How blockchain can fix the broken venture capital model

Kevin Monserrat highlights 4 things that are wrong with venture capital, arguing that blockchain can fix its broken system.

 interlinked blockchain concept to illustrate blockchain venture capital opinion piece

Interlinked: could blockchain revolutionise the way venture capital operates?

Three out of four start-ups will fail, never to return any cash to investors. Yet, venture capital firms continue to be hailed as the enablers of enterprising tech companies, heralding in ground-breaking change.

According to a CB Insight study, when finding out the reasons for start-up failures, 14 out of 20 were related to the customers. Failing start-ups are the ones that either don’t understand their clients or ignored them altogether. This begs the question whether VC investors too are giving small businesses the support they really need.

Chamath Palihapitiya, the outspoken Silicon Valley tech investor, has called the start-up economy a charade, saying we are in the “middle of an enormous multivariate kind of Ponzi scheme” where valuation (driven by inflated VC investments) has become the barometer for success in the start-up world.

In theory, venture capitalists should provide cash to facilitate faster growth), validation (to attract talent, customers and get press) and guidance (advice, connections and resources). Today though, there are four main issues which need to be resolved:

#1 – Priorities are all wrong

Start-ups are too fixated on fundraising, securing high valuations; financiers meanwhile naturally seek reduced risk and lower valuations, while freelancers and consultants find themselves working long hours with low and delayed pay and high risk.

#2 – Founders don’t have the time to do both

The process to raise capital is a massive distraction for founders and requires a lot of time which they simply don’t have. Studies have found that they can spend up to 60 per cent of their time on future funding rounds. This inevitably causes entrepreneurs to neglect operational day-to-day activities and this can be incredibly detrimental to a business in the beginning phase.

‘VC is blindly focussed on finding the next Airbnb or Uber, not sustainable investing’

#3 – We’ve lost the human side of funding

The current model continues to value returns over the company’s potential for social impact. Investment will find itself into a profitable fintech company before a bio-tech company that can save lives. VC is blindly focussed on finding the next Airbnb or Uber, not sustainable investing.

#4 – There’s a fear of being honest

By having just an investor and a start-up involved in the current model, it puts serious pressure on the entrepreneur in question to be at their best and present a strong front. This onus to appear profitable and present a hyped-up business case with inflated metrics, manufactured advisors or exaggeration of product/service readiness is detrimental to the start-up’s progress.

In other cases, business owners would rather withhold prominent operational concerns or pain points with their backers, because they fear they won’t receive the support and cash flow that they need. Minimising problems and playing up successes makes it difficult for investors to help so it is vital that start-ups share their concerns and pain points for investors to understand the true status of a company.

>See also: Why venture capital investment is like rock climbing’

Why blockchain is the answer

Raising money for a new business idea is competitive and scary. The process of pitching VCs and angel investors is anything but predictable but it’s important to remember that an investment means a relationship that spans years, even decades. Honest, open communication is critical.

These rifts between start-ups and investors mean start-ups are experiencing an unsustainable misalignment of business priorities and realities.

To troubleshoot this problem, we need a more sustainable approach to investment. In our new funding model at Consilience Ventures, start-ups get more than money. They also receive a network filled with expertise and support to ensure that they blossom to their full potential which will enable investors to get their forecast returns. This ecosystem made up of start-ups, investors and experts share mutual benefits and risks by trading a single digital asset underpinned by the entire ecosystem value.

In our ecosystem, we use a security tokens held on a blockchain venture capital platform to facilitate the trades of cash and services. The set up allows everyone to align their interests and creates a real hub of support for start-ups to grow as they deserve.

>See also: VC backing for UK scale-ups rockets by 22% in 2019, hitting £9bn

How blockchain venture capital works

In practice, start-ups issue their shares to Consilience Ventures in exchange for the equivalent value in security token. Because the security tokens represent the ecosystem value, it is more liquid and less risky than paying in sweat equity thus giving the opportunity to world-class advisors to build an alternative of their pension. On the other hand, start-ups can be assured that these experts are fully committed to support their growth instead of just being interested in the transaction. This creates a well-rounded, all basis-covered, network where everyone has a vested interest in being the best and most honest version of themselves to make money.

The world of business has changed massively since the first venture capitalist firms were created in 1946 – it’s time the model reflected this.

Adopting the ecosystem for investment will require a huge change and re-education for the sector but once adopted, the potential for a more sustainable start-up economy is enormous.

Kevin Monserrat is founder of Consilience Ventures

Further reading

Why venture capital funds need to develop a social conscience

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