The traditional venture capital ecosystem is faced with challenges such as a long locked-up period, high minimum investment requirement, and illiquidity.  tokens and blockchain technology have come to break down the barrier, usher in a new crop of investors, and bring to the space some of the benefits of digital securities.

What does a Venture Capital firm do?

A Venture Capital firm pools funds from multiple investors and invests said funds into early-stage companies with strong growth potential. In exchange, they get an ownership stake in these companies.

The Challenges with the Traditional System

With the traditional system, investors in venture capital funds are typically very large institutions and accredited investors (high net worth individuals) because there is a minimum capital requirement set for investors and it usually runs into hundreds of thousands to millions of dollars.

Venture capital investments are usually long termed because early-stage companies take a lot of time to mature. Therefore, invested funds are locked up for an average of 5 to 10 years before investors can see returns. This 5 to 10-year period is called a lock-up period.

During this period, Venture capital investors have no way to cash out as there is no market to sell their shares. They are only able to see returns when a company gets acquired by a big corporation or IPO (listed on a stock exchange).

How venture token solves these challenges

1. It breaks down the barrier to entry:

By tokenizing shares of their funds and selling the tokens to investors,  venture capital firms make it easier for the investors to become indirect shareholders and gain access to the firm's returns on their portfolios.

These tokens are made accessible to investors worldwide and they have a much lower minimum investment requirement.  Hence more people are able to participate in the potential wealth appreciation of the traditional venture capital portfolio.

2. It helps facilitate liquidity:

The appeal of tokenized securities is the opportunity it creates for liquidity because the piece you hold is easily tradable. Such transactability didn’t exist before.

There has never been a marketplace for investors in a VC fund to sell their shares before the end of the lock-up period.  But security tokens are connecting the dots; investors can get liquidity much faster by trading their tokens in accredited security token exchanges.

What do investors need to be part of a tokenized venture fund?

The conditions for investing are usually set by the entity issuing the token. However, it may also depend on local laws. For example,  for US investors, the accredited investor rule still applies to some tokenized funds.

What are the Benefits to investors?

Seeking out up-and-coming projects can be confusing for people who are new to the investment ecosystem and are looking to invest in the next game changer.  Venture capital tokens take that burden off their backs. Such investors by simply owning a VC-backed token, gain access to the opinions of proven professionals, because VC firms are usually managed by dedicated investment professionals who take on the responsibility to source, identify and invest in the right opportunities, on behalf of their investors.

Popular players in the space

Cosimo ventures

Cosimo is giving investors early exposure to the blockchain market. Their token is available to US and non-US investors. They focus on companies that are changing the world using blockchain technology.  It stipulates a 45-day lock-up period for non-US investors and a $10,000 minimum investment and a 1-year lock-up period for US investors with a $200,000 minimum investment.

Blockchain Capital

Focused on startups in the blockchain industry, its security token BCAP represents an indirect interest in the blockchain capital venture fund. Their portfolio provides exposure to so many emerging companies in the blockchain industry. And the tokens can be bought by investors based within and outside the US.

Next gen capital

Next Gen capital is taking a different approach through its new funding structure called vertical funds. They plan to offer tokenization as an alternative way to finance early-stage start-ups by tokenizing multiple startups at once and offering a theme-based basket of ventures as one bundled investment proposition.

The vertical or basket will consist of 30 start-ups in a particular sector, for example, AI or Robotics. Investors are offered 31 tokens in total. 30 tokens will represent each start-up in the vertical and the 31st token will represent the basket of all the tokens. Holders can trade their tokens individually or collectively through an accredited security token exchange.

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