How a Decentralized VC Revolutionizes Startup Investing
10 Feb, 2022While traditional venture capital financing modalities are continuing to appeal to the senior investing audience, the truth is that this style of fundraising is quickly becoming obsolete. Current trends show more and more people are interested in, and educated on, higher risk and higher profit investments, focusing on emerging technology projects in need of funding. So, it is not surprising that the old financial ecosystem is being replaced with a more modern, and flexible investment model. Featuring the core values of on-chain transparency and the democratization of initial-stage business funding, decentralized venture capital fundraising is shaking up the startup investing game. Below you will find the most relevant information about this emerging financing modality and how it's reshaping the investment world into a more accessible and trustful space.
What Venture Capitalists(VCs) Are all AboutLimited partnerships (LPs) are commonly formed by venture capitalists, in which the partners invest in the VC fund. A committee is usually responsible for making investment decisions for the fund. Following the identification of companies with promising growth, the pooled investor funds are used to support these companies in exchange for an equity interest. A strong management team, a vast potential market, and a distinctive product or service with a strong competitive advantage are all things that VCs look for. They also look for possibilities in areas they are familiar with, as well as the possibility to own a big portion of a project, and so, have a say in how it is run. Venture capitalists are ready to take a chance on such businesses since they tend to profit handsomely if they succeed. 25% to 30% of venture-backed businesses fail.
Why Is Traditional Venture Capital not Working Anymore?Taking a look back at the history of money and investments, venture capital type of investment have been around as models of investing since the beginning of the 1900s. It all began with a couple of wealthy families interested in growing their wealth while funding small local businesses. Until the 2000s Nasdaq crash, this type of investing used to be one of the most popular means of acquiring funds for developing an initial-stage business. Up to now, venture capitalists are primarily endowments, family offices, pension funds, and ultra-high net worth individuals. Parallel to that, the three essential steps that every VC firm must do for their investors to succeed have been centralized in small partnerships, usually sitting on venture capital land, Sand Hill Road. These are the steps:
- Acquiring capital from limited partners;
- Finding high-potential businesses to invest in;
- Choosing the finest ones.
How Does Decentralized Venture Capital Work?In short, decentralized VCs (DVCs) have the same goal as a traditional VC fund, which invests privately in promising businesses. The core difference is that DVCs are groups of average investors that give small contributions to cryptocurrency-based funds to promote these startups. While the VC regulations aim to prevent novice and low-net-worth investors from making poor choices, they have effectively shut out these individuals from profitable private investment options. However, blockchain technology and decentralized financial platforms are leveling and drastically altering that same investing landscape. The decentralized venture capital principles are simple: thousands of small investors have the option and ability to join together to back, or crowdfund, financial ventures in a blockchain-based ecosystem. Besides the democratization of the investor persona, the decision-making processes around DVCs are also different. In traditional VC, the decision-making is rather vague. There is no standardized method to find a consensus. While some firms may prefer a voting method, others might let it be an individual decision. Whatever procedure they choose, the process is often kept secret. So, how is someone to be sure that the company they wish to invest in is non-consensus and has a high returning potential, if they can not learn everything about it? With the decentralization of the three steps for VC success, alongside blockchain transparency, the whole investing process becomes unclouded, benefiting both the investor and the invested entrepreneurs. For startups, it is easier to reach for funding through DVCs, as the range of investors has increased, and the pathway to them is less rigorous. Additionally, DVCs remove all geographic implications that could influence an investor's decision. Allowing business to compete for cryptocurrency financing based on merits rather than location. In addition, the entrepreneur will also be able to gain access to investors as a collective, benefiting from their diverse expertise of the online members, being introduced to staffing and sales opportunities, and overall gaining advisors for the company. For the investors, as the opportunities open for less wealthy individuals and include more process transparency, individual investors can "tokenize" their piece of the asset using a DVC. This personal stake is able to be sold, just like any other NFT, and allows the member to cash out and enjoy their financial gain much sooner than in a traditional scenario.
Why VCs Are Becoming More DecentralizedVC platforms must excel at three things in order to thrive:
- Raising funds from partners
- Identifying projects and companies to invest in
- Selecting the best projects