VCs read this and weep – 22x is an early stage fund without fees thanks to Tokens on Blockchain

weep

Lots of ICOs are junk and many are outright frauds. They also hit a big need in the market, because as we wrote nearly a year ago in March 2017, “the innovation capital business is broken”.

This post outlines:

  • why the innovation capital business is broken.
  • why the first phase of the ICO market went too far in the opposite direction.
  • why self regulation failed and why the future of Tokenised Securities is so hard to achieve.
  • Why the 22x Fund may have cracked the code.
  • Our Qui Bono and Qui Amisit analysis

The innovation capital business is broken.

The old saw is “if it ain’t broke, don’t fix it”.

The corollary, for entrepreneurs, is “if it is broke, you can profit by fixing it”.

Most entrepreneurs understand the chasm between MVP (Minimum Viable Product) and PMF (Product Market Fit). The low cost to build MVP increases supply, but real demand does not change that fast, so lots of MVP ventures fall into the chasm (i.e. they fail).

The next chasm is less well understood. This is the chasm between PMF and Liquidity (via an IPO on the Public Markets and failing that via trade sale).

Today, we don’t see this chasm so clearly because there is a very expensive bridge across it – in a few locations. The very expensive bridge is provided by the big PE/VC Funds. That is an expensive bridge a) for the Limited Partners (aka the LPs aka the real investors who pay the PE/VC Fund Manager their 2 and 20 cut) and b) for the entrepreneurs (faced with all those preferential equity terms that toss founder and management equity to the bottom of the stack).

This broken innovation capital business is a problem for both entrepreneurs and investors.

Why the first phase of the ICO market went too far in the opposite direction.

Entrepreneurs were able to use ICOs to raise huge sums that are more appropriate to a late stage growth business) on nothing more than a “minimum viable white paper” (hat tip to Andreas Antonopoulos).

That was always going to end badly for investors.

This phase of the ICO market was like Napster – hugely disruptive,, but full of legal jeopardy. Napster changed the world by paving the way for what came after – not quite free but totally legal services such as iTunes and Spotify. The basic innovation of ICO ICO, ITO, TGE (Token Generating Event) or whatever we call it, combines two things:

  1. Raise money online. Ho hum, crowdfunding.
  2. Instant liquidity. This is what makes it crowdfunding on steroids.

Although that next phase was obviously needed, getting there proved harder than expected because self regulation failed.

Why self regulation failed and why the future of Tokenised Securities is so hard to achieve.

In March 2017 I created a forum to help create a self regulatory code of conduct. Like everybody else who worked on that I was disappointed that it was all talk no action. In the end we got what we tried to avoid:

  1. Lots of scammy ICOs
  2. Heavy-handed regulatory action.

This led to Eeyore saying “I told you this would end badly” and Tigger looking uncharacteristically sheepish.

Why the 22x Fund may have cracked the code.

The 22x Fund was created by a group of ventures that all were part of the same accelerator. Rather than go it alone, each raising money from different funds, they decided to create a fund by harmonising their terms. The key features of this from an investor POV are:

  • Selection is done by a good Accelerator. It is hard to get into the 500 Startups Accelerator. Investors can take comfort from this
  • Diversification. It is not perfect diversification as there is selection bias in the Accelerator. But it is way better than an angel trying to assemble a portfolio.
  • No Fees. You get selection and diversification without paying 2 and 20 to a VC Fund GP.
  • Accredited or non-accredited is by location/jurisdiction. For example, in the USA you need to be accredited. In some markets you don’t need to be. That is a simple, pragmatic, legal approach. We believe that the accredited/non-accredited rules will change over time due to jurisdictional competition but entrepreneurs live with the rules we have today not the rules that we would like.

22X Fund used the Securitize platform to Tokenise their fund. Securitize – like some other platforms – aims to “tokenize any asset”. A Fund is one type of asset and that is the example of the 22X Fund we are focussed on. Seeing the cake (the tokenised fund) makes it easier to understand the ingredients (the platform).

Our Qui Bono and Qui Amisit analysis

Qui Bono – entrepreneurs win

This is true for all entrepreneurs, but it is much more true for entrepreneurs living outside of the hubs where VC Funds congregate. That VC/PE bridge is very expensive, but it is non-existent if you live outside major hubs such as Silicon Valley, New York, London and Singapore. Outside those centres you were scrambling and doing so in the knowledge that some entrepreneur in Silicon Valley just raised 10x what you raised and is planning on using that to crush you. ICO levels the capital raising playing field.

Qui Amisit – Investor Intermediaries lose

Investors will do well if they are careful. They have to do their own DD rather than rely on an intermediary, but they save on the 2 and 20 fees and gain more access to more deals. The losers are the VC Fund Manager intermediaries who are charging fees for the selection and diversification that 22X Fund is offering without fees. This is classic disintermediation and was what we were looking for when we wrote that the blockchain economy won’ be finance by ye olde artisanal vc funds.

Image Source.

Bernard Lunn is a Fintech deal-maker, author, adviser and thought-leader.

You can reach out directly to discuss our market development services by sending an email to julia at dailyfintech dot com

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