Last Wednesday, Patrick and I, we had a (long overdue) dinner at a Japanese restaurant called Gyu-Kaku Prime in Singapore. We have worked both in the group-buying industry (he launched & IPO’ed iBuy Group and I co-founded & exited DailyDeal) and ever since have been active in the internet industry as co-founder or early-stage investors. We somehow got to the topic of doing business angel investments and the challenges we are facing to liquidate (or in normal words „to exit“) an investment.
The Role of a Business Angel
To provide some context, a business angel is an individual person (or if it is a group then it is called „syndicate“) who does a comparatively small investment ticket (usually from $25–500K) in an early-stage company. A typical business angel holds 5–25 investments in early-stage companies. And most – if not all – face the same challenge: there will not be an liquidation event (meaning an „exit“ so you can sell your equity) in the next 5–10 years. You have to go through very tumultuous times with the founders & company and sometimes get screwed by later-stage institutional investors. In general, it is an „all or nothing“ approach so it is a very binary system. Either you make a lot of money with an investment or – most of the times – you loose all the money. 90% of the companies you invest in don‘t make it after year 3, the 10% that make it beyond year 3 will be from an average to super(ior) return. And no one knows which company is in the 10% bucket. Thus spreading across founders/teams and geographies is important. Investing in teams with traction and/or track-record is paramount.
In addition to the odds that are technically highly against you it is a comparatively small and competitive landscape. Especially for good „deals“ (these are companies that are considered ‚hot‘ and people want to invest in their early stage(s)). For example: If you do not know any of the founders and/or early investors of Go-Jek it will be very, very difficult to impossible to participate in any round. Even in a round that valued Go-Jek at +300MM. If you are not „in the circle“ you don‘t get and/or have access to it. What a pity for any (potential) business angel.
An Alternative: ICO
ICOs can be a good fundraising option if you have strong network effects in your business model which would drive real utility and demand for your coin. Bitcoin is a great example for utility as a currency. We believe for example that we’ll pay with Bitcoin, Litecoin or one of the other larger currency-focused coins for much of our shopping a few years from now. Blockchain technology will reach mass adoption mid-term, so great infrastructure projects such as IOTA, EOS, Ethereum and the like will see demand rise for their coins. Network effects will kick in, having raised via an ICO and the whole crypto business-model will make sense.
However, there has been an avalanche of questionable blockchain startups aiming to raise via an ICO in the last 12 months which will never have any substantial network effects whatsoever if you look at it realistically. And some elements of the ecosystem is rigged: Positive ICO ratings can be bought on most tracking sites, insider trades are rampant at some level (including some of the funds), first-time entrepreneurs develop egos like masters of the universe, celebrating the ICO fundraise of tens of millions like it was a major company success. Instead of seeing it as the first step in a long road ahead to fulfil their responsibilities to their investors and create real success (e.g. the first 1.000 USD in real-world revenue).
In the end, the coin price of many projects will collapse due to non-existent adoption. Raising 20 million USD in a few months without the need of a MVP, no real product-market fit and only a whitepaper has attracted the wrong kind of folks into the space. It’s largely a speculators market without real substance around those kind of ICOs. The current market shakeout might not be that bad in the long-run for building more substance into the ICO ecosystem though. Having said that, there are also ICOs we are quite bullish on and invested in (e.g. finnoq in Austria), but those are far-and-few between.
In summary, we think the ICO space needs to rid itself of the get-rich-quick-let’s-screw-some-retail-investor types to be sustainable for angel investments in the long run. From a pure portfolio perspective for the average investor we believe adding some “blue-chip” infrastructure coins such as Bitcoin, Ethereum, EOS, IOTA will turn out well in a few years. That’s not exactly angel investing though.
A New Form of Asset Class is Needed
So these are two extreme worlds and we were wondering what can be the next asset class which combines the attractiveness of early stage investments with the option to liquidate at any stage? Crowdfunding: No. Typical angel investment: No. ICOs: Maybe but far too early stage. Tokenized Equity for an established company (or as we call it IPO 2.0): Interesting.
Let‘s explore this more. Patrick has gone through an IPO already and I was considering it as an option for FALCON (in the long run) but Patrick warned me about the immense regulatory requirements and the „do you want to spend 2 days of the week to entertain your investors & do all the regulatory stuff or do you want to spend these 2 days to grow the business“. For me – as for any execution-driven entrepreneur – this was a no-brainer: I want to spend the time to grow the business.
Proposing IPO 2.0 — Tokenization of Equity
So we were discussing what can you — as entrepreneur, investor, equity owner — do if you have a real business, with real traction (=paying customers), an established team looking for growth capital BUT the team (or board) does not want to have the full prospectus requirements of an IPO. We are proposing an IPO 2.0. Meaning a tokenized equity instrument to help companies who want to grow (further) and raise capital in the public market without the bureaucracy and maturity requirements of an IPO. We — as entrepreneurs — want that our partners, investors and employees who hold stock options to have the right and opportunity to sell (part of) their shares in case they are in need of money. Anytime. And to give other investors a chance to participate in the opportunity — even if there is not an official fundraise going on — and without the need for all that extensive paperwork. There is no harm to it and it would make early-stage investments and hiring TOP-talent early on much more attractive which in turn will help companies to succeed with a much higher probability: creating more jobs, delivering better value for consumers and paying (more) taxes to the respective governments. So it can be a win-win-win situation.
BUT Companies will have to do some homework
Obviously, there must be a proper screening and/or vetting process. incl. regular updates to owner, investors, employees and the wider public. But not to the extent as you have to do it for a typical IPO but much more as you have to do it for an ICO. So we strongly hope that this thinking will find a basis for discussion as it can benefit an individual as well as the society as a whole.
So we ended the dinner with writing this article and cheering on tokenized equities – or as we labelled it IPO 2.0 – in a hope to a better solution (& future) for any business angel/investor, entrepreneur and employee. Cheers!