Blockchain startups are generally in need of large investments. The task of developing breakthrough technology requires thorough marketing, specific legal counsel, a professional team on a payroll, and incurrence in many other operating costs. At the same time, a growing number of investors have become interested in blockchain startups thanks to the comfortable liquidity they produce. A blockchain investor can benefit from a faster turnover of funds and execute more profitable exits from these deals than traditional venture capital would allow.
There is a clear, mutually beneficial relationship between blockchain startups and large venture capital funds that seek to dip their toes in the blossoming market. However, things haven’t always been so simple. In the beginnings of the blockchain boom, large investments were complicated by the fact that funds were not allowed to buy a blockchain startup’s token directly. Generally, a fund’s shareholders have regulations in place that prohibit the acquisition of a startup’s product — which includes tokens — and restricts purchases exclusively to equity.
A workaround was necessary. One that would allow venture capital funds to make large wholesale investments in this new kind of company. Blockchain investment expert Nick Evdokimov collaborated with a group of funds to come up with the solution. They realized that large investors could participate in ICOs through an innovative structure called mixed deals. The strategy behind these is that a fund will purchase shares in a blockchain startup according to its valuation, then the startup will issue tokens to the fund as a gift that ensures the transaction.
For example, if a blockchain startup is valued at $10 million, an investor can buy equity for 20% of the company at $2 million. Once the transaction is closed, the startup issues a number of tokens to the investor that is equivalent in value. More so, it could even issue $2.5 million’s worth in tokens given that startups are willing to offer discounts to large investments.
Once mixed deals became a part of the market, dozens of blockchain startups were able to secure funding by large investors. Deals were structured in such a way that investors participate in the benefits of a startup’s token economy as well as in its equity. Meanwhile, startups have access to larger deals funneled through a smaller number of investors. A win-win situation for both parties.
Nowadays, funds that implement mixed deals are an important vehicle for capital in the blockchain ecosystem. Nick Evdokimov explains the success of these deals in his online video course.
“This led to the fact that the startups, and generally the ICO market, began moving towards venture capital and private equity, connecting capital from that market to the implementation of these processes. This allowed both participants of the ecosystem to coexist, and to work quite effectively.”
One last thing to take note of is that funds also work perfectly for private investors who wish to maintain a low entry price. These typically have an accessible threshold that allows a large number of small investors to participate in the deals funds have access to. A fund will generally make a deal with a startup on better terms than a private investor could, thanks to their leverage. In turn, small investors receive the benefits of a mixed deal, and perhaps even at a discount.
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