The tokenization market, also known as real world asset tokens (RWA), has gained significant strength in recent years as more economic sectors begin to explore the benefits of tokenization. According to the Boston Consulting Group (BCG), this market could reach US$16 trillion by 2030, representing a massive opportunity for financial innovation. This growing adoption reflects the potential liquidity, accessibility and democratization of investments that tokenization offers, especially in historically illiquid markets, such as venture capital (VC).
With the advent of tokens, we have a new and powerful way of financing companies. The phenomenon of initial coin offerings (ICOs) represented, at its peak, a significant disruption to the traditional fundraising model, attracting billions of dollars to blockchain startups between 2017 and 2018.
This movement surpassed even traditional venture capital investments in the sector. However, more than a passing fad, tokenization has evolved and paved the way for more mature models, such as initial exchange offerings (IEOs) and securities tokens (STOs), pointing to a future where venture capital will be vastly transformed.
The traditional venture capital model and its challenges
Over the past few decades, venture capital has been one of the main drivers of technological innovation, financing large companies such as Apple, Microsoft, Google and Facebook. However, despite its impact, the traditional VC model faces intrinsic challenges that limit its efficiency, mainly in relation to lack of liquidity and prolonged exits.
Venture capital investors often face long waiting periods—five to seven years or more—to see returns on their bets. In a VC fund, capital is put into early-stage startups, hoping that some of these companies will reach high valuations through acquisitions or initial public offerings (IPOs).
However, nine out of ten startups fail, and the success of a single company needs to compensate for all the losses. Thus, traditional venture capital, despite being a profitable business for few, is highly risky and has low liquidity.
Another problem facing VC funds is the concept of “blind pool”, where investors commit to a fund without clarity on which startups will receive the capital. As highlighted in Mahendra Ramsinghani’s book The Business of Venture Capital, this relationship can last more than a decade, with investors limited to inflexible exits and no visibility into returns during the period.
More autonomy and liquidity for the investor
Venture capital tokenization has the potential to transform the landscape by introducing greater liquidity, inclusion and control for investors. By tokenizing VC funds, you can offer investors tokens that represent their holdings in funds, allowing them to trade the assets on secondary markets.
This offers a quicker and less restrictive exit than traditional methods, where investors are often locked in for years until a liquidity event such as a merger or IPO occurs.
With tokenization, investors can choose to sell part or all of their tokens at any time, depending on their strategy and financial needs, instead of waiting for startups to perform over years.
The model creates a much more efficient secondary liquidity market, allowing investors to reinvest or reallocate their resources more dynamically. Additionally, tokenized platforms offer automatic transactions via smart contracts, ensuring quick and accurate distribution of returns among investors.
Inclusion and democratization of venture capital investments
Another notable benefit of tokenization is the democratization of access to venture capital. Historically, VC funds have been exclusive to qualified investors and institutions with significant capital to support the low liquidity and high risks involved.
However, by fractionalizing token holdings, it is possible to create investment units accessible to a much wider audience. This allows small investors to participate in opportunities previously reserved only for large funds.
This inclusion, within regulatory limits, has the potential to attract billions of additional dollars to the venture capital market. With more investors participating, the VC sector would become not only more robust but more diverse, increasing the supply of capital available to emerging startups.
Furthermore, tokenization allows funds to adjust their investment theses with greater flexibility. Unlike traditional VC funds, which are locked into cycles of fundraising and long-term returns, tokenized funds can adapt more quickly to market conditions, taking advantage of short- and medium-term opportunities. This flexibility allows for an increase in investors’ internal rate of return (IRR), creating faster and more predictable cycles.
Security and governance with STOs
Securities tokens (STOs) also play an important role in the evolution of venture capital. Unlike utility tokens, which have been widely used in ICOs, STOs are regulated like financial assets and offer additional rights and protections to investors.
With STOs, VC funds can issue tokens that represent equity or debt in investee companies, providing an additional layer of governance and legal certainty for investors.
Although STOs are in the early stages of adoption, they are expected to play a crucial role in the tokenization of private markets, including private equity and venture capital, in the future. When the transition is consolidated, the entire startup financing ecosystem can be tokenized, with more transparent, secure and accessible processes.
As tokenization infrastructure advances, the future of VC appears to be moving toward a more dynamic, flexible, and accessible model. Tokenization eliminates many of the traditional problems faced by investors and fund managers, such as lack of liquidity and long wait times for exits.
Furthermore, it offers more control and autonomy for investors, who can manage their holdings more actively.
Therefore, with the ability to access new audiences and create more inclusive investment opportunities, venture capital tokenization has the potential to revolutionize the sector, transforming not only the way funds are managed, but also the impact they have on the technological innovation and global economic growth.
Source: Exam
