Alternative Mechanisms of Fundraising

Author, Francesco Corea

A Data Science Foundation Blog

June 2018

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www.datascience.foundation

What can you look at if traditional channels let you down

It is not a secret that we live in an era of abundance, and money is certainly abundant out there. What sometimes is missed is a way to channel them toward specific objectives and activities.

I am actively involved in fundraising work with both startups and a venture fund, so this is a problem I am seeing nowadays more than ever. And whether you are raising money from a VC (entrepreneurs) or LPs (investors), you might be glad to know that other ways exist to obtain the money you need to run your company.

The following methods are surely a partial list of the ones existing, but I am in search mode for new innovative ways to efficiently channel money, so if you have ideas or saw something interesting please comment below and let me know.

Crowdfunding

Well, this is not exactly new but is worth to mention and talk through in a more systematic way. Crowdfunding is a way to pull and pool together small amounts of money from a multitude of (usually small and not-sophisticated) investors. To my knowledge, there are at least six different types of crowdfunding (borrowing this classification from brian cohen — read his book by the way, very interesting if you want to get into angel investing):

Equity crowdfunding: a way for not accredited investors to buy an infinitesimal equity stake in a startup; Debt crowdfunding: a peer-to-peer lending example where the entrepreneur borrows money from those small investors and agree to repay the loan if the company starts off; Reward-based crowdfunding: the investment is still small in the reward-based model, but the money is directed toward social projects and usually the investor gets rewarded with a perk or a symbolic token; Good-cause crowdfunding: this is a donation-based type of funding where people donate money to support a project that usually has some ethical or moral implications; Pre-order crowdfunding: this model envisages people pledging money today with the expectation of receiving the first batch of shipped products in the future (a product that, to be clear, it only exists on paper!); Inventor-based crowdfunding: a sort of hybrid model between a reward and a

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There are multiple very well-known platforms which are examples of what described above, such as Kickstarter, Indiegogo, Lendingclub, Kiva, Seedrs, Crowdcube, OurCrowd, Quirky, SeedInvest, etc., and I think they will stick around for a while since they try to democratize an asset class that has been historically very selective and not within everyone’s reach.

Token Offering

Call it ICO or token issue or whatever you feel like, but the idea is not extremely far from a crowdfunding one. The main difference is that you as an investor receive a token that represents the smallest functional unit of a specific network (or application). As I already said before, an ICO is a hybrid concept that has elements of sharesa allocation, a pre- sales/crowdfundingcampaign, and a currency with a limited power and application’s domain.

In the startup world, there are nowadays so many examples, scandals, theories and problems in the ICOs world that does not make any sense to give you here examples or a list of the most relevant ones up to date (but clearly FileCoin, Tezos, Telegram and SingularityNET, within many, have done the history of the field so far).

In venture capital world however, a fascinating concept proposed some years ago wasthe DAO (Decentralized Autonomous Organization), which in 2016 was also hacked and “unloaded” by about $50M. A new variation of the DAO has been recently postulated and named DAICO (DAO + ICO), which basically merges the characteristics of a decentralized venture fund with the ones of an ICO (leaving some sort of voting power to the initial contributors).

DAICO original concept: https://ethresear.ch/t/explanation-of-daicos/465

Another recent (and more interesting, at least to me) case is instead the22xFund , which tokenized the opportunity to invest in a group of pre-vetted early-stage startups (coming out from the 22nd Batch of 500 Startups). This option gives you (and this is one of the key points of the ICO mechanism itself) not only access to deals but also a certain degree of liquidity (you can sell your token and exit your position).

Finally, still in the VC sector,EQUI Capital, JWC Blockchain Ventures,SPiCE VC and Asgard VC are trying to do somehow similar things, with the first two respectively more oriented toward real estate and luxury asset classes (the first one) and e-commerce, logistic and biotech (the second one), the third one fostering and investing only in the tokenized

Data Science Foundation Data Science Foundation, Atlantic Business Centre, Atlantic Street, Altrincham, WA14 5NQ Tel: 0161 926 3670 Email:[email protected] Web: www.datascience.foundation Registered in England and Wales 4th June 2015, Registered Number 9624670 ecosystem itself, while the latter specialized in AI and targeting anyway accredited investors with the intent though to make VC fundraising faster, easier, more transparent and more liquid.

Syndication Platforms

To this class belong software platforms that allow accredited investors (i.e., investors who are financially sophisticated and with enough means to properly invest) to pool together and invest in a bigger round alongside micro VC, super angels, and other wealthy individuals.

AngelList is the best example of this class, but Gust, AngelMD (focused on the healthcare domain) or Propel(x) are equally valid alternatives.

Enabling Platforms

This is kind of a new concept, which could, in theory, be included in the previous group, but I am intentionally trying to separate them since this concerns different types of decentralized marketplaces.

In this cluster, I would include companies and platforms that are not using alternative fundraising themselves but rather creating the foundations for others to leverage non- traditional channels. The best example to explain it is likelySwarm Fund, which basically allows the “tokenization of real-world objects”. And by the way, it is a non-profit company, so when they say they do that for increasing trust and transparency in the industry I think it is easier to believe them.

A second alternative is given instead by Blockstack, which has recently launched a fund backed by other VCs to invest exclusively in decentralized applications built on the Blockstack platform itself (it is slightly more complicated than that, but I am trying to oversimplifying here). This project falls within theEnabling Platforms group because what they are really trying to do is building a new decentralized version of the internet (but sure, why not revolutionize the investment world in the meantime?)

Conclusion

This is not a full list of alternative fundraising mechanisms, but rather a first attempt to map what options both entrepreneurs and investors have. I am not on purpose distinguishing between fundraising for startups and for venture funds because I am more interested in what is conceptually possible and how emerging technologies such as AI and blockchain are

In addition to unlocking a new phase for the investment world, those technologies and new business models are democratizing venture funding (from both sides) as never before, as well as solving some major issues the field has ever had. They are indeed i) getting more companies in front of a larger audience; ii) reducing the cost of investing; iii) increasing the market liquidity, and iv) increasing the capital availability (and the possibility to achieve a certain financial goal).

However, whether all this democratization will have a positive effect on the industry is still unclear and I would not rush to line up with one side or the other until the long-term implications of those channels will be deeply thought and analyzed.

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