With the onset of initial coin offerings (ICOs) and blockchain-based crowdfunding techniques, the venture capital (VC) space is getting crowded. Despite the irrefutable efficacy of ICOs, however, initial public offerings (IPOs) have remained very popular and 2018 is slated to see the highest number of IPOs in recent memory.
The draw of such a model though is logical. Start-ups with proven revenue and operational models can give away small slices of equity and secure enough funding to stay solvent for years. Plus it usually comes with the vital advice of their investing partners as well.
Start-ups give out equity rights to their investors and their employees as well, which are essentially contracts that entitle them to public shares in the company when the company completes its IPO.
Partly due to a record-length bull market and a surplus of cheap credit, companies are going public at an exponentially increasing pace. While one wonders if it can last, 2017 was set to end with 159 companies going public that raised around $38 billion.
According to data from Reuters, last year’s figure compared with 277 companies and about $93 billion raised in 2014, which was the best year since the financial crisis a decade ago.Pointing to the state of play, Jackie Kelley, Ernst & Young Americas IPO Markets Leader, was quoted last December saying:
“We’ll continue to see unicorns trickle out (in 2018), not a unicorn boom year, but a steady stream.” And, at the time it was expected that the U.S. would continue to be an attractive destination for foreign companies looking to tap the public markets through 2018.
Alongside the growing presence of IPOs, a secondary market for these contracts has also sprouted up. Back in 2002, the secondary market for equity rights was worth around $3 billion. Fast forward to 2016 and that number had increased to $49 billion.
In some ways, this secondary market is a bootstrapped solution to an array of problems that blockchain - or distributed ledger technology (DLT) - can solve more effectively.As ICOs and IPOs grow in tandem, it is inevitable that they spill into each other somewhat, yet the former is much less mature and forgiving.
The only investments available with cryptocurrency are in companies with barely developed concepts, which are both unproven and volatile.
And, in its typical mutually beneficial way, some industry protagonists have been arguing that blockchain can help give cryptocurrency investments a semblance of stability, while also lending liquidity and flexibility to a rigid pre-IPO market.
ICOs & Fundraising ICOs are a method of raising money for companies, who usually are implementing blockchain into their future business solutions, by offering their tokens.
These tokens can be securities and act only as an investment, or they can act as utility tokens and have a dual purpose, where on top of acting as an investment, the token can allow the owner to use the services of the company or purchase the product or service of the company at a discount, for example.
Siim Õunap, an FX and cryptocurrency trader, commenting said: “In this light, tokens and coins, are akin to stocks, and they can play a somewhat parallel role. However, this is where similarities end.
”He added: “ICOs are still raw in many ways. That said, in coming the future they will play a huge role - not only in crypto-stock exchanges - but in the whole financial spectrum.
These tokens are bought, sold and traded on crypto-exchanges, which are very similar to the stock exchanges. And, it will not be long before we see cryptocurrencies on the main stock exchanges.”In addition, there are many stock exchanges that are currently looking to integrate blockchain [technologies] into their system, such as the Hong Kong Stock Exchange (HKEX).
And, the Estonian believed that they HKEX “will probably be the first major stock exchange that will undertake this task.” It will “most likely follow”, he further suggested, that cryptocurrencies would make their appearance not far after this implementation.
ICO (initial coin offering) concept featuring digital money cryptocurrency Bitcoin, Litecoin, Ethereum, Dash and Ripple. (Image: Shutterstock).Moving Towards ‘Value-Backed’ TokensBlockchain’s ability to digitize value with tokens is revolutionary, but the cryptocurrency market’s need for stability is catalyzing an emergence of new, physical asset-backed tokens.
Art, real estate and other physical property are some established crypto investment options in the market, yet clearly value does not need to be physical to define it as stable. The entry of blockchain into the secondary private equity market lends credence to this idea and potentially heralds a solution for the tenacious problems plaguing both markets.
As Chaim Schiff, co-CEO of The Elephant (formerly PrivatEquity.biz) founded in 2014 and who practiced international corporate law negotiating multi-million dollar international transactions, has noted: “The connection between blockchain and the growing pre-IPO market will facilitate greater liquidity for buyers who step into the shoes of the sellers in the secondary market.
”He further added: “The market is about to move to its next phase by tokenizing the participation units of the partnerships by creating a dedicated security token representing these participating units, turning them into liquid assets.
”In essence, The Elephant introduces the first security token backed by shares of the most promising private companies (unicorns and high-profile tech companies) around the globe prior to liquidity events.
Aiming to make equity rights liquid at all times through tokenizing, their platform enables shareholders of pre-IPO companies to sell their shares prior to a liquidity event and for investors to invest in such shares via partnerships represented by digital tokens.
Liquidity for Private Equity Rights
One of the most ironic problems is a lack of liquidity for private equity rights, despite their high demand. Investors in private, venture- or angel-funded pre-IPO companies have their options locked up until the company goes public and issues shares to the public. This is only exacerbated by the lengthening time to IPO that many companies experience.
While the standard time from funding to public offering used to be between three and four years, it is now closer to 10. Delaying an IPO is fine for the company itself, since they probably have no shortage of investors, are already in many cases profitable, and want to avoid the significant investment that an IPO represents. However, it is not often that ideal for recipients of equity rights.
This is a catalyst for trends that are visible even in larger companies like Facebook, which had a secondary market in place for its equity as early as 2007 - around five years before it went public.
The fact that an unofficial market had to be created to solve this issue is worrisome, but an even greater concern is the lack of exposure that retail investors need to the post-IPO “value boom”.
Many pre-IPO investors are asked to give hundreds of thousands of dollars at a minimum. But in exchange, their equity rights (when they are eventually redeemed) multiply in value many times post-IPO.
Retail investors do not get access to this wealth creation as evidenced by existing platforms.
Companies like EquityZen, which connects equity rights holders with potential investors, limit access to remain compliant with regulations. Yet even the smallest funds that can afford this model often experience buyer’s remorse. It is simply not feasible to tie up so much capital, only to wait 10 years before realizing profits.
Another idea contingent on blockchain comes courtesy of Funderbeam, an Estonian start-up stock exchange founded in 2013 that is headquartered in London and has offices in Croatia and Singapore alongside the UK and Estonia. Indeed, it has been described as combining the benefits of crowdfunding with a stock exchange.
Companies on the platform of Funderbeam, which has a database of around 180,000 start-ups and investors, can fund their operations and offer tokens on the marketplace as well with the key being that it is that only pre-IPO start-ups that can participate. It is somewhat reminiscent of major stock exchanges like NASDAQ, but exclusively for providing greater liquidity to early stage ventures that are not traded publicly yet.
Spotify is a good example of a company where the stock was traded privately off exchange and staff were granted stock prior a “non-IPO” listing on the New York Stock Exchange early this April.
While there is a secondary market for pre-IPO opportunities that can be found through other outlets and platforms, companies such as global on-demand ride hailing provider Gett (formerly GetTaxi), in which Volkswagen Group announced a $300 million investment back in May 2016, and cloud e-commerce platform BigCommerce founded in 2009, might eventually go public and traded on an exchange like NASDAQ.
Against this backdrop, the blockchain carries many roles that in traditional stock markets are typically provided by intermediaries. Specifically, Funderbeam uses blockchain to secure issuing tokens, trading tokens, keeping track of investors (i.e. cap table management) and clearing the trades. Their platform uses Bitcoin blockchain, utilizing a technology called coloured coins, which are pieces of Bitcoin on top of which metadata is embedded and is recorded in the blockchain.
The coloured coins here represent digital rights to an investment agreement between an investor and the syndicate (or SPV) created to invest in a start-up. So, were an investor to place €100 (c.$120) in a start-up, they will receive 100 tokens (coloured coins) in return, with each coin representing a portion of the rights to the investment agreement.
Not to be outdone, NASDAQ itself is taking a page from blockchain’s playbook, with its upcoming Linq exchange built on blockchain. Linq will be the first blockchain platform from an established financial entity and allow entrepreneurs and VC investors to reap the benefits of a ledger-based asset trading ecosystem.
In a similar vein, companies like Velocity Ledger, which has created a blockchain-based platform for real-estate securities secondary trading that includes some OTC (over-the-counter) accessibility, are looking to cash in on the secondary markets area.By combining the idea of tokenization with the secondary market for equity rights, it will inject liquidity and flexibility and relieve pressure on investors.
For cryptocurrency markets, the addition of new cryptocurrency investment options based in the traditional market should be seen as a boon. It means more stability and maturity as well as further integration with established financial markets and enhanced legitimacy on the world stage.
A Pre-IPO Blockchain MarketplaceCompanies such as The Elephant are merging the “off-chain” and “on-chain” investment worlds, for what is claimed by some the betterment of both. The venture is creating a platform that tokenizes shares of private off-chain companies during the pre-IPO stage, which will open the crypto market to these assets and help it grow towards less volatile investment options.
While those who invested in start-ups gain a liquid market for their previously locked equity, otherwise available only after IPO, cryptocurrency enthusiasts gain a plethora of new, more mature and conservative investments to add to their portfolios.
Elephant’s entire concept is made possible through partnerships between those who buy equity rights from shareholders and make them available via the blockchain. And, it is understood that the company has already signed on over 2,000 accredited investor partners, and plans to help them utilize their valuations and private equity without jumping through the hoops of an IPO process.
Then there are other companies such as BnkToTheFuture that are focusing their efforts on providing a secondary market specifically for companies working on blockchain projects. The company allows traders to buy into private equity of blockchain-based projects, with all records recorded transparently on the blockchain.
As another recent new entrant, Funderbeam is looking to create essentially a secondary stock exchange for pre-IPO equity. And, widening the entrance to the pre-IPO secondary market lowers the threshold to benefit from this market for regular investors, just as blockchain demolishes barriers to entry in virtually every other industry and market.
The idea represents a fresher take on the model that VCs are currently using to enhance their operations. Instead of funding blockchain start-ups in exchange for a set number of their ICO’s coins, or simply buying the coins outright - akin to activities undertaken by Starta Ventures and SPiCE VC - they are incorporating blockchain concepts to benefit an older model.
And, such is the trend pervading nearly every industry and vertical, while blockchain and application of the technology can create a convincing facsimile, it is perhaps better to apply it to existing models than try to reinvent the wheel. Carpe diem.
Follow Roger, an ex-FT writer who has penned various investment stories, on Twitter @AitkenRL, LinkedIn, Forbes, Google+. He won a State Street Institutional Press award in 2015.
The draw of such a model though is logical. Start-ups with proven revenue and operational models can give away small slices of equity and secure enough funding to stay solvent for years. Plus it usually comes with the vital advice of their investing partners as well.
Start-ups give out equity rights to their investors and their employees as well, which are essentially contracts that entitle them to public shares in the company when the company completes its IPO.
Partly due to a record-length bull market and a surplus of cheap credit, companies are going public at an exponentially increasing pace. While one wonders if it can last, 2017 was set to end with 159 companies going public that raised around $38 billion.
According to data from Reuters, last year’s figure compared with 277 companies and about $93 billion raised in 2014, which was the best year since the financial crisis a decade ago.Pointing to the state of play, Jackie Kelley, Ernst & Young Americas IPO Markets Leader, was quoted last December saying:
“We’ll continue to see unicorns trickle out (in 2018), not a unicorn boom year, but a steady stream.” And, at the time it was expected that the U.S. would continue to be an attractive destination for foreign companies looking to tap the public markets through 2018.
Alongside the growing presence of IPOs, a secondary market for these contracts has also sprouted up. Back in 2002, the secondary market for equity rights was worth around $3 billion. Fast forward to 2016 and that number had increased to $49 billion.
In some ways, this secondary market is a bootstrapped solution to an array of problems that blockchain - or distributed ledger technology (DLT) - can solve more effectively.As ICOs and IPOs grow in tandem, it is inevitable that they spill into each other somewhat, yet the former is much less mature and forgiving.
The only investments available with cryptocurrency are in companies with barely developed concepts, which are both unproven and volatile.
And, in its typical mutually beneficial way, some industry protagonists have been arguing that blockchain can help give cryptocurrency investments a semblance of stability, while also lending liquidity and flexibility to a rigid pre-IPO market.
ICOs & Fundraising ICOs are a method of raising money for companies, who usually are implementing blockchain into their future business solutions, by offering their tokens.
These tokens can be securities and act only as an investment, or they can act as utility tokens and have a dual purpose, where on top of acting as an investment, the token can allow the owner to use the services of the company or purchase the product or service of the company at a discount, for example.
Siim Õunap, an FX and cryptocurrency trader, commenting said: “In this light, tokens and coins, are akin to stocks, and they can play a somewhat parallel role. However, this is where similarities end.
”He added: “ICOs are still raw in many ways. That said, in coming the future they will play a huge role - not only in crypto-stock exchanges - but in the whole financial spectrum.
These tokens are bought, sold and traded on crypto-exchanges, which are very similar to the stock exchanges. And, it will not be long before we see cryptocurrencies on the main stock exchanges.”In addition, there are many stock exchanges that are currently looking to integrate blockchain [technologies] into their system, such as the Hong Kong Stock Exchange (HKEX).
And, the Estonian believed that they HKEX “will probably be the first major stock exchange that will undertake this task.” It will “most likely follow”, he further suggested, that cryptocurrencies would make their appearance not far after this implementation.
ICO (initial coin offering) concept featuring digital money cryptocurrency Bitcoin, Litecoin, Ethereum, Dash and Ripple. (Image: Shutterstock).Moving Towards ‘Value-Backed’ TokensBlockchain’s ability to digitize value with tokens is revolutionary, but the cryptocurrency market’s need for stability is catalyzing an emergence of new, physical asset-backed tokens.
Art, real estate and other physical property are some established crypto investment options in the market, yet clearly value does not need to be physical to define it as stable. The entry of blockchain into the secondary private equity market lends credence to this idea and potentially heralds a solution for the tenacious problems plaguing both markets.
As Chaim Schiff, co-CEO of The Elephant (formerly PrivatEquity.biz) founded in 2014 and who practiced international corporate law negotiating multi-million dollar international transactions, has noted: “The connection between blockchain and the growing pre-IPO market will facilitate greater liquidity for buyers who step into the shoes of the sellers in the secondary market.
”He further added: “The market is about to move to its next phase by tokenizing the participation units of the partnerships by creating a dedicated security token representing these participating units, turning them into liquid assets.
”In essence, The Elephant introduces the first security token backed by shares of the most promising private companies (unicorns and high-profile tech companies) around the globe prior to liquidity events.
Aiming to make equity rights liquid at all times through tokenizing, their platform enables shareholders of pre-IPO companies to sell their shares prior to a liquidity event and for investors to invest in such shares via partnerships represented by digital tokens.
Liquidity for Private Equity Rights
One of the most ironic problems is a lack of liquidity for private equity rights, despite their high demand. Investors in private, venture- or angel-funded pre-IPO companies have their options locked up until the company goes public and issues shares to the public. This is only exacerbated by the lengthening time to IPO that many companies experience.
While the standard time from funding to public offering used to be between three and four years, it is now closer to 10. Delaying an IPO is fine for the company itself, since they probably have no shortage of investors, are already in many cases profitable, and want to avoid the significant investment that an IPO represents. However, it is not often that ideal for recipients of equity rights.
This is a catalyst for trends that are visible even in larger companies like Facebook, which had a secondary market in place for its equity as early as 2007 - around five years before it went public.
The fact that an unofficial market had to be created to solve this issue is worrisome, but an even greater concern is the lack of exposure that retail investors need to the post-IPO “value boom”.
Many pre-IPO investors are asked to give hundreds of thousands of dollars at a minimum. But in exchange, their equity rights (when they are eventually redeemed) multiply in value many times post-IPO.
Retail investors do not get access to this wealth creation as evidenced by existing platforms.
Companies like EquityZen, which connects equity rights holders with potential investors, limit access to remain compliant with regulations. Yet even the smallest funds that can afford this model often experience buyer’s remorse. It is simply not feasible to tie up so much capital, only to wait 10 years before realizing profits.
Another idea contingent on blockchain comes courtesy of Funderbeam, an Estonian start-up stock exchange founded in 2013 that is headquartered in London and has offices in Croatia and Singapore alongside the UK and Estonia. Indeed, it has been described as combining the benefits of crowdfunding with a stock exchange.
Companies on the platform of Funderbeam, which has a database of around 180,000 start-ups and investors, can fund their operations and offer tokens on the marketplace as well with the key being that it is that only pre-IPO start-ups that can participate. It is somewhat reminiscent of major stock exchanges like NASDAQ, but exclusively for providing greater liquidity to early stage ventures that are not traded publicly yet.
Spotify is a good example of a company where the stock was traded privately off exchange and staff were granted stock prior a “non-IPO” listing on the New York Stock Exchange early this April.
While there is a secondary market for pre-IPO opportunities that can be found through other outlets and platforms, companies such as global on-demand ride hailing provider Gett (formerly GetTaxi), in which Volkswagen Group announced a $300 million investment back in May 2016, and cloud e-commerce platform BigCommerce founded in 2009, might eventually go public and traded on an exchange like NASDAQ.
Against this backdrop, the blockchain carries many roles that in traditional stock markets are typically provided by intermediaries. Specifically, Funderbeam uses blockchain to secure issuing tokens, trading tokens, keeping track of investors (i.e. cap table management) and clearing the trades. Their platform uses Bitcoin blockchain, utilizing a technology called coloured coins, which are pieces of Bitcoin on top of which metadata is embedded and is recorded in the blockchain.
The coloured coins here represent digital rights to an investment agreement between an investor and the syndicate (or SPV) created to invest in a start-up. So, were an investor to place €100 (c.$120) in a start-up, they will receive 100 tokens (coloured coins) in return, with each coin representing a portion of the rights to the investment agreement.
Not to be outdone, NASDAQ itself is taking a page from blockchain’s playbook, with its upcoming Linq exchange built on blockchain. Linq will be the first blockchain platform from an established financial entity and allow entrepreneurs and VC investors to reap the benefits of a ledger-based asset trading ecosystem.
In a similar vein, companies like Velocity Ledger, which has created a blockchain-based platform for real-estate securities secondary trading that includes some OTC (over-the-counter) accessibility, are looking to cash in on the secondary markets area.By combining the idea of tokenization with the secondary market for equity rights, it will inject liquidity and flexibility and relieve pressure on investors.
For cryptocurrency markets, the addition of new cryptocurrency investment options based in the traditional market should be seen as a boon. It means more stability and maturity as well as further integration with established financial markets and enhanced legitimacy on the world stage.
A Pre-IPO Blockchain MarketplaceCompanies such as The Elephant are merging the “off-chain” and “on-chain” investment worlds, for what is claimed by some the betterment of both. The venture is creating a platform that tokenizes shares of private off-chain companies during the pre-IPO stage, which will open the crypto market to these assets and help it grow towards less volatile investment options.
While those who invested in start-ups gain a liquid market for their previously locked equity, otherwise available only after IPO, cryptocurrency enthusiasts gain a plethora of new, more mature and conservative investments to add to their portfolios.
Elephant’s entire concept is made possible through partnerships between those who buy equity rights from shareholders and make them available via the blockchain. And, it is understood that the company has already signed on over 2,000 accredited investor partners, and plans to help them utilize their valuations and private equity without jumping through the hoops of an IPO process.
Then there are other companies such as BnkToTheFuture that are focusing their efforts on providing a secondary market specifically for companies working on blockchain projects. The company allows traders to buy into private equity of blockchain-based projects, with all records recorded transparently on the blockchain.
As another recent new entrant, Funderbeam is looking to create essentially a secondary stock exchange for pre-IPO equity. And, widening the entrance to the pre-IPO secondary market lowers the threshold to benefit from this market for regular investors, just as blockchain demolishes barriers to entry in virtually every other industry and market.
The idea represents a fresher take on the model that VCs are currently using to enhance their operations. Instead of funding blockchain start-ups in exchange for a set number of their ICO’s coins, or simply buying the coins outright - akin to activities undertaken by Starta Ventures and SPiCE VC - they are incorporating blockchain concepts to benefit an older model.
And, such is the trend pervading nearly every industry and vertical, while blockchain and application of the technology can create a convincing facsimile, it is perhaps better to apply it to existing models than try to reinvent the wheel. Carpe diem.
Follow Roger, an ex-FT writer who has penned various investment stories, on Twitter @AitkenRL, LinkedIn, Forbes, Google+. He won a State Street Institutional Press award in 2015.
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Francisco Gimeno - BC Analyst Blockchain is permeating all around, in vertical and horizontal layers of Finance and other sectors. ICOs and IPOs, STOs. The idea is to renew old models and also create new ones which will build a new digital economy, demolishing old barriers and creating new fields.