If you want to raise funding, you should naturally think about setting up a Fund. Having a Fund allows you to handle multiple investors and to dissociate their investment [into the Fund] from the Fund's investments [into non-cash assets]. Advantages are multiples: the Fund Managers do not have to get approval from their investors for each transaction, risk can be diversified, regulation raises confidence and enables institutional investments, reporting is guaranteed etc...
Therefore, why is setting up a Fund not the panacea for all fundraising strategies?
Because, as all first-time or would be Fund Managers will tell you, investors don't like investing in new Funds. We are facing the chicken-and-egg conundrum. To attract investors to a Fund, one needs to have managed (successfully) a Fund before. Investors want to see track records and historical performances. No one wants to be the anchor investors - also called guinea pig - of would-be Fund Managers.
Bottom-line, without a personal contribution - typically €3+ million for a regulated Fund - and no credentials to reassure anchor investors, chances of success are really slim.
But, is there a workaround?
VC-A's Proposed Strategy
VC-A's proposed strategy is to flip the first two steps of the process: instead of raising an initial tranche in cash to acquire the first asset(s), acquire the asset(s) first and then monetise them to secure cash.
What are the advantages of the proposed strategy?
- You no longer need to identify a cash-rich Anchor Investor but an asset-rich Partner.
There are significantly more non-cash-asset-rich people than cash-rich people simply because cash is not an attractive asset to hold in a portfolio.
- You no longer need to acquire the initial asset(s) because they are brought in by the "Anchor Investor"
- Your Anchor Investor is likely to be an expert in the management of the asset(s) he owns and you can partner with him to co-manage the Fund
- You now have a Fund, with asset(s), and an expert in asset management on board
The initial asset(s) and the Anchor Investor's expertise bring the credentials needed by the Fund to raise further funding.
This all looks good, but how do I monetise my Assets?
Find the golden berg (gold mountain)
Before addressing the asset monetisation process, let's us ask ourselves the question:
Where is the money?
Thanks to the COVID, we have nowadays trillions of public money floating out there, but it is unlikely that this money can be used to set up a privately owned Fund. Maybe at a later stage for leverage?
You also have a lot of money in existing Funds like The Blackstone Group, The Carlyle Group, KKR & Co etc. "The winner takes it all" says the song and the top-Funds are fully loaded. Unfortunately, they are not friends of would-be Fund Managers, but rather competitors.
The bulk of the money is managed by institutional investors the like of pension funds, but they tend to invest very large tranches and only in regulated instruments. They are our best bet to grow our Fund aggressively, but not until we have built our credentials.
The uncovered vault of money is in the hand of cryptocurrency owners. There are close to 19 million Bitcoins valued at around $40k each at the time of this article. Just in Bitcoins, there are c.a $700 billion on the blockchain, followed by Etherum, $300 billion, Tether, $58 billion, Binance Coins, $57 billion, DogeCoins, 53$ B and another 5 000+ cryptocurrencies.
We have found our golden berg, let's see now how to mine it.
Value the asset
The first step to monetise a non-cash asset is to value it. If it is gold, it is easy, you will generally use the LBMA second fixing price. If it is real estate, you can eventually rely on reputable auditors. If it is a large listed company, you have credit rating agencies like S&P and Moody's, but what happens if your asset is a startup ? or a real estate development? or a piece of art?
You need a "Digital Asset Rating Agent (DARA)". The asset is in the real world, the security token issued against the asset in the digital world. The DARA shall put a value on the security token. Both valuations should converge.
The DARA's valuation will help you convince investors to acquire your security tokens.
Know your potential investors
Why will this strategy be successful?
To understand why this strategy will be successful, we need to understand the risk profile of the investors. Every investor has got a risk profile, from risk-averse to risk-taker. To invest in an early stage Fund, one needs to be a risk-taker.
Institutional investors are risk-averse and therefore, likely to invest only in consolidated Funds.
Risk takers will be either hands-on or hands-off investors. Hands-on investors want to know in which assets their money is invested and have a say on the investment decision. They are unlikely to invest in a Fund managed by third parties.
Our target anchor investor is therefore likely to be a risk-taker and a hands-off investor.
What is the profile of a cryptocurrency owner?
There are multiple sorts of cryptocurrency owners so let's try to segment them into categories:
Miners have earned their cryptos through proof of works or proof of stake. There are likely to be young sophisticated technologists. They will value their crypto in the mirror of the effort that it took them to create them rather than in the amount of cash that they would have had to spend to acquire them. They may be idealists and even antisystem.
They understand the crypto world and may be extremely rich - that is in cryptos value - and looking for ways to invest in the real world. Given their youth, they may not be in a hurry to swap their cryptos for fiat money, which they may not trust as a reliable asset.
It is hard to tell because of the opacity of the market, but as much as 50% of all BTC may be owned by Chinese investors looking to invest outside of China. They are looking for investment opportunities in the real world and are unlikely to be long-time crypto holders.
I would put into that category would-be investors lured by the sirens of crypto-related success stories. Late-stage investors are unlikely to have made a lot of money with their cryptos yet, but they are trying hard to uncover the next shooting star.
A few large organisations have already adopted cryptocurrencies and the trend is accelerating in the wake of Elon Musk's ebb and flow. Large organisations have acquired cryptos to trade their goods and services and have no intention to invest in third-party Funds. Fortunately, they only represent a minority of crypto investors.
Bitcoin is helping nefarious organisations transfer and launder dirty money. No doubt that they are risk-takers.
Lucky early-stage investors
Imagine that you acquired 1000 BTC at 10 cents each and forgot about them until recently. All of a sudden, you are a millionaire and you do not even know why. Now, what are you going to do with your fortune?
If you did not forget about your cryptos, you need to have had solid nerves to hold them on your portfolio as their valuation looks like a roller-coaster.
The Islamic law forbids investors to make money out of money. With cryptocurrencies, many Islamic investors have found a workaround as well as a way to invest in occidental countries.
All the categories above except the large organisations are likely to be interested in a Security Token Offering (STO) because:
- they will not leave the crypto world, just swap a cryptocurrency for a crypto token
- they will understand the value of a crypto token as they understand the value of a cryptocurrency
- they are risk-takers
- they do not value their wealth like traditional investors
- they are hands-off.
Procedure to setup the Fund
The procedure to set up a Fund with non-liquid assets could be as follows:
- The Anchor Investor is the owner of non-liquid assets (NLA). The Anchor Investor transfers the property of his assets into a Fund [in Malta] in exchange for a stake of the Fund’s equity. NLA are protected. The Anchor Investor shall join as a Limited Partner (LP) to optimise his cost or ask to join as a General Partner (GP) and create his own SICAV. The GPs need to pay in advance the cost of setting up the Fund.
- The NLA is appraised by a third-party auditor. Equity shares are issued in favour of the Anchor Investor and valued based on the appraisal.
- The Fund issues security tokens and sells them through the Crypto Platform to the Cryptocurrency Owners. Cryptocurrency Owners buy the tokens and pay in cryptocurrencies. The GPs need to cover the cost of the security token offering (STO) and the marketing expenses of the tokens.
- The Crypto Platform swaps the cryptocurrencies for fiat money, e.g. €,$ or £
- Fiat money is transferred into the Fund to cover the setup cost, the STO cost and the marketing cost. GPs' advanced payment is paid back.
- The Fund is created, regulated and the NLA is the first credential. Large amounts of money can now be raised from institutional investors in exchange for Limited Partnership positions.
What assets can be used as initial investments?
There is no cast-in-stone answer to that questions. It all depends on the valuation and the regulator. Can the asset be appraised by a third-party auditor? If yes, will the asset be accepted by the regulator? If not, it is still possible to set up a Fund, but not to regulate it, which closes the door on future institutional investments.
At VC-A we are currently in the process of setting up a SICAV and would like to find Anchor Investors to create Funds and Sub-Funds to invest in the following asset classes (subject to successful compliance due diligence on the assets and green light from the Appraiser):
- Gold bullion, silver and other precious metals
- Diamond and other precious gems
- Agricultural products, coffee, rice, wheat, hevea, kenaf products...
- Companies listed on the stock exchange
- Private equities
Other non-cash assets
- Financial instruments such as Bank Guarantees, SBLCs, LOC...
- Non-Performing Loans (NPL)
- Big Data
- Hotels and other hospitality real estate
- Buy-to-rent real estate, residential or commercial
- Distressed real estate, residential or commercial
- Luxury cars
- Forests, woodlands
- Tree plantation
- Land for plantation
Why work with VC-A?
We bring all the pieces of the jigsaw
Our Fundraising platform shall bring:
- a SICAV to speed up the creation of regulated Sub-Funds
- regulated Directors to administer the Fund and form an Investment Committee
- relationships with placement agents to reach out to institutional investors.
Our VC-A Network shall source:
- new assets to invest in
- traditional investors to grow the Fund
- subject matter expert to access the Fund's investments.
Our Crypto platform shall provide:
- a Digital Asset Rating Agency soon to be regulated (DARA)
- access to 250,000+ cryptocurrency owners
- a passive income to token owners through staking, lending and trading
- swap facilities to convert cryptocurrencies into fiat money.
The beauty of the model is that it can be tweaked in multiple ways:
- Funds can be set up the traditional way without having to issue security tokens
- Assets do not need to be securitised at all if the Anchor Investor/GP can bring in cash
- Assets can be securitised only partially to balance the risk and return to the token holders
- Funds can be regulated or not
- Assets can be sold to the Fund
- Asset owner can decide to take part in the management of the Fund or not.
So, if you own, or know of someone who owns assets valued over €5 million, and is looking to monetise them, and/or grow his portfolio, please get in touch for a free assessment of your project.