As the blockchain technology space matures, we‘re seeing an increasing number of platforms designed to help traditional markets tokenize, decentralize, and take advantage of distributed ledgers.
VNX Exchange is now launching a European digital asset marketplace aimed at bringing liquidity to the $620 billion global venture capital industry. It has recently added Dominique Valschaerts, former CEO of the Brussels Stock Exchange, to its board.
By creating a regulatory compliant and secure marketplace, VNX aims to reduce barriers for regular investors and unlock venture capital as an asset class to a much broader global investor base.
“VNX is a financial marketplace (conceptually similar to a classical stock exchange) that will interlink several categories of customers (supply side and demand side),” founder and CEO Alexander Tkachenko told me. “The supply side is represented by inventory providers — VC funds, startup accelerators, and other types of venture investors that are issuing digital tokens on the VNX platform, linked to the future incomes from their investment portfolios.”
The VNX platform takes an age-old financial practice and brings it up to date with blockchain technology.
“These VC tokens are essentially tokenized financial instruments (like a bond, or a futures contract) that will pay token holders a share of the future incomes of the VC portfolio being tokenized and sold on the VNX platform,” Tkachenko said. “These tokens will be listed and traded on the VNX platform.”
The VC industry can be difficult to enter, so VNX’s mission is to make it more inclusive for entrepreneurs and investors alike. By tokenizing their investments and making them tradeable on a liquid secondary market, VC fund managers will be able to significantly reduce the capital locked up for their existing investors and attract a much broader investor base.
So how does it work in practice?
The inventory provider (for example, a VC fund manager) submits a listing application to VNX. The company, along with designated third-party service providers, then evaluates the VC fund’s investment portfolio. This includes legal due diligence, asset valuation, and more.
After assessing the VC, the terms of listing are defined, the initial book building auction date is announced, and liquidity providers are invited to participate in the initial VC token offering. Only up to 50 percent of any given fund or investment portfolio is allowed for sale on the VNX platform, to ensure that the inventory provider has a vested interest in continuing to manage its investments and make profits on them.
On the auction date, liquidity providers submit their investment bids, and at the end of the auction the order book is closed, payments are settled, and the tokens are distributed to the liquidity providers. At the same time, the inventory provider receives the proceeds from the token sales.
Following the end of the auction and initial token distribution, the tokens are added to the VNX List and made available for trading on the VNX marketplace. Thereby, the VC tokens are introduced to the general public for free trading, where anyone can buy and sell these tokens based on the market prices.
As VCs sell their stakes in portfolio companies and receive profits, they share part of these profits with all token holders.
“The VNX platform operates as a marketplace that allows VCs to get additional liquidity in exchange for a share in the future profits,” Tkachenko said. “This, in turn, improves the capital velocity and economics of VC investing, reducing capital lock-in from 12-14 years to just 2-3 years, making venture investment more attractive as an asset class, opening it up to a much wider global investor base.”
So how is blockchain technology and tokenization helping in this particular financial use case?
“We don’t see blockchain as the key essence of our product and rather treat it as one of the technology layers in our platform that just happens to be the most relevant and up-to-date solutions for some of the problems we are trying to solve,” Tkachenko said. “In VNX’s case, we think that the use of blockchain technology and asset tokenization offers many added benefits compared to how traditional capital markets operate, such as reduced dependence on intermediaries such as share depositories, clearing houses, transfer agents, custodial providers, and more.”
There are other reasons blockchain technology assists with this kind of VC funding.
“It offers a significant level of automation for multiple steps in the value chain; [for example,] paying out of income to VC token holders can be fully automated through smart contracts and blockchain wallets,” Tkachenko said. “We also see it helping with enhanced security and transparency, enabled by the immutable distributed ledger underlying every blockchain, fractionalized ownership, allowing the purchase of even high-value assets at a minimum amount, and enhanced governance and compliance that can be automated through smart contracts.”
So, what’s next for VNX?
“Our primary objective as we build our platform is to open up VC as an asset class to a broad investor base,” Tkachenko said. “To achieve this, we understand that it is crucial to give our customers a level of security, reliability, and usability that will not only match but exceed that of existing market platforms — both traditional and new. This means that our marketplace should be properly regulated and built with the highest level of security and trust.”
Part of the roadmap includes ensuring regulatory compliance in all the territories VNX wants to service.
“Our major focus now is to develop all the platform infrastructure and frameworks that will allow us to comply with existing regulatory environment to eventually become a fully regulated exchange in the EU,” Tkachenko said. “Our ambition is to become the first fully compliant marketplace in EU for trading VC funds. Currently, we are in the process of filing for a license in Luxembourg in CSSF (Commission de Surveillance du Secteur Financier, the local financial markets regulator), working with a team of lawyers and advisors led by Luc Frieden, former Luxembourg Minister of Finance and Minister of Justice.”
VNX is currently finalizing the next version of its trading platform after completing testing and evaluation of our first MVP version that was released in February 2018. This second version of the platform is scheduled to go live in private beta by the end of 2018. The entire product will be launched in 2019 after receiving all necessary regulatory approvals.
The ambitions of VNX don’t stop with regulatory compliance and technical releases.
“Another strategic goal for VNX is creating a robust ecosystem,” Tkachenko said. “We have a partnership with Luxembourg University, the leading European center of blockchain competence, and are in the process of signing partnership agreements with several key players in the blockchain ecosystem, as well as working closely with the first VCs to come to our platform in 2019. We have already secured soft commitments with a number of major players in the European early-stage venture investment space, and plan to have at least $1 billion worth of venture portfolios in our listing pipeline by the time we go live in 2019.”