Venture Capital Funding To See Serious Challenge By Security Token Offerings (STOs)
Venture Capital Funding Challenged By STOs
There comes a time in every young business's lifetime when they need to expand and dominate or stagnate and watch competitors take over market share. Venture Capital funding was the driver behind the tech industry that flourished in the eighties that created Silicon Valley. It was also the driver behind the internet company boom of the late nineties. A boom that leads to Amazon, Google, and others becoming household names.
Venture Capital firms get large discounts on the share price. Discounts are ranging from 40-75%. As they were the only source of funding for start-ups, it is not without precedent for Venture Capital firms to outright own new companies. However, the usual percentage taken is 20-25%. Centralized money from a single source. It has been 75 years of Venture Capital dominance in the early stage private equity market but that is about to change.
However, the internet has matured and today we have something different. Sometime during the middle of the second decade of the second millennium of the Common Era, something changed. Early stage private equity became democratized. How did this happen? Payment systems and trust in the internet rose to spectacular new levels. This lead to crowdfunding. Community-based funding was not only based on a financial motive, but also on a sense of personal attachment.
Crowdfunding is done based on need, a sphere of interest and personal attachment. It has allowed disruptive technology to come to the public eye. The patronage system of old is brought to the end consumers of the product. The democratization of patronage, of private equity and of companies where the community is king. It also allowed companies to strictly control how much equity was given to investors, set the price of that equity. Control that start-ups did not have when dealing with Venture Capital firms.
Blockchain Creates A Vastly New Landscape For Crowdfunding
The crowdfunding phenomenon happened at roughly the same time as when blockchain began to gain massive market appeal. People looked at the underlying technology of cryptocurrencies and began to experiment. What the market received was the ICO (Initial Coin Offering). This evolved into STOs (Security Token Offerings).
These new types of crowdfunding have had success, no doubt. They have also seen a lot of criticism aimed at them. Fortune reports that nearly half the ICOs in 2017 failed. The cryptocurrency start-ups that pioneered ICOs also brought about new legislation from the SEC. If a token is sold without any indication or plan that it be used as currency, it can be classified as a security, which makes it the domain of the SEC in the United States.
This form of regulation has hindered cryptocurrency in the past, but it can only help the new kid on the block, STOs. STOs are tokens that are specifically used to raise funds for crowdfunding. They are not cryptocurrency; they are not currency at all. They market themselves as securities – crypto shares as it were.
Control And Community Key To Changing Views On VC
The key reasons for crowdfunding becoming popular with companies is the issue of control. Many VC firms can use the major shareholding to influence direction, rush projects and make unwanted changes. That does not mean many VD firms do this. The involvement is usually more subtle, but it is always there.
Companies are looking to STOs to take complete control over their future, which they believe in. IT is not only board room control. It is control of all their available assets. The average VC firm take of 20-25% of equity can kill many smaller firms when they are looking to list publically. Many never make it to that stage due to that early loss of equity. They remain smaller players who are bought out by much larger firms.
There is also a community aspect to consider. When a company with an active community holds an STO, they know that their most die-hard fans will come calling. They want, sometimes even need, their community to be a part of the company. It would be what drives their growth. STOs are seen as the perfect medium for newer Social Media companies according to industry experts in both industries (social media and crypto).
There is a VC benefit with crowdfunding as well. It minimizes risk. While this risk is acceptable to billion-dollar companies, the smaller VC investors are glad that they can buy a much smaller part of an upcoming company and spread their risk across multiple companies. That, without need billions of dollars to play around with.
The potential of STOs is real – and 2019 could be the year the market realizes it as well.