Blockchain Use in Venture Capital Investing

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In 2012, the Kauffman Foundation released a report titled “We Have Met the Enemy… And He is Us.” The report contains research from 20 years of the Kauffman Foundation’s investments in venture capital (VC) Funds. Unfortunately, the report found many issues with the current venture capital system.

VC Fund Background

Typically, General partners (GPs) manage VC funds. The GP raises the fund by collecting investments from limited partners (LPs). Then, the GP decides the companies in which the fund will invest. The GP receives a management fee as well as a percentage of the return on investment. The management fee is typically 2% of the fund size.

Blockchain Solutions

The most significant problem with VC funds is they do not return investments. 93% of Venture Capital Funds do not return 2x capital. In many funds, GPs take large percentages of any early exits. If the rest of the investments in the fund do poorly, the GP must pay the LPs back. If the GP has already spent the money or the fund is under new management, LPs can lose their money.

Tokenized Funds

The easiest way to implement blockchain solutions into the VC system is through tokenized funds. A tokenized fund would have LPs buy fund tokens. The current VC fund model is extremely illiquid. Investors have to wait until a company exits, or the life of the fund is over to cash out. Therefore, many limited partners must wait ten years or longer to determine if they are making the right investment. Many funds also have very high minimum investments, which makes it difficult for limited partners to diversify their holdings. Thankfully, tokenized funds provide a solution. If people believe in the fund, the token price will go up. For example, if an investor decides they would rather invest elsewhere, they sell their tokens at the current market price. Alternatively, an investor can buy more tokens and increase their share of the fund. When a company exits, the returns go back into the fund. Also, a tokenized fund eliminates minimum investments. Likewise, any accredited investor can buy tokens and invest in the fund.

The Future of Venture Capital

Hackfund, Blockchain Capital, and Swarmfund are all successful tokenized funds. Typically, tokenized funds are evergreen funds, meaning they do not have a set life. Typical 10-15 year funds push startups to scale quickly and exit early. Tokenized evergreen funds allow investors to cash out in the secondary token market and support stable growth.

Venture capital investing is problematic and does not return investor capital. Fortunately, tokenized funds and blockchain solutions can solve these issues. Venture capital provides the means for startups to create disruptive solutions. Furthermore, it’s time for blockchain to disrupt the venture capital system.

The easiest way to implement blockchain solutions into the VC system is through tokenized funds. A tokenized fund would have LPs buy fund tokens. The current VC fund model is extremely illiquid. Investors have to wait until a company exits, or the life of the fund is over to cash out. Therefore, many limited partners must wait ten years or longer to determine if they are making the right investment. Many funds also have very high minimum investments, which makes it difficult for limited partners to diversify their holdings. Thankfully, tokenized funds provide a solution. If people believe in the fund, the token price will go up. For example, if an investor decides they would rather invest elsewhere, they sell their tokens at the current market price. Alternatively, an investor can buy more tokens and increase their share of the fund. When a company exits, the returns go back into the fund. Also, a tokenized fund eliminates minimum investments. Likewise, any accredited investor can buy tokens and invest in the fund.

The Future of Venture Capital

Hackfund, Blockchain Capital, and Swarmfund are all successful tokenized funds. Typically, tokenized funds are evergreen funds, meaning they do not have a set life. Typical 10-15 year funds push startups to scale quickly and exit early. Tokenized evergreen funds allow investors to cash out in the secondary token market and support stable growth.

Venture capital investing is problematic and does not return investor capital. Fortunately, tokenized funds and blockchain solutions can solve these issues. Venture capital provides the means for startups to create disruptive solutions. Furthermore, it’s time for blockchain to disrupt the venture capital system.

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