How a Decentralized VC Revolutionizes Startup Investing
While 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 About
Limited 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.
At first glance, it might seem reasonable to centralize these processes. It may even appear simpler and faster for the investors and the projects. However, centralization means that this investment system is full of blurred information, mystery, and secrecy.
With centralization creating so many barriers to a successful investment flow, it is not surprising that soon a new system is finding its footing within the industry. And why the decentralized venture capital funds is beginning to take up more and more space in the investment realm.
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 Decentralized
VC 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
Each of these three ventures has traditionally been highly centralized in a partnership sitting on Sand Hill Road.
However, this is changing as a result of new networks. One of the most recent, known as DAO, aims to decentralize all three at the same time.
VC platforms have experimented with decentralized sourcing over the last decade. Several online applications and bounty referral schemes – which include scouts and equity partners – represent a unique approach to identifying fresh investment opportunities on a large scale.
The Future of Venture Capital Investing
Although it is a somewhat new fundraising modality, it’s already clear that DVCs will most certainly overtake the role of traditional venture capital funds. If not entirely, at least on a substantial scale.
The vast market for emerging crypto-based products and services creates a high demand for resources and qualified developers, meaning funding for those initiatives is needed and there is a place for every type of investor to join.
With this new landscape on the horizon, the truth is that there isn’t enough traditional venture capital money to meet the rising demand. With VCs, only a small percentage of initiatives that make it to the pitch room have a chance to get the idea off the paper, while endless others don’t even get the opportunity to start.
DVCs, on the other hand, can help solve this demand dilemma by tapping into the seemingly endless capital available in the hands of the accumulating prosperous middle class.
Industries that are directly or indirectly involved in cryptocurrencies and blockchains are most likely to understand the benefits of DVC and pursue these investments earlier. For example, DVC will arguably be one of the essential tools to enable Metaverse and its related startups.
Some specific industries, such as gaming, are deeply involved with DVC. But there are shifting focuses on a more broad scale towards funds formed to support more passionate projects, such as promising alternative energy startups, minority-owned and female-owned companies, and some projects focused on local communities development.
Decentralized venture capital funds are the new wave within the investment landscape. For those seeking more flexible and democratic investing opportunities that are still secure and trustful, it may be one of the best modalities available to this date.
DVC platforms have the primary goal of reuniting and allowing a group of interested investors to fund any promising initiative that can contribute to society and the overall technology advances while still generating satisfactory returns to the collective of investors.
That is also in direct alignment with the BullPerks’ mission. Utilizing the BullStarter platform, the company offers a safe space for investors and entrepreneurs to match anonymously. Promoting an environment that is now easier than ever for startups to reach out for funding and develop their projects with all the necessary resources.
Learn more about how to invest in VC deals through BullStarter by clicking here.