How blockchain startups are revolutionizing venture capital

William Mougayar is the author of Blockchain for Business and serves as a board advisor and investor in various blockchain projects and startups.

Mougayar believes that the traditional venture capital model is rapidly being replaced by young cryptocurrency and blockchain technology startups.

The distributed effects of blockchain-based cryptocurrencies are impacting the venture capital industry in different ways. While the traditional venture capital industry is boring, the crypto technology industry is gradually becoming more attractive.

In fact, I see the two models as diametrically opposed: one is a closed market dominated by command and control practices and headed by a few wealthy people on Sand Hill Road, and the other is a widely open global market where anyone can participate and where the rewards and risks are more evenly distributed.

This has prompted a rethinking of how startups operating in the blockchain space raise money, with the potential to change the relationships venture capital firms want to have with these startups.

As an investor, advisor, or board member, I have been closely involved with various early-stage companies that are dealing with the surge in cryptocurrency and blockchain-based innovation.

The table below summarizes the upcoming changes, covering nine variables.

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Yield Returns: While traditional VC funding has a 7-10 year payback period, we are currently in the early stages of a crypto-led valuation inflection point, resulting in short-term liquidity options for early investors within 1-5 years.

Ownership model: Traditionally, venture investors receive preferred shares by purchasing private equity. With the new model, they can acquire shares, tokens, or cryptocurrencies issued by the startup.

Entry stage: Angel investment, seed stage, early stage to completion stage is the trajectory of known traditional startup investment. The new continuum has another development code: pre-mine, genesis, initial cryptocurrency offering (ICO), listing on an exchange or private sale of the company's crypto tokens.

Business Model: Traditional startups are usually focused on developing and marketing an actual product or service. A blockchain-based startup may have an intended product or service as part of their development, but their biggest impact is creating a self-sustaining circular economy, backed by their own currency and tokens, while there is a transaction loop when earning and spending those tokens in their ecosystem.

Legal structure: Startups are usually organized as limited liability companies (LLCs) or any other traditional means, depending on the corporate laws of their jurisdiction. In the new environment, LLCs can create basic open source technology or protocols, but they will run proprietary independent businesses on or near them (such as IPFS and Filecoin), or they can create a valuable ecosystem (such as Ethereum). In extreme cases, the organization is non-registered and operates on the blockchain as a distributed autonomous organization (such as BitNation).

Limited partnership portfolio: Traditional portfolios of high net worth individuals, family offices and funds usually invest in venture capital funds. This move will attract emerging markets, only if they are progressive, innovative and visionary, and have the ability to freely allocate funds based on strategic considerations. In addition, given the more relaxed crowdfunding regulations in several jurisdictions around the world, crowd-sourced investors will also be able to participate in new venture capital.

Fund Currency: In addition to fiat currencies, new venture capital funds can also accept cryptocurrencies, as accepting cryptocurrencies online is frictionless. However, it would be prudent to immediately convert these funds into fiat currency as the initial reference currency of the investment vehicle to avoid a fall in the value of the cryptocurrency and eliminate any intention of currency speculation outside the remit of the venture capital fund.

Market approach: The best candidates for this new model will be blockchain startups that intentionally create new business models rather than support existing ones. The reason is that these new business models provide more fertile soil for innovative circular economies, new ecosystems, and new value creation, which are important conditions for success.

The nature of blockchain startups is changing, and with that change comes an evolution in how they are funded.

A new venture capital fund with the above features has the advantages of an existing limited partnership agreement, where these changes were painstakingly obtained. Instead, these elements will be part of the initial limited partnership agreement, while legal and compliance considerations are appropriately addressed.