One of the biggest challenges for angel investors and a factor that deters many small investors from investing more money in startups is the acute illiquidity of startup investments. Traditionally, when investing in a young startup, either through liaising directly with the founders or through online crowdfunding platforms, the invested funds will be locked up in the company until it is either sold or has an IPO. Not only does that mean that one’s invested capital is locked away for a period but it, therefore, also makes startup investments very risky because nine out of 10 startups fail.
Fortunately, for startup investors today, there is now a blockchain-based solution to this problem that creates benefits for both angel investors and startups called Funderbeam.
The First Stock Exchange for Startups
Estonia-based Funderbeam has built a crowdfunding platform that includes a secondary market using blockchain technology. The secondary market allows investors to buy and sell their holdings in the form of digital tokens at a price that buyers and sellers determine among themselves. The digital token allows early stage investors to cash out their investment if they require their funds or if they are happy with the return generated on the investment. Funderbeam’s platform will, therefore, most likely attract more investors to the startup space as the issue of illiquidity is being alleviated, not only benefitting angel investors but also the startups that are seeking funds as it will be easier to attract investors.
Funderbeam was founded by former NASDAQ Tallinn Stock Exchange CEO Kaidi Ruusalepp in 2013 and officially launched “the world's first syndication platform and aftermarket for startup investments, secured by the blockchain” in 2016.
Ruusalepp told TechCrunch: “Today growth companies look to the stock markets only as a serious option for exits. On top, early-stage and growth funding has grown to unimagined heights, but it is one of the most illiquid assets classes. Once you’re in, you hardly get out.” This is where Funderbeam’s platform comes in to provide a much-needed service that serves both angel investors and startups.
However, Funderbeam is not only a trading platform for startup investments. Funderbeam also provides in-depth research and analysis on the startup sector to help early-stage investors compare and value companies and to help startups position themselves correctly for their funding rounds. For example, Funderbeam has recently published the Global Funding Report 2016 that details the global startup funding trends of the past year. Furthermore, using the search function on Funderbeam’s data section, you can find out details about any international startup that has received funding with publicly available data on the funding round.
How Funderbeam Works
Once you have signed up to Funderbeam, you will receive emails about new syndications on the platform, i.e. new startup crowdfunding campaign, and you will receive notifications about sell orders in previous syndications that are now trading on Funderbeam’s secondary market. As Funderbeam is built on blockchain technology, you are not trading shares like on a traditional stock exchange, but, instead, you are trading digital tokens that represent your share in the startup.
Having followed Funderbeam closely toward the end of 2016 and having partaken in its second syndication that raised €424,000 in early November, at this point Funderbeam does not yet function as a stock exchange in the traditional sense. The secondary market liquidity is not yet at the level where there are constant bid/offer prices listed at which you could trade, and there is not enough liquidity for an active order book as you would see on the New York Stock Exchange for example.
Currently, Funderbeam’s secondary market feels more like the OTC (over-the-counter) bond market. If you have partaken in a syndication as an investor, you will receive all buy orders and sell orders for that startup’s token via email. In the case of Funderbeam’s Syndicate 2, you'll receive up to ten emails a day with orders that are looking to be filled. Having said that, the bid/offer spread, of where people want to buy and where people are willing to sell, is still quite far apart. Furthermore, much like in the OTC bond market, you are not being informed of whether anyone traded at the proposed order levels. Therefore, to determine how much your startup investment is currently worth you would value it at the bid price that someone is willing to pay for the amount you hold.
At the time of writing this article, Funderbeam’s Syndicate 2 had bid levels around the €1.40 mark suggesting that the value of Funderbeam has gone up by around 18 percent from its initial value of €1.19 per token since early November 2016.
Is Funderbeam the Future of Startup Investing?
Funderbeam’s innovative approach to startup investing by creating a secondary market for each crowdfunding campaign will be the future of startup investing. Why would anyone want to lock up their funds in a high-risk investment for ten years or more, if they can instead invest in the same startup but have the option to exit the investment at any time? It simply does not make sense. By providing research, data and a secondary market for startups, the investing appetite for early-stage startups investment as an asset class should increase as it becomes much more accessible to the everyday investor.
Currently, four startups are trading on Funderbeam, and the number is expected to grow in 2017. If Funderbeam becomes the success that it is primed to be, it would not be surprising to see traditional stock exchanges create similar exchanges for startups on top of the distributed ledger technology to benefit from the boom in tech startup investing. In fact, the New York-based NASDAQ stock exchange has already developed a similar blockchain-fuelled platform called Linq, where the first trade of shares in the blockchain startup Chain Inc. was conducted in January 2016.
Disclosure: The author holds a small share in Funderbeam acquired during its Syndicate 2 funding round in November 2016 and the author can confirm that no remuneration for this article was received from Funderbeam, solely from BTCManager.