Securitizing Venture Capital Funds — Match Made in Heaven or Not?

August 14th, 2018San Francisco, CA

I have spoken with a few venture capital funds that are seeking to tokenize their funds and have already revised their PPM’s. Their pitch goes like this — we are able to tokenize our fund, giving qualified investors as well as anyone outside of the U.S. the ability to invest alongside the marquee venture capital investors for outsized returns with little to no liquidity risk.

What these folks are saying, in essence, is that the Sharpe ratio is way higher in this new investment class that has been created for (1) those who do not have the personal connections or accreditation to participate as LP’s in the high return venture capital asset class or (2) those who are not able to stomach the varied results that venture capital as an asset class have to offer given the high risk of startup failure.

Given a higher Sharpe ratio, buying a security token for a tokenized venture capital fund should be a no-brainer, right? First of all, this assumes that there will be liquidity for the security tokens in the secondary market, which is not at all guaranteed unless the fund has done a good job marketing its security token and also employed market makers. Liquidity risk still exists in these tokenized instruments.

Second of all, the promise of returns as great as other “prestige” venture capital firms is no easy feat. Many times, venture capital firms differentiate from each other by emphasizing their “strong value add,” especially strategic LP’s that may be able to provide support with partnerships, marketing, etc. for the startup that is fundraising. But since the “LP’s” of these tokenized funds may be varied and may also change from day to day depending on who has decided to liquidate their security token position, the best startups may not be willing to “play ball” with such an unknown and untested ownership structure.

What are your thoughts? Is it possible for tokenized VC funds to achieve a higher Sharpe ratio by issuing tokens that can be listed and traded on secondary markets? Will tokenizing allow the funds to preserve the high returns of venture capital investing while minimizing downside risk by offering improved liquidity? Why or why not?___

Disclaimer: These opinions are solely my own and do not represent the opinions of Sharespost or any companies that I may advise or invest in.

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