Venture capital provides a great way for entrepreneurs and founders to get the funding they need to start a business. In exchange for funding, entrepreneurs often give equity, a share of future profits, or ownership of future property of the company.
This article has two parts. In the first part, we dive into the current funding landscape. This includes adding info about common practices. In the second section, we dive into how a tokenized fund could use publicly traded tokens to give entrepreneurs quicker access to startup capital at more competitive rates.
How Funding Works Now
For promising businesses just starting out, venture capital firms and angel investors often participate in smaller rounds. These investments are largely concentrated in technology fields like software and biotechnology. The statistics aggregator Statista estimates that 30.16 billion dollars of venture capital is invested in software startups, out of a total of 71.92 billion dollars. VCs and angels aren’t the only players in the fundraising game, however. Private equity firms often buy out companies for larger amounts and streamline operations to increase revenue.
There are other ways to raise capital that don’t involve immediately giving away equity. One newer option for funding is a SAFE, or Simple Agreement For Future Equity. These agreements avoid forcing investors and founders to negotiate company valuations until the next financing round. To avoid overly inflated valuations that dilute investors in SAFEs, a maximum valuation cap for converting the agreement to equity is often agreed on beforehand.
Convertible notes are another option to receive funding. These notes have a reputation for being slightly more complex and can come with catches or “glitches”. For example, convertible notes can contain an interest rate or a specified time of maturity. This can become an issue for entrepreneurs if they fail to reach a certain valuation by a maturity date, since they could end up giving away much more equity than originally intended.
How Funding Could Work
There is no reason why entrepreneurs shouldn’t be able to use token offerings as a way to crowdfund ideas in exchange for equity. In an equity crowdfunding offering, tokens could represent shares in a future company.
Decentralized tokens are already cheaper to transfer and more secure than stock certificates. We won’t go into all the benefits of decentralization in this article, but we’ve outlined the benefits of blockchain technology here. In 20 years, tokens could represent stock in major corporations. They’ll be cheaper to trade, faster to transfer, and more accessible. Brokers won’t get large commissions for executing trades. Instead, these transactions will cost a fraction of a cent and be done on a blockchain. Tokenized equity offerings would also allow the mass market to offer more competitive deals when entrepreneurs wish to raise. By allowing more people to invest in startups and benefit from the creation of wealth outside of technological hubs like Silicon Valley, income inequality would decrease.