Without Decentralization, Who Gets to Be a Venture Capitalist?

By Edwin Mata, CEO & Co-Founder of Brickken

How long can tech VCs keep up the facade that everything is running smoothly?

To an outsider, it appears that the well-oiled machine of early-stage investment continues to churn as it always has. But as VC firms continue to set mind-boggling funding records, the tech-market downturn calls the long-term viability of this system into question. While it looks as though the "easy money" era of tech startup funding comes to a resounding close, now is an opportune time to reassess the sustainability of the wider VC ecosystem.

While it would be impossible to fix every issue in the tech VC marketplace, there are obstacles that can be alleviated. Decentralization could provide an avenue to help ease some of the restraints inherent to the traditional VC ecosystem and help create a more sustainable environment for both investors and startups to thrive.

Classic VC confines

The VC marketplace follows a relentless, often-parodied timeline of grueling funding cycles and extraneous obstacles for companies to clear. And this is just in hope of the slim chance of getting noticed by big firms and deep-pocketed angel investors. But this competitive undercurrent creates a landscape that is overcrowded, hostile, and exclusionary to startups and potential investors alike.

Of course, there are also some founders that have an advantage in this system. If you look at the demographics of who is heading the startups raking in early-stage funding, the landscape starts to look very homogenous. This leadership homogeneity translates to VC boardrooms throwing money at projects based on vibes alone. This indicates that worthwhile founders and projects that don’t fit the mold are getting overlooked before they even enter the building.

Likewise, the average retail investor has very limited options to get in on the ground floor of an exciting startup, assuming they don’t have a treasure trove of funds or industry connections. As such, they lose out on potentially lucrative investment opportunities. This high entry barrier then also forces startups to heavily rely on the VC pool for equity funding.

Yes, startups looking for funding can seek backers through crowdfunding platforms and community-based campaigns. But these crowdfunding campaigns do not grant investors access to equity, just superficial support.

Garnering grassroots support also poses its own challenges in maintaining attention and dollars, especially when a project inevitably runs into delays in development or rollout. In a sea of projects battling for attention, decentralization could foster a more inclusive environment.

Making funding more equitable

Blockchain development continues to experiment with impactful business applications, and company tokenization presents a way to level the VC and early-stage investment playing field. Through tokenized shares, startups can take an alternative financing route from inception to facilitate a diverse community of early investors. For instance, marginalized founders and investors can now fuel the future and generate passive income while launching projects through the blockchain.

This is not to say that tokenized shares completely eliminate the need for VCs, but it widens the options for companies to find an investor community faster. While a startup can go for mass market appeal through retail investors, the door is still open to VCs or DAOs, which is becoming a new funding mechanism. The decentralized model does not alienate any players but expands the toolkit for companies.

Decentralization can help remove the generally archaic funding stages and benchmarks that companies rely on now to indicate growth. While these labels have been useful in the past, they often lose their salience in truly reflecting business progression today. Funding could now occur parallel to development without requiring the hardline labels of pre-seed, seed, series A, etc. to show startup growth. Transitioning from stages and static measures makes it possible to create an ongoing "liquid" dynamic format to raise funds and indicate upward mobility.

Not only would a transition like this show the potential of innovative projects, but it could also help court the favor of investors and institutions in times when a certain industry might not be so “trendy.” Developments like these are especially vital now for blockchain-based startups that must now prove their reserves to avoid the disastrous fate of FTX or BlockFi. Good luck to any firm trying to secure funding from a crypto-allergic VC without those figures right now.

Creating communities through decentralized models can transform clients into investors, and investors into clients. Security tokens or shares can become activated and start gaining utility, which can eventually form a reciprocal client-investor community. When startups don’t feel pressured to chase trends in order to gain funding, they can focus on building truly great products and services.

While the decentralized model leaves room for major investing groups to propel projects to the next level, it doesn’t alienate people from getting their foot in the door. For founders and investors dismayed by the traditional venture capital system, decentralizing ownership and digitizing assets unlock more accessible and inclusive approaches to financing and corporate governance.

About the Author:

Edwin Mata is the CEO and Co-Founder of Brickken, a platform that allows companies to autonomously tokenize their equity and assets, bringing their management on-chain. Mata is a digital lawyer, lecturer, and mentor with a passion for law, entrepreneurship, and blockchain technology. Aside from Brickken, Mata serves as an advisor and consultant for cryptocurrency and legaltech projects, sharing his expertise and experience in both fields to support innovative initiatives.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.