There is much talk about new forms of investment, but very little about the issues dogging the investment ecosystem over the past decade: the shrinking amount of liquidity on the exit, and the length of the illiquidity period. Spice VC wants to change that, and it is turning to the blockchain as the answer to the liquidity problem.
Today, Spice has announced the launch of the first initial coin offering (ICO) for a VC fund that can accept funds from pre-qualified investors (per country regulations, under Reg D Rule 506(c) in the U.S.), offering immediate liquidity.
“We believe the 7 to 10 years of illiquidity is the biggest limitation of VC funds and solving that has a wide effect on the economics of the industry,” Tal Elyashiv, cofounder and managing partner at Spice VC, told me. “Until now, the privilege of investing in tech was reserved for very few. The new model makes the VC model available and attractive to three huge new investor groups. First, the major institutional investors, which in Europe allocate much less to the VC asset class than in the U.S. Second, thousands of smaller accredited investors which until now could only invest in tech as angels or in crowdfunding sites without any liquidity, and last, a new class of crypto investors looking to diversify into general tech.”
Spice uses the Ethereum blockchain to host its token. This token acts as a digital security, guaranteeing that every investor gets their share of the exits when they occur. The token itself can also be used as a tradable asset, making Spice quite unique — it is both asset-backed and liquid.
Combining the blockchain with VC funding is certainly an interesting solution. One one side, the solution offers the opportunity of opening venture capital to pre-qualified investments, as well as immediate liquidity. From the VC side, Spice brings due diligence and assets with which it backs the tokens. That should shield them from market volatility.
Security and regulation is important to Spice.
“Unlike most ICOs, because we’re a fund, we took the proactive approach of defining ourselves as a security, and building the regulatory compliance infrastructure as a traditional fund under current regulations,” Elyashiv said. “For example, in the U.S. we will only accept a limited number of accredited investors under Reg D. Rule 506(c), which puts us in full compliance, and we took similar measures in other countries, so that we operate as a normal fund, only with digital tokens instead of paper shares. We see this is the beginning of the transition of all securities from analog to digital, a move which we believe is inevitable.”
Bancor is the blockchain startup that raised $147 million in an ICO this year, and it’s been adding members to its currency-liquidity network since. Users of currencies running the Bancor protocol can liquidate those currencies instantly.
“Bancor developed the tools to allow us to keep a small portion of the money we raise as a reserve (until we need it for investments), which we will use to give investors an option to sell tokens back to the fund,” Elyashiv said. “This enables some liquidity to investors from a very early stage without requiring investors to trade between them.”
The Spice token ICO is scheduled for late November 2017.