The Tokenization Of Venture Capital

Similar to what we saw early in our careers as internet pioneers, blockchain technology represents a complete disruption to the existing technology markets. We believe that the immense scale of such a disruption will undoubtedly create a significant wealth creation opportunity for forward looking investors.

As we see it, the world is now entering the fourth phase of the Internet where decentralized technologies like blockchain are creating and accelerating growth of many new value generating companies.

With the flood of early stage blockchain entrepreneurs entering this market, there is an extraordinary opportunity for experienced investors to help transform the most promising technology start-ups into global leaders.

As my partners and I set out to seize this opportunity and invest in this disruption we asked ourselves:

“Why not use blockchain to disrupt our own industry?”

Traditional venture capital funds are one of the most illiquid asset classes available

Venture Capital J-Curve

A venture capital partnership is a 10-year blind-pool… a long relationship in which investors have limited ability to exit, and no clarity of outcomes. We believe it doesn’t have to be.

TOKENIZATION solves the major issue of illiquidity for investors.

So, what about venture funds?

Blockchain technologies allow almost any illiquid asset to be “tokenized” in a digital ledger to then become liquid. It creates a broader market with improved price discovery.

Liquidity facilitates broader adoption among a larger investor base.

Investors want Liquidity

“LP interests are likely to be tokenized. The prestige venture capital firms will resist this, but there are already a few new venture capital firms at the margins that are tokenizing. Soon, a few more will do it. Then a few more. Eventually, illiquidity will be a competitive disadvantage in fundraising that only the top firms will be able to justify.”

David Sacks, PayPal COO, Yammer founder and CEO, Zenefits CEO

INVESTORS WANT LIQUIDITY

We all know that investors want liquidity.

INVESTORS PAY FOR LIQUIDITY

All else being equal, the more liquidity you give investors, the lower return they require:

Investors Pay for Liquidity

When thinking about blockchain and its ability to “tokenize” everything it is hard not to get excited about the opportunity. With hundreds of trillions of dollars in private assets that could be tokenized, the value that will be unlocked via tokenization over the next decade is in the tens of trillions of dollars.

At COSIMO we seek to revolutionize the illiquid venture capital investment market with the Blockchain.

Doing so, we launched COSIMO X: The world’s first Tokenized evergreen Fund. Here is how it works:

Security Tokens Represent Shares

Each token represents an economic interest in a collection of rigorously vetted, early stage deep technology companies whose aggregate NAV is validated by a recognized, independent third-party provider and published on our website on a quarterly basis.

Backed by Tangible High Growth Potential Assets

Net proceeds from token sales are invested in portfolio companies to grow and expand their operations toward the pursuit of a digital security offering, follow-on funding, or financial independence.

Security Tokens are Liquid and Tradable

Trade tokens with other accredited investors on our designated exchange as the NAV of the token appreciates or wait until fund proceeds are realized and COSIMO X repurchases tokens on the open market at a multiple of the NAV.

Licensing approved by the SEC has the features and protections of traditional assets.

The investors:

Send USD, EUR, ETH, or BTC to us and obtain economic interest in the fund in the form of COSIMO X Tokens. Token purchases can be made privately or through our website.

Securitize will walk you through a quick and painless identification and, if applicable, accreditation process through their online platform.

After you are approved by Securitize as an appropriate investor, you will be asked to create a wallet in which you can hold your COSIMO X tokens.

HOW THE TOKENIZATION ECONOMICS WORK Investor Purchases Token

  • Backed by economic interest in the fund
  • The Net Asset Value of the fund is determined on a quarterly basis (Third Party Audit)
  • The ‘Book’ Token Value is derived from the NAV over the float of outstanding tokens

Dynamic Token Supply

  • Primary Market — Newly issued by fund — proceeds go to fund.
  • Secondary Market — Purchased from holders — proceeds go to holder.

Liquidity

Quarterly NAV Adjustment

Evergreen Structure

  • Token holders have first right of sale
  • Excess demand is supplied by issuance of new tokens expanding AUM of the Fund.

Distribution of Exit Proceeds

  • 50% of proceeds stays in fund for reinvestment
  • 50% goes onto market for token buyback.
  • Buyback liquidity stays as an open order until filled.
  • Buyback tokens are burned.

Fees

  • Carried interest is paid out on deal by deal basis
  • Management fee is paid out on quarterly NAV

BENEFITS OF FUND TOKENIZATION Enhanced Liquidity

Investors can trade their economic Interest in COSIMO X, on select exchanges, in the form of Digital Security Tokens. One can buy and sell any amount of their tokens at any time, subject to applicable lock-up periods, for the market value of the token.

Liquidity is also provided by the fund itself through the repurchase and subsequent retirement of tokens on the open market upon portfolio company exits.

Superior Economics

COSIMO X will distribute 50% of the proceeds from its investment exits on a deal-by-deal basis by purchasing tokens on the open market, at the market price, and permanently retiring those tokens.

Since the remaining 50% of the proceeds is reinvested into the fund, long-term holders benefit from the reduced token supply representing a larger pool of investable capital.

Valuation Transparency

The fund will undergo a third-party valuation audit each quarter and publish a current, aggregate portfolio valuation.

Similar to how a public company may report earnings to its shareholders, this aggregate NAV will be posted on the COSIMO X website to signal to its investors the underlying value of their tokens.

  • Leveraging blockchain and smart contracts, information like sales can be public in real time, eliminating the never-ending series of one-off disclosures. As more services become distributed ledger based, reporting will evolve from static disclosures to real-time and web based.
  • By definition, all else being equal, companies that are more transparent, will have higher valuations.
  • In addition, technologies like Zero Knowledge Proof will enable sophisticated privacy features, eliminating one of the major drivers of private blockchains.

Capital Call Discretion

Unlike most traditionally structured venture capital or private equity funds, COSIMO X permits you to deploy capital at your own discretion.

There are no capital calls and no unexpected commitment requirements. All tokens are purchased at the discretion of the investor — whether those tokens are purchased from the fund directly or on the open market.

Broader Investor Base

The $10,000 minimum primary token purchase for foreign investors, coupled with the evergreen nature of the fund, democratizes investor capital.

This prevents the fund from being controlled by a small number of investors, allowing COSIMO X to deploy capital with a perpetual financial outlook, rather than one that cultivates short-sighted investments.

Evergreen Framework

The COSIMO X fund is evergreen, meaning that it is open to new capital from new investors and additional capital from existing investors.

By restricting the new issuance of primary tokens to times when new and exciting investment opportunities arise, the fund can protect the value of the token for existing investors and promote its appreciation amidst the broader market.

It is time that venture investors got smarter with regard to how their own funds are structured. By using the very technologies we are investing in to create a fund with heightened transparency, enhanced liquidity, and superior economics, we find ourselves at the forefront of what the fourth phase of the internet can create.

Originally published at https://www.linkedin.com.


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