Investing in startups is hard. If you don't meet the financial requirements to be an accredited investor, you can only invest a small portion of your wealth, and the equity you get in exchange can be illiquid for a long time, assuming its value doesn't just go to zero.
A new startup is looking to solve that problem using -- is it even necessary to say this in early 2018? -- blockchain technology. Called Securitize, the company is the apotheosis of the current "throw it on the blockchain" trend: It's a platform for running an ICO (which stands for "initial coin offering") without doing all the technical heavy lifting yourself.
The startup has made sure to bake in its lawyers' advice, with the hope of avoiding the SEC's baleful eye. VentureBeat reported that Securitize "promises fundraising companies, and their investors, peace of mind that they're in full conformity with domestic and international laws," due to the regulatory compliance features that the company built into its product.
Securitize also "enables a new era of venture funding, where investors can buy-in knowing the assets are completely liquid from day one." Liquid assets are ones that you can liquidate essentially whenever you feel like it. Historically, owning equity in a startup has not worked like that, and unloading shares can pose problems when investors want an exit prior to an acquisition or IPO. (Employees compensated in options have also struggled to find liquidity, and in the future, it's possible that tokenized equity -- that is, equity converted into the form of exchangeable coins -- could help new hires avoid the "golden handcuffs.")
The latest and most intriguing of Securitize's projects is 22X, a fund that offers tokenized equity in 30 startups -- up to 10 percent of each. The whole cohort of 30 went through the accelerator program run by 500 Startups during the summer of 2017, although 500 Startups itself is not involved in running 22X. The pre-sale opens this Friday, January 26. 22X's goal is to raise $35 million, distributing $1 million to each startup and using the rest to cover the costs of putting on an ICO.
Unlike many cryptocurrencies and associated tokens, 22X is abiding by United States law and only accepting accredited investors, and following the equivalent laws in other national jurisdictions. Nevertheless, a yearly income of $200,000 or a net worth exceeding $1 million are lower hurdles than being a partner in a VC firm. (Citizens of China and South Korea, where cryptocurrencies are illegal, will be blocked altogether. "They could fake their location" using a VPN or similar tool, a 22X representative conceded. But "they would be unable to fool" 22X's know-your-customer process.)
"Democratizing access to startup capital is the most significant innovation opportunity for the next ten years," Ashwini Anburajan, founder and CEO of participating startup OpenUp, told tech website ChipIn. 22X also offering the participating startups access to foreign capital without the overhead of needing to cultivate personal relationships and go through individual due diligence procedures. 500 Startups' established reputation will presumably help boost 22X, even though the accelerator is not actively involved.
The 30 startups aren't shunning traditional venture capital, having emerged from that ecosystem, but they are opening themselves to a blended model of semi-diversified funding. The whole tech community will be watching to see how it turns out for these trailblazers.