STO as an Alternative to Venture Capital Funding

April 17, 2019

Security tokens have recently been gaining popularity across the financial industry. Instructions added to the token’s code can automate a number of processes, including dividend payments and shareholder voting, leading to a significant reduction in governance and issuance costs. Security token offering is a great alternative to classic fundraising methods, in this article we’ve compared security token offering to venture capital.

In our article, last week, we’ve compared STO to Crowdinvesting.

Finding funds can be a tough challenge for small business owners. One of the ways can be attracting venture capital. A venture capitalist can provide a company with the capital necessary for start-up costs and other expenses associated with expansion projects. Although venture capital is a viable source of equity financing, business owners should be aware of the caveats that exist with this type of funding.

Venture Capital: the Basics

Before we get to drawbacks of venture capital, let’s take a closer look at how this fundraising method works.

Venture capital is financing that investors provide small businesses that are believed to have long-term growth potential. Venture capital generally comes from well-off investors, investment banks and any other financial institutions. However, it does not always take a monetary form; it can also be provided in the form of technical or managerial expertise. In a venture capital deal, ownership parts of a company are created and sold to a few investors through venture capital firms or venture capitalists.

Drawbacks of VC

Loss of control: a common practice in venture capital financing is an assumption a member of his or her management team is needed on the ground at the financed company. As soon as you sign off on a VC firm investing in your company, you relinquish a significant part of the control.

Loss of control may be financially beneficial for you, but there is a chance that it will destroy your company if the right decisions aren’t made. Since an inexperienced VC firm wouldn’t know the nuances of your company and wouldn’t be working with the same passion, they may even be the end of the company.

Along with that, you will give up many key decisions on how your company will operate. This is because the VC firm will require to be informed of any major decision you make, and they usually have the power to override such decisions.

Complicated set-up process: as you can see on the image below, the process is complicated. There is a number of unnecessary intermediaries involved as well.

High costs: legal costs alone could run from $15,000 all the way up to $50,000 depending on the complexities involved in completing the deal. Larger VC funds normally set attorneys’ fees in the range of $50,000 to $100,000 once enter the Series A phase. VC preferred stock investment documents tend to run beyond 100 pages, and negotiating with investors’ counsel inevitably adds costs.

Delays in funding: venture capital investing involves a large amount of capital exchange, a venture capitalist may not be willing to extend all requested funding at the same time. This means business owners may have certain milestones to reach prior to receiving the financing they initially requested, which could put additional undue pressure on them. Delays in funding could also come by way of an extended vetting process of the start-up business asking for financing.

Takes too much time: funding on the first stages takes from 12 to 18 months to conduct, that would’ve been acceptable if a company didn’t have to take part in numerous roadshows and negotiations with potential investors. This process is time-consuming meaning that business owners get carried away from business development.

Tokenomica’s Solution

We believe that a security token offering is a solution to most of the problems of venture capital funding

Lead your business how you find best: the investing process and all post STO activities are transparent. It’s up to you how you want to lead your business and which decisions require tokenholders voting. Investors are able to vote from their account from anywhere and take part in companies’ activities.

Easy process: with Tokenomica, in some cases it will take weeks to attract funds meaning that a company can focus on their business. In more complicated cases, preparing required documents and having them checked by the regulator (if required) will take just 2–3 months. As soon as the regulator’s approval is obtained, the token will be issued.

Reduced costs: your expenses are reduced to a minimum. At the start, the security token issuance platform on Tokenomica will be free of charge. For sure, there are set-up costs, but none of it is collected by Tokenomica and the total amount will be way less than one with VC.

No delays in funding: once your STO is finished, you receive all funds instantly.

For some businesses, attracting venture capital is a great way to raise funds, but for most companies, STO might be an easier way to get funding. Moreover, we are planning to make VC available on Tokenomica improving the process with the new tech. We will be covering our vision on improved VC in the near future.