Building their own set of crypto tokens, this startup says that they have found a way to make buying and selling investments in startups easy
Cryptocurrency hybrid VC startup Neufund announced today the close of their €2 million round of seed funding. One part blockchain startup, one part fund, the founders of describe their project as as reimagining the way we think about startup investments.
Viewing the traditional investment model as too slow and inefficient, the aptly named Neufund is developing a blockchain-based platform built on Ethereum wherein investors will use tokens called Neumarks instead of cash to manage their equity in startups.
The investors behind the round are Atlantic Labs, Klaas Kersting, and a group of undisclosed superangels who see an opportunity in altering the structure of how private companies raise funds.
A young company, Neufund was co-founded in September 2016 by CEO Zoe Adamovicz and CTO Marcin Rudolf. With their headquarters in Berlin, the team has grown quickly to a staff of 15.
Serial entrepreneurs, Adamovicz and Rudolf sold their first company Xyo, an app search engine and contextual advertising technology, to the Nasdaq-traded Mandalay Digital Group back in 2014, before going on to work for Digital Turbine. Their former Xyo co-founder Matthäus Krzykowski is working out of Berlin as a director platform at Y Combinator startup Tenjin. He is also angel investing in technical startups such as Lastmile that spoke at Geektime’s recent conference.
The duo now returns with their latest venture, pushing for radical change. Speaking with Geektime, Adamovicz says that her experience in seeing how much easier publicly traded companies like Mandalay are able to raise money and trade their assets in a more transparent and liquid manner influenced her to try and provide the private market ecosystem with more options.
“If I am a founder, I have to wait until I sell my company to make some money,” says Adamovicz, explaining that the core of their innovation is the ability to make investment money much more tradable. “Our system is making this classically static, illiquid asset liquid. We make this money flow very fast.”
She gives the example of a big company that is still private. “The moment that they want to fund raise, they will go to big VCs and hopefully get investment. What is bad about this is that very few people can invest. For current investors, if they have equity, it is difficult to pull out. What we are doing with this system, the company can set aside maybe 5% for blockchain investors, making a bridge and mirroring shares into tokens.” Adamovicz says that this allows for turning the standard off-chain normal company into a blockchain company.
They hope that by offering more opportunities for investments via blockchain, they can help grow the ecosystem, bringing in more companies and making it a more attractive environment to put your money into. “Our vision is to create an ecosystem that enables hundreds or thousands of different token systems by establishing new projects and their supporting networks,” the company says in their white paper that was sent to the press.
This contribution to improving the investment space touches heavily on cost reduction. Adamovicz admits that while there are still costs at converting standard currencies (dollars, euros, etc) into Neumarks and then back again through an exchange, the cost of carrying out investments with the crypto currencies is significantly minimized due in part to the lack of administrative fees that she notes can run at around $50,000 per million dollars invested. The rates only go up in later rounds as the amount increases.
In an effort to better facilitate these transactions, they are opening Neufund VC, an investment vehicle upon which they will be the GP and provide services for investors that come in as LPs. Working with delegates that are chosen by the LPs, they will seek out investments in startups. It is in this partnership that the company will make part of their revenue, charging fees for completed transactions. However these charges will still be a fraction of the normal cost of carrying out an investment.
Within this system, investors and startup owners can trade around the Neumarks and tokens issued by the startups themselves according to their needs. Adamovicz understands that total freedom of movement might not be ideal in all cases, suggesting that maybe terms of a deal could state that the funds must stay put for the first year. This would give the startup owner the stability to scale up the company, but not hold anyone to long term contracts that would tie their hands on the order that it is now. “Stock markets work this way,” she remarks, explaining that what she wants is for more options in the market.
The team is also counting on the transparency of the blockchain playing in their favor, easing the flow of capital. Working on a ledger system (aka blockchain), information on investments would be available to all. Despite some concerns over privacy, since not everyone likes the idea of having your financials out in the wind, Adamovicz says that there are some key advantages. She points to Albert Wenger, a partner at Union Square Ventures in New York, who has argued that in cases where there is increased transparency, there is an argument for lower levels of liability. Less risk through openness she says could help spur the growth of the platform.
Moving forward, while still in development, they plan on running their first round of test investments with the cryptocurrency before having their initial coin offering some time in Q1 of this year. The process of opening the Nuemarks up for investments from the community and bringing the startups on-chain will then follow, eventually leading to a state where trading of the tokens becomes open to all.
If you want to change the way an ecosystem works, then you need to be close to the gates. So when it comes to causing a shift in how companies get funded, it makes perfect sense to position yourself at the point where the money flows. This is essentially a remaking of the VC space, and one that I would argue brings in some much needed fresh air.
While Adamovicz is probably right that this system will open up investing to a wider cadre of folks, it will likely remain a relatively small circle to begin with, providing the most value for VCs and Angels. Even here, it will likely remain a limited option for the start, seeing only tiny percentages opening up for equity investments here at first.
It is in their work around to bring sunlight (to the extent possible) into this process, that I see significant value. Somewhat skeptical about making it quite so easy to move around funds, it is this transparency that makes it sound far more reasonable that it otherwise might be. Still, this will take a lot of negotiation and perhaps a bit more regulation – even if it is internal – to make this feasible. As expressed above, startups need perhaps a greater degree of fiscal stability to build from than a company that has already reached its IPO stage. Just as shorting a stock can tank an established company, the same could happen if a trader believes that they could take advantage of a situation here.
Again wearing the hat of the skeptic, I have to admit to never having bought a Bitcoin or other such token for cash. However, I see the blockchain as both a force for good in society and the future. More openness inspires confidence, which in turn leads to better commerce. The same can be said for uses of blockchain in other realms like government systems of bureaucracy or within organizations. Ostensibly offering a new way to invest, Neufund appears to be helping in bring society et large a little closer to embracing blockchain. But perhaps that vision is too long term.
In the short run at least, Adamovicz sees her project as a way of encouraging entrepreneurship, which she views as a positive value. As such, if Neufund is able to ease the way for entrepreneurs in advancing their startups, then she is serving a decent purpose. With her passion for building and making the world a little bit better than she found it, it is difficult not to get behind this project.