Financial Services Industry disruption

Blockchain technology is most often thought of as the disruptor of the financial system – cryptocurrencies, the first use case for blockchain, are designed as an alternative to government controlled fiat currencies or other holders of value (gold, art, etc.). Since that first use case (Bitcoin), blockchain has evolved and is now piloted in most financial institutions for a large variety of purposes. Year 2017 brought us the explosion of using blockchain to attract funding for startups, which can be done quickly and with low costs with blockchain when compared to existing channels. Lack of regulatory barriers, large pool of capital available in the crypto world, quick liquidity of the investments and quick gains were all important factors in the ICO boom. VCs are feeling threatened.

However, as the value of cryptocurrencies engaged in ICOs (and consequently in trading) get bigger, regulators started stepping in. At the same time, there is a number of reasons why ICO funding is not the best way for the project to succeed. Most startups have to be very motivated to achieve profitability, and if you only begin to work on the startup and have millions of dollars available to you, this will not be a priority, for most – until it’s too late. Second – most of project disguise their investment need into a utility token, where the utility of that token will never be really needed. Most of the tokens issued today should represent equity, but markets have not discovered that yet.

Which brings us to the question of the ideal vehicle for funding startups, as well as providing financing for existing businesses that need capital to grow (Private Equity). Who wouldn’t want to be an early investor in Google, Facebook and alike? However, to do that today you have to be rich – VCs open their funds only for high contributions. ICOs aim to change that, with tremendous success for entrepreneurs and for early investors. But the issues raised above (and many others) will force the ICOs to evolve very quickly. Market forces will expose their current weaknesses.

A new wave of platforms for ICOs that will be more investor friendly and will have risk management procedures in place is coming to the market. They will combine the benefits of VC firms (evaluating projects, their potential and perform due diligence) and the wisdom of the crowd funding (many eyes examining each project, quick community building for project’s growth, etc.). One stands out as a clear front runner both in terms of readiness and the quality of vision – Neufund.org. Envisioned over a year ago (I followed their work since then), it has already done what market still contemplates as a futuristic idea:

1. Built a legal platform to issue Equity Tokens, giving a large pool of investors (anyone, basically) an opportunity to buy a share in tomorrow’s Google. By deploying a group of visionary lawyers, they created a structure that fully complies with German law (and hence EU). By enabling digital tokens to represent equity shares in a corporation, they bridge the current financial system (with trillions of Dollars and Euros of available financing) with the efficiency of blockchain crowdfunding. Tokens are for niche investors who can understand them, and niche projects that are fully on blockchain. Equity is for most retail or institutional investors. That’s why they collected a group of Who’s Who of Silicon Valley and far beyond as early supporters.
2. Created the whole technical solution. Their smart contract code is so advanced, that we have our developers review it as part of their mandatory trainings. From token design to the execution of the ICBM contributions everything is deeply secure and elegant. And everything that can be automated is automated, fully demonstrating the Trustless Trust principle in action.
3. Governance methods and investor’s role they envision are very solid and favorable. Unlike crypto hedge funds launching these days that take enormous fees for the management, Neufund is designed to build a community owned (decentralized) fundraising platform. They recognized that funds invested are the main value creator in their business, so investors who commit funds are the main beneficiary of rewards. The way platform works is that investors buy equity tokens of startups (or established companies), making them owners of shares in the startup. With every investment in ET, investors also get Neufund’s NEU tokens, giving them a 50% share in platform’s fees. Startups can then list their ET on the exchanges, which will give all token holders quick liquidity, something VC funds do not have. All in all, we counted 5 revenue sources for each investment. As a result, companies can attract financing with only 5% cost on terms they set (industry standard costs are much higher and terms are set by the investors), and community investors get a great deal as well.

All this describes a completely new vehicle for financing companies with a great potential. It takes the privilege of access to startups from the rich to a much wider audience. It brings VC financing in all its benefits to the middle class. And then enhances it with efficiency and liquidity that blockchain enables.

I have been researching use cases for Financial Services industry where blockchain can disrupt the incumbents for over a year now. But I haven’t seen anything that comes even close to the readiness and potential like that of Neufund. $100 billion VC and Private Equity industries are getting a powerful new business model that will create some serious disruption over the next decade.

If you missed the links above, here’s where you can learn more on Neufund: https://commit.neufund.org/