Rethinking How We Raise Capital

Posted: Nov 28, 2017 12:01 AM

For small and medium-sized businesses, raising capital is a delicate proposition. It’s crucial to be able to grow the business, yet undertaking fundraising incorrectly can result in unmanageable conditions that could contribute to a firm’s early decline. Over the years, the ways companies have gone about gathering the funds they need have shifted dramatically. While fifty years ago one might have had the bank, or family, to rely on exclusively, now there are other options. Venture capital is an industry that was spawned largely at the behest of Silicon Valley’s technology boom, as new, ambitious startups sought guidance and funding in a single package. 

Until recently, venture capital was the most cutting-edge way for new companies to access capital. However, it’s not enough. There are groundbreaking ideas that aren’t getting the attention or funding they deserve, largely because of a stagnant status quo. Venture capital firms have their hand on the spigot, and no incentive to remove it. Dealing with them is a complicated, trying process.

The advent of blockchain and other fintech tools is helping to show the business world just how restricted their options are in this regard. Post-financial crisis governments and regulatory bodies have repeatedly attempted to balance the situation, but at this stage, a full redistribution of responsibility is warranted when it comes to funding innovation.

Venture Capital’s Iron Grip on Innovation 

Unfortunately for innovators in technology, medicine, and even science, venture capital funding is crucial. The current model is largely the result of industry centralization and the narrow interests shared by those sitting at the top. VC firms are often themselves not the highest link on the chain, and must answer to lenders and bigger institutions. Regardless, they look at a potentially groundbreaking idea not for its benefits, but for its chance of success and potential profit. This significantly slows the process of funding great ideas, but even those who pass muster pay dearly for the privilege

Startups often feel beholden to their new investors, which has a cramping effect on innovation—not to mention the potential for losing creative control alongside equity. However, this is only the finish line. To earn their indentured servitude, young startups must sweat in front of a board of executives and give their pitch, sign piles of documentation, and deal with lawyers and other bureaucracy. The existing venture capital system has a monopoly on the platform by which good ideas present themselves. Blockchain has emerged as the solution for avoiding this fate entirely. 

Building a Business on Blockchain

To move investment participation to individuals and away from institutions to fund new ideas, companies are increasingly turning to blockchain to raise capital.  The blockchain is a decentralized platform that can support complicated networks just like the ones we deploy today but are spread out over a web of individual computers rather than a single server. It distributes the power bill and other system requirements to these participants, and by the same token, gives them more responsibility as well.

Single companies can also employ their own personal blockchain solution, thanks to innovative new services like Starbase. Starbase allows a firm to create their own cryptocurrency token as a derivative of another, already-existent base currency like Ethereum. This process is called an ICO, or initial coin offering. With this type of fundraising platform, companies can easily set the terms by which investors buy their new token, and demonstrate to them how this token can be used in the service they’re building. Potential investors can also browse the latest and greatest ideas and participate in them by allocating their own cryptocurrency holdings.

Retail investors have a real incentive to exchange their liquid cryptocurrencies for application-specific ones. Any cryptocurrency gains value as more people push their money into it, and if the application of such a token is ambitious, then they have an interesting use case to look forward to after launch, and a greater reason to invest. This combination of speculation and innovation is potent. It creates a new dynamic by which stakeholders participate in the companies they love.

In turn, these participating companies will prefer to launch an ICO because it doesn’t necessitate any redistribution of equity in their business, nor will they owe investors anything for their contribution. Funding is also easier and faster to find because instead of begging rigid venture capital firms for money, businesses can simply petition a pre-assembled community.

A Capital Idea

The blockchain is the best tool we have for redistributing power to individuals by helping them become willing participants in a new economy, instead of mere bystanders. It can unlock the potential of retail investors in the startup funding scene. This advent was born of necessity, as traditional investment firms had become more rigid with how they scrutinize new ideas and practice a tighter grip on their capital. No longer will startups need to go from door to door, pitch to countless tables of somber executives, or expose themselves financially just to have a shot at growth.

The tables are slowly turning on the antiquated fundraising model. Blockchain and its champions in industries far and wide are helping to decentralize the infrastructure that our society relies upon. The future will see more value placed on the decisions of the individual and give new ideas the chance to compete on merit alone.