In a startling turn of events, startup funding in North America is stumbling, gasping for breath after an exuberant run. How far down? For the second quarter of 2023, investors put $31.8 billion into seed- through growth-stage rounds for U.S. and Canadian startups, according to preliminary Crunchbase data. That’s the lowest quarterly total in more than three years.
Crunchbase went on to report that venture capital funding of start-ups has plunged by more than 50 per cent in the past 12 months, and without the Microsoft transaction with OpenAI, the first quarter of 2023 would have been the worst quarter for venture investment in more than five years.
None of this is good news for startups at any stage that rely on that very funding, which continues to dwindle, to secure the capital needed for growth. From seed funding to more significant investments in the form of Series A and B funding from venture capital firms and institutional investors, these funding rounds not only provide the necessary capital for expansion but also help startups build a network of investors and stakeholders invested in their success.
When it comes to liquidity, the path has been less straightforward for startups. Traditional shares in private companies are often illiquid, with early investors and founders facing restrictions on selling their shares until a liquidity event occurs, such as an acquisition or an initial public offering (IPO). This lack of liquidity can be a challenge, as early investors may have to wait for years before realizing a return on their investment.
The decline in overall funding, combined with a liquidity system that continues an anemic tradition, has created an almost impossible environment for startups looking to grow and thrive.
New Options Breed More Access for Startups
Recently, however, even amidst financial turbulence, a VC crunch and liquidity stalemate, a glimmer of promise emerges: tokenization and security tokens, offering a fresh lifeline for beleaguered startups.
Tokenization and security tokens are paving the way for a multitude of solutions tailored for startups. They offer an opportunity to raise capital without compromising ownership, widening the distribution network to engage a more diverse investor crowd. If liquidity is a more pressing issue than capital for some shareholders, tokenizing shares and listing them on a regulated digital asset exchange could be an attractive option, sidestepping the need for additional capital raising.
This type of direct listing of tokenized shares offers a wealth of new opportunities for startups and high-growth companies – stepping away from the traditional Wall Street dance. This evolution is opening up doors for startups, attracting a cohort of exciting investors, both crypto and fiat flush, all ready to bet on future unicorns. We’re at the dawn of a new era where retail investors, once sidelined, now gain VIP access to private companies at much earlier stages, well before the hoopla of an IPO. The result is a dramatic shift in the balance of power, with the narrative of a startup’s future now in many more hands.
A fully-regulated process, the direct listing of tokenized shares is already becoming a reality for innovative startups that are leveraging the confluence of traditional and digital economies. It’s a paradigm shift in how startups can access liquidity and funding, revamping the traditional processes.
One name that rings a bell in this context is Casper Labs. Their approach deviates from the conventional – choosing to tokenize their shares (their equity to be exact) and list them immediately on SEC-registered digital asset exchange INX. They’ve effectively managed to tap into an expansive network of investors who see value in the company’s vision and tech.
It’s crucial to understand the strategic implications of such moves. Startups usually wade through several rounds of funding, from seed to Series A and B. These rounds tend to serve a dual purpose: accessing capital and expanding their investor base. With tokenization and platforms like INX, these startups can find their wider audience, and also provide an exit for early investors seeking to cash out.
A Turning Point for Startups & Investors
In this evolving financial landscape, tokenization of equity is proving to be a game-changer for startups. This revolutionary approach to raising capital and managing ownership provides several key benefits:
- Access to Global Investors Tokenization isn’t just rewriting the rules—it’s tearing up the rulebook. By tokenizing their equity, startups can offer their shares to a global audience. The restrictive boundaries of traditional markets are fading away, enabling startups to tap into a worldwide pool of potential investors. The result? An opportunity to cultivate a diverse and supportive investor base.
- Increased Liquidity: Traditional shares in startups tend to be illiquid, often locked up until a liquidity event like an acquisition or an IPO. Tokenized shares, however, can be traded on secondary markets almost immediately. This feature provides enhanced liquidity, allowing early investors to cash out if they wish and enabling startups to attract a broader range of investors who value this flexibility.
- Fractional Ownership: Tokenization allows equity to be divided into smaller, more manageable parts. This fractional ownership enables smaller investors to participate in a funding round, widening the pool of potential capital and allowing for greater diversification among the investor base.
- Streamlined process: The processes involved in equity management and capital raising can be complex and time-consuming. Tokenization can streamline these processes by automating various tasks such as issuing shares, distributing dividends, or conducting shareholder votes via smart contracts.
- Enhanced Transparency: The immutability of blockchain technology—the underlying tech of tokenization—ensures all transactions are transparent and easily auditable. This transparency can enhance trust among investors and can also simplify the due diligence process in future funding rounds or during an acquisition.
- Lower Costs: By automating many of the administrative tasks associated with issuing shares and raising capital, tokenization can significantly reduce costs. This reduction is particularly beneficial for startups, where managing burn rate and making the most of every dollar can be the difference between success and failure.
In addition to Casper Labs, a growing list of startups and mature companies alike are already using blockchain-based tokenization to not only raise capital, but also to access a wider net of investors and liquidity, including Bitcoin Miner Hashrate and digital SaaS service provider Trucpal, as well as larger names like Greenbriar Capital, among a slew of others. I would be remiss if I didn’t include the INX Token on that list, as it was INX that introduced the first SEC-registered digital security IPO in 2021. We also can’t forget the opportunities tokenization offers private equity firms as they look to engage with the millions of accredited investors that manage trillions of dollars in assets.
Learn more: Securities