A recent article on TechCrunch quoted Gil Ben-Artzy stating that 95% of VCs are not profitable, meaning that they do not achieve enough returns to justify the risks, fees and illiquidity taken on by their investors. VCs would need to return 3x their fund in order to be profitable for their LPs (LP stands for Limited Partners, they are the ones who invest in VC funds – typically pension funds, institutional accounts and wealthy individuals).
There is also a widespread dissatisfaction amongst start-ups with the lengthy and consuming process of finding and securing VC investment, and with the unwanted “strings attached” that come with it.
Many argue that both these inefficiencies are symptoms of an investment model that is broken at its very core, trying to align the interests of the Founders, the start-up’s users and customers, the VCs and their investors. Such interests are all very different and not all the parties are even aware of each other.
In recent years, different models tried to make up VC’s faulty model by trying to change the relationship between Founders and investors, like crowdfunding, Capital-as-a-Service or Initial Coin Offerings. While none of these has come close to replacing VCs in the start-up ecosystems, some Founders have resorted to grants, debts and angel investment in an effort to bootstrap their businesses without involving institutional investors.
In an effort to align the interest of all the parties involved in the financing of a company, London-based Consilience Venture has come up with a new model that they define as a hybrid between a community and an investment platform.
How it works
The concept is based on a carefully selected group of start-ups, investors and experts (advisors, accountants, lawyers). In numbers, the plan includes around 60 companies, over 500 investors and over 1200 advisors. There is no application process in place: participants can only get in by referral.
Consilience’s model consists in creating a financial ecosystem for this community, based around a blockchain token.
Before we continue, bear in mind that the blockchain component of the model is merely a tool to keep track of ownership between the community. As Consilience CEO Kevin Monserrat put it: “You could be using coconut shells or bottle caps as tokens if you wanted”.
Investors put in some money, with a minimum investment of £25,000. Start-ups all put in a portion of equity, starting with 1-3%. Both parties get an equivalent amount of what they put in the form of said tokens, called CVDs.
The token monetary value is based on the collective value of all the start-ups in the community. If one of the start-ups’ valuation goes up, so does the value of the token – and vice versa. Since the risk is pooled, the investment is less risky than just putting all the money in a single company.
The systems allows for tokens to be bought and sold, creating the opportunity for liquidity for both investors and start-ups: if a company needs more money, they can exchange some more equity for tokens within the system, then either sell the tokens for cash or use the tokens to pay consultants within the community.
Investors, meanwhile, can sell their holdings (provided they can find a buyer within the system) more quickly than they could do with traditional VC investment, where money is locked up for a long time — 13 years is typical.
If a company is bought or IPOs, everyone in the community gets a share of the proceeds, according to how many tokens they own, making venture investing easier.
Ok, but will it work?
Consilience CEO Kevin Monserrat openly admits that, as a new model, Consilience is facing some scepticism from investors: “Investors are worried because this is such a new, unproven model,” he says. He’s also wary that the initiative might be perceived as “another ICO or crypto-venture”, and therefore appearing unreliable to investors.
Consilience’s mission is not at all linked to the blockchain technology used within its community: Monserrat knows that, eventually, the project’s success will depend on the quality of the start-ups selected and on their cooperation with the community members to grow and thrive.
“I am not going to say that we have some method that makes us better at choosing companies. But we will be better at helping them outperform,”
“VCs all claim that they have the secret sauce that makes them the best at spotting winners, but in reality, they are all pretty similar. Their network is the difference. I am not going to say that we have some method that makes us better at choosing companies. But what I would say is that we will be better at helping companies outperform using our sprint financing model,” says Monserrat.
This is the other big idea. Everyone helps each other — shares ideas, makes introductions, collaborates on tech — because everyone in the club has a vested interest in making sure the value of the token stays as high as possible. Monserrat’s theory is that this will give the portfolio a higher success rate.
So far Consilience has secured a few initial investors and is in talks with more. It has also selected three start-ups to invest in — but needs to find plenty more before launching later this year. It’s a long shot. But hey, VC needs all the innovation it can get.