A handful of methods exist for raising capital, from private offerings to semi-public to a full-blown IPO or ICO. Now STOs are on the rise which might just be what tech startups need to revitalize the market
According to data collected by Pitchbook, a smaller number of startups are being obtained by larger firms or are going public. Many of these startups, though venture-funded, have a minimal chance of starting an initial public offering (IPO). Some are resorting to cost-cutting measures to better their operating margins in the hopes of drawing mergers and acquisitions (M&A).
Today, more young companies are being allocated capital by VCs, and yet, fewer are exiting through M&A. And the exits are taking longer for those who go through an IPO.
It is said that 2014 was the height of VC-supported exits with 200 startups lined for an IPO. As the years passed the numbers dropped, in 2017, not more than 100 IPOs reached the market.
The sloping movement persisted throughout 2018. Now even less companies backed by large investments are being offered an IPO or M&A exits.
Pitchbook notes that in 2006 it took businesses an exit time of around 4.9 years. But by 2016 it took roughly double that time, 8.3 years. Investors are holding back for an exit from a position for 10 years.
The STO: A Modern Route to Liquidity
Initial coin offerings (ICOs) have transformed crowd-funding and capital-raising. However, a majority of it was ineffectual in delivering business benefits.
On the other hand, an STO can lead the way to equip medium, VC- supported tech startups to re-define itself whilst allowing innovative entrepreneurs to elucidate new problems.
Anticipated to be compliant, security token offerings (STOs) behave like traditional equities. Typically, it has a standard exemption through the SEC’s Reg D. Its difference from the traditional lays in the execution which is done through a smart contract.
Tokenizing a business backed by big money unravels liquidity difficulties. The accepted scope for tokenizing starts from $100 million up to $1 billion. But there are other alternatives such as a partially private token offering using the SEC’s Reg D exclusion which can be offered to qualified investors, or a semi-public offering through the Reg A+ Sec exemption. Though it can be proffered to non-accredited investors, the semi-public offering is restricted to $50 million per year.
The significance of tokenized shares can also be felt in the secondary market enabling seed investors to shift funds to other innovative businesses.
Advantages of Tokenization
Young companies that have undergone several funding rounds possess proof that can be considered quantifiable and comparable. After half a decade or so, these startups already have a client base, a product, revenues, and financial background where fair market valuations can be derived.
Startups in tech have the financials ready for tokenization. Through tokenizing, the opportunity for discovering capital and talent is realized. It can revitalize the tech industry and its accompanying market.
Another benefit that comes with the process is that token converted shares can be sold at a later time on exchanges viz. Open Finance and tZero.
In summation, tokenizing shares and conducting STOs can pick up on the innovation started by ICOs and breathe new life into the market.