One of the last giant problems with startup investing is the absence of liquidity, say Villu Arak and Urmas Peiker, one half of the founding team behind Estonian fintech company Funderbeam. Early next year, the start-up intelligence firm is launching a marketplace for early-stage investments, using blockchain technology to bring on-demand liquidity to startup investors.
“It’s quite difficult and time-consuming to invest in a start-up company,” says Arak. “Once an investment is done, it takes years before any chance of that rare profitable exit everyone hopes for. Until then you’re stuck. Even if your investment increases in value, you cannot easily offload it, whether in part or as a whole. And that’s what we’re aiming to solve with the Funderbeam marketplace. To do that, we’re combining start-up data, syndicated investing, and aftermarket trading.”
How does the system work for investors?
Arak: “Investing in startups on the Funderbeam platform will take place through syndicates that pool several investors’ resources. A syndicate is created by a lead investor, someone with stellar experience, reputation and a wide network. The lead is responsible for finding and negotiating with a start-up that he’d like to invest in. He then posts an invitation on the platform for others to participate as backers. This gives small investors a way to participate in larger and more attractive deals they’d otherwise never see in their pipeline. For example, 100 people can each put, say, €1,000, in a syndicate that then invests €100,000 in a startup. The startup’s only contact in the syndicate is its lead investor, so founders won’t have to deal with hundreds of small investors.”
Why should this platform be more transparent?
Arak: “After the syndicate has been formed it becomes a separate company known as a special purpose vehicle (SPV). The SPV invests in the start-up, in return for an equity stake. This is key — syndicate investors won’t directly hold equity in the startup. This is where the elegance and beauty of the system lies. In exchange for their claim on the syndicate, and its underlying startup investment, investors will be issued digital tokens that are easily tradeable. Token ownership and all trades are recorded on the blockchain, which makes the trading fast, transparent, secure and cheap.”
Do you think the start-up market will continue growing?
Peiker: “Absolutely. In the UK, for example, the market for alternative funding has doubled every year for the past 3-4 years. The general public is becoming increasingly aware of other ways to arrange funding, and thanks to technological innovations, institutional and private investors are becoming more similar in many ways. All of this, coupled with improved company data and transparency, will help grow the market.”
Could there be a so-called bubble in this sector?
Arak: “Everyone seems to have an answer. The risk of a bubble should decrease with improved transparency and accuracy of market data and its participants.
Peiker: “We’re convinced that data, including ours, makes more knowledge available to the public. Of course, you should never discount human psychology, including irrational exuberance. There will still be some discrepancy between valuations that people put on their start-ups and what their companies are really worth.”
Funderbeam has received funding from Skype co-founder Jaan Tallinn. In your experience, what are the best ways to attract the attention of possible investors?
Arak: “Among other things, one of the key pieces that investors look is the team and its experience. At a very early stage, a startup’s track record simply isn’t there. So you rely on what the team has done before, and how it gets together. That’s no guarantee of attracting investment, but it’s an indicator few investors will ignore. In our case, Kaidi Ruusalepp, our Founder and CEO, used to run the Nasdaq OMX stock market in Estonia, Urmas is a former regulator and compliance officer, and other key team members also bring deep knowledge and experience in their fields. Our investors have been very supportive of what we’re looking to achieve, and trust that Funderbeam will get there.”
“Another key thing is that it’s essential identify a considerable pain point, a problem in the market. If lots of people have the same problem you’ve identified, it helps validate the need for your product or service. Funderbeam’s team felt that there is a lack of transparency and liquidity when it comes to startup investments. So we decided to build a product that attacks these problems for investors and startups worldwide. So, find a serious problem and then solve it.”