In the past couple of years, the startup model has been transformed by the introduction of the Initial Coin Offering, or ICO: a form of fundraising that involves the issuance of digital tokens stored on a decentralized blockchain, instead of the standard system of equity preferred by Venture Capital firms. In this article we’ll discuss what advantages tokenization offers and how Consilience Ventures is positioned to leverage these advantages even further.
Security tokens are the most standard form of tokenization and they can be thought of as an improved system of equity. Like equity, they represent a share of ownership of a startup but with a few advantages. They are stored on a blockchain and as such offered improved security in a trustless environment, being impossible to counterfeit and easy to track. Additionally, they are often far more liquid than standard equity investments which can be illiquid for years. Not only is improved liquidity a benefit to investors as it lowers risk, it is also valuable to the startups themselves, as equity often needs to be discounted in order to coax investors into purchasing illiquid assets. On top of all this, security tokens’ digital nature makes them far more convenient, with their transaction costs being lower and with fractional ownership being far simpler to establish. All of this means that tokenization provides clear advantages to the standard model and, as regulation clears up, we can only expect ICOs to become more prevalent in the startup world.
Consilience Ventures takes tokenization a step further with an equity-backed security and utility token. A utility token, unlike a security token which is only held as an asset, can be used as credit to make use of a function of the startup. In the case of Consilience Ventures, investors exchange equity for LKY, which allows them to purchase services from other members in the marketplace. This accelerates the rate of value creation by giving experts and service providers skin in the game. Because the token can purchase services and time, the value of the token is directly related to the value of the portfolio, giving all experts and service providers motive to improve the service they provide and thereby increase the value of the tokens they hold. This is doubly beneficial because do utility tokens accelerate value creation, they also help avoid potential stumbling blocks by harmonizing the incentives of interested parties. Whereas normally there is a conflict between suppliers and customers, as suppliers seek to squeeze the highest possible profits out of consumers, quite possibly at the detriment of the having a win-win partnership, with a utility and security token system suppliers can generate a profit by improving their service, aligning their interests with customers’ success. This alternate source of profit can also lower transaction costs by reducing or eliminating the need for transaction fees; the standard approach many centralized marketplaces take in order to generate profits.
In summary, a marketplace like Consilience ventures increases liquidity, accountability, and transparency through its use of the blockchain, as well as a marketplace that offers better, simpler and faster transactions, all of which is to the benefit of the entrepreneurs, investors, experts, and service providers, which down the line, improve enterprise readiness and collaboration with corporates.