By Bob Ras, Co-Founder and CEO of Sologenic, Co-Founder of Coreum
Venture capital funding is no longer the golden ticket it used to be in the tech industry, with the “free money” era of generous investments with little oversight firmly in the rearview.
Call it a market correction or a sign of the times for wider economic troubles, but funds are falling across the board. Even with the lure of AI, PitchBook reported a 30 percent decline in startup funding in 2023, with VC firms themselves raising only $67 billion last year—a six-year low.
But any market downturn opens the door for companies to get creative. Crypto startups know this better than perhaps anyone else. And blockchain technology—specifically tokenization—could be a new avenue that gets money into the pockets of cash-strapped startups, even those outside the blockchain industry. If done correctly, tokenization will augment VC funding forever thanks to a renewed interest from traditional institutions and a less antagonistic regulatory reality.
However, there’s still a lot of hype to dispel around tokenization’s role in startup fundraising, and it’s up to both VC leaders and those vying for their attention to be cognizant of it.
Is tokenization in venture capital just a gimmick?
This seems like a million-dollar question, but the answer is more complex than simply yes or no.
For one, the concept of VCs mingling in tokenization is nothing new. Many pundits have harped on tokenization’s transformative potential in fundraising as far back as the ICO boom of 2017. But in retrospect, nearly everyone understands it as an era marked by countless frauds and generally chaotic scammy behavior that still affects the crypto industry today. So what makes tokenization in the VC realm any different now?
The big difference is the role tokenization is playing this time around in terms of its utility and regulatory status. For instance, we now have Security Token Offerings (STOs), which were introduced to address the rightful concerns around ICOs as a more compliant alternative.
Since STOs function like traditional securities and are subject to the same laws, they’re tied to tangible assets and grant investors far more say through governance votes and legal protections. In essence, their usefulness is a lot more concrete than a simple memecoin.
Again, this might seem gimmicky if nobody is using these tools in fundraising. But what they enable VCs to do is not only broaden what kind of projects they can support—but open the gates to fractionalized ownership that transcends traditional fundraising structures. There’s also the added benefit of liquidity since traditional startup shares tend to be illiquid until an IPO or acquisition. Tokenized shares give VCs the tools to trade them on secondary markets nearly instantaneously to boost liquidity that enables broader investment flexibility from both VCs and the startups they’re investing in.
Tips VC leaders should keep in mind
With the benefits of tokenization or tokenized shares out in the open, there are some key points for VCs to keep in mind when exploring them as an option. Due diligence didn’t disappear just because the SEC approved some bitcoin spot ETFs, so diving in head-first may leave funds in a precarious position if they approach it incorrectly.
Luckily, there are a few concrete pointers that can help steer VCs along the right path.
For one, tokenization doesn’t always make things more efficient, and it’s not a one-size-fits-all solution to boosting liquidity or instantly gaining an innovative reputation. Tokenized funds and real-world asset tokenization are very real trends that are at the forefront of financial democratization efforts.
But that doesn’t necessarily mean a VC should completely pivot their strategy to accommodate them if it doesn’t suit their goals. If anything, this just makes them a “fairweather friend” to blockchain projects, and we all witnessed how that backfired in the last crypto bear market.
DAOs could also become problematic. While they can be incredible ways to fundraise, a general complaint that many DAOs are still trying to address are issues in scalability, governance infrastructures, and regulatory standing. The concept is there, but their functionalities still have a long journey ahead. So unless a DAO is particularly captivating and has these obstacles honestly squared away, it would be wise to approach cautiously.
Another facet to consider is that early liquidity can easily translate to heightened volatility—especially when it comes to investing in blockchain-native projects.
Of course, VC funding in general is never a sure win, funds make poor investments all the time for one reason or another. But despite the impressive steadying of the blockchain industry as a whole, especially among leading tokens, it’s still not immune to volatile periods. Likewise, VCs investing in projects through tokens can end up encountering conflict with future token holders in the project’s community if their visions for the company diverge.
Venture capital is far from losing its luster as a powerful investment vehicle for innovative technologies that push our world forward. But a couple of bumps in the road have provided an opportunity for the sector to re-evaluate its approach towards tokenized fundraising or even backing blockchain-based projects. As the blockchain industry gains momentum and legitimacy by the day, it’s now a two-way street for startups to woo investors the right way and for those liquidity providers to utilize the technology to their advantage.
About the Author: Bob Ras, an investor and serial entrepreneur based in Dubai, is renowned for his influence in technology, blockchain and manufacturing. He is a co-founder and partner at CoreNest Capital, co-founder of Sologenic, and also co-founded Coreum, a Layer-1 blockchain. Previously, he founded various manufacturing plants, including Hardex. His strategic skills have led to multiple successful exits.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.