What if any individual could invest alongside a VC firm in the sexy startups they select and with the same conditions?
In this post, I would like to propose the idea of a STO platform owned and managed by a VC firm. The tokens issued by STO would be linked to the VC-backed startup and correlated to its business performance.
Imagine a digital platform allowing anyone to invest in a startup going through a Security Token Offering (STO) at the same time that the startup raises funds with a VC investing in its equity.
When a privately-held company (from startup to SME) issues security tokens on the market, it is called a Security Token Offering or STO. It is a similar process to an Initial Coin Offering (ICO) where an investor exchanges money for coins or tokens representing their investment. However, unlike an ICO, the STO goes even further and distributes tokens that have the status of financial securities complying with local government laws and regulations (while ICOs are not subject to). Security Tokens can be linked to an underlying investment asset, such as stocks or bonds.
A company can issue different types of Security Tokens such as Equity Tokens or Debt Tokens.
Equity Tokens holders are similarly entitled to a company’s profit, and can have the right to vote like a shareholder. The main difference between a traditional stock and an equity token is how the ownership information is recorded. Equity Tokens will be recorded on the blockchain, while traditional stocks are printed on certificates and/or stored in a database.
The first STO was launched by Blockchain Capital (BCAP) on April 10, 2017. The STO raised $10,000,000 in a single day. Since then, STOs have continued to gain momentum in 2018 and 2019 to date. (To learn more about STOs, check out this link )
Obviously, this model only works if all 3 parties involved find a strong interest in it. Let's look into it.
Benefits for the STO investors
We've established that the model is virtuous for STO investors. But what's in it for the VC investor? Why would they let strangers in on their best deals?
Benefits for the VC investor
The VC investor actually has much to win with this proposition:
Benefits for the startup
The founders also have an interest in such a model:
Currently, there are some companies offering to startups a digital platform enabling them to raise funds by STO and they also offer live pricing of startup-linked tokens on their secondary market. The live pricing can be based both on supply & demand and in one way or another on the startup's performance.
Take a look at these companies:
VCs may see the STO platforms as a threat to their business just like donation-reward crowdfunding and then equity-crowdfunding were perceived as a threat 10 years ago. Nevertheless, most of these STO platforms have serious VCs as investors in their equity.
Therefore, the next bold move in the VC industry could be a dual model combining VC and STO, or even better, a triple model: Startup-Studio/VC/STO
About the author
Ari Massoudi is a life scientist, former Academic researcher in biomedicine, and serial entrepreneur (education business, food business). Since 2009, he has worked as a consultant for biopharmaceutical startups and their investors.
After a meteoric success in recent years, Vauban has just been acquired by Carta, the American heavyweight of the sector. An exceptional exit for the two friends from the South of France, who agreed to be interviewed by OpenVC for 1 hour.
My goal from this post is for you to come away with a solid idea of what it means to create a financial model for a venture capital fund, complete with templates and examples that you can use for modeling your fund.