One of our portfolio companies — Securer — lets promising startups to create digital securities and focus on the product development, customer engagement, and market penetration, instead of chasing another investment round.