Guest Article: Venture Capital Unlocked: Lowering the Barrier to Entry Using Blockchain Technology

By Business & Finance
22 September 2018

Cosimo Ventures’ Ciaran Hynes on how entry to VC funding is becoming more democratic with blockchain

For years, venture capitalists (VCs) have invested in early-stage tech companies, allowing household names like Uber, Airbnb, and Twitter to transition from small-scale startups into giants of their industry.  But while interest surrounding VC funds has evolved overtime, the VC investment model has largely stayed the same. In fact, despite the emergence of democratising technological forces like the internet, VC funds have largely been restricted to the “big fish” of the world, ranging from wealthy individuals to institutions like banks or hedge funds. However, by using blockchain technology, the decentralised infrastructure supporting cryptocurrencies like bitcoin and ether, a shift is beginning to occur in the VC infrastructure that’s creating a new class of investors entirely: the general public.

Venture Capital funds – lowering the bar to entry

Traditionally, VC funds have only been made available to investors with at least $500,000 USD in expendable income. More often than not, this criteria restricts much of the everyday individual from participating, meaning only institutional or high net worth investors can afford to meet the minimum. However, the onset of blockchain technology has brought about new fund structures that fundamentally change these designations, allowing for VCs to offer “tokenised funds”, similar to shares, of a fund to individuals interested in partial investment in early-stage companies. 

As a result, blockchain empowers VCs to offer lower investment minimums to interested parties. Typically, a traditional VC structure can only accept as many investors as it can manage from a book-keeping or distribution perspective. Since a tokenised fund manages the economic interests and financial relationships of its investors on an immutable blockchain maintained by a decentralised network of nodes, the logistical burden is lifted from the fund — making space for an increased number of investors. Using a tokenised VC model, a fund can accept more investors and therefore does not need to be as strict about the size of the cheques it will accept (notwithstanding regulatory limitations). For European investors, this can be as little as $10,000 USD, however, U.S. investors must be accredited, meaning that they can access tokenised funds for as low of a minimum as $250,000 USD.

This may not seem significant on its surface, however, creating a low barrier to entry holds major implications for both funds and investors — opening up VC endeavours to an entirely new class of participants. With the advent of tokenised VC, individuals can now gain exposure to a diversified portfolio of early stage, high-growth tech companies that have been vetted by experienced investors.

Tokenised VC platforms – eliminating redemption periods

In addition, tokenised VC platforms provide the benefit of liquidity to investors. Traditionally, the time horizon for an investment in VC is 7 to 10 years. However, tokenised funds allow investors to move in or out of their position in the fund by buying or selling the fund’s tokens, eliminating the need for a redemption period. Not only does this provide flexibility for individual investors, but this newfound liquidity makes VC investments a more attractive option for institutional money managers, who are increasingly investing directly in both company and venture fund tokens.

Admittedly, the widespread adoption of tokenised funds has been slow, but as more of them enter the marketplace, popularity is likely to rise, and liquidity risk and higher barriers to entry will be competitive disadvantages that few firms will be able to justify. Tokenising assets such as art and real estate were a crucial first step toward opening up investment access to everyday investors. Now, tokenised funds seem like the logical next step in levelling the investment playing field, providing a larger pool of capital for companies looking to become the next giants of their industries.

Ciarán Hynes, Managing Partner of Cosimo, is a serial entrepreneur who brings hands-on transatlantic experience to the advisory support for Oneiro’s management.  He has over ten years of deep tech market experience and has worked closely with Cosimo’s portfolio companies like Oneiro to help them develop their US infrastructure and expand into the US market. Ciarán leverages his extensive network of “pro-Irish” investors, advisors, government agencies and business leaders throughout the US to bring strategic benefits to these organizations. He is involved in many regional business organizations and sits on the US Board of the UCD/Michael Smurfit Graduate School of Business.