Liquid Ventures: Token-based Startups

December 8, 2023

It’s clear that crypto is not just a passing trend, but a transformative technological shift reshaping the landscape of value transfer, startup formation, and asset ownership. Network participation and ownership, liquidity to protocols, fostering an ecosystem where participants are directly invested in the success of the networks they support.

This represents the most radical shift in our financial system since the modernization of banking and finance, which began over three centuries ago.

Crypto startups vs traditional startups

Crypto startup are typically young ventures who have distinct features that set them apart from traditional startups:

  • Tokens and Utility: Crypto startups frequently issue digital tokens that are used within the ecosystem to pay for transaction fees, access services, or engage in governance through voting mechanisms. These tokens can be native to their blockchain or, initially, they might utilize tokens from other chains.
  • Liquidity: Tokens provide liquidity advantages not commonly found in traditional equity investments. They can be traded on centralized and decentralized exchanges, enabling more straightforward and rapid asset liquidity management, a feature often missing in conventional startup investments.
  • Community-Centric Business Models: Crypto startups often revolve around community-driven models, where user participation and governance are key. Unlike traditional startups, these companies empower their users, often token holders, to actively influence key decisions, fostering a sense of co-ownership and engagement in the project's direction and success.



How are VC approaching tokens nowadays?

In the evolving landscape of crypto startup financing, venture capitalists are adapting their strategies to align with new fundraising structures. A prevalent approach now is the use of a SAFE combined with a token warrant. This combination, often referred to as SAFE+token warrant, is becoming a standard in crypto fundraising. Unlike traditional SAFE agreements in Web2 startups, where the focus is solely on equity with a long-term involvement commitment, the SAFE + token model in crypto includes an inherent agreement for token warrants.

This structure is generally initiated by the founders and is integrated into the initial SAFE agreement, granting investors rights to future tokens. This approach allows VCs to balance their traditional investment methods with the unique opportunities presented by tokenization in the crypto space.

The interesting aspect here is the shift in VC investment philosophy. While traditional Web2 investment via SAFE is about equity and long-term engagement with the business, in the crypto realm, the addition of token warrants offers a pathway to liquidity and potentially quicker returns. This reflects a willingness among VCs to adapt to the fluid nature of crypto assets, even though it might mean less legal control compared to traditional equity holdings.

This trend indicates a significant evolution in venture capital, where VCs are not only financiers but also active participants in the emerging token economy


The benefits of tokens

Despite regulatory uncertainties, the demand for tokens continue to surge due to several factors:

  • High Liquidity: Tokens can be traded on various exchanges, providing investors with the ability to quickly enter and exit positions.
  • Innovative Fundraising Tool: For startups, tokens are a novel way to raise funds without diluting equity or taking on debt. However, we believe that in the future, tokens will likely be considered more akin to equity.
  • Alignment of Incentives: Tokens can align the interests of various stakeholders, including users, investors, and developers, fostering a more cohesive ecosystem.


Traditional Startups in a Token-Based Economy

Early liquidity for traditional startups is going to eventually become a natural shift.

VCs and investors are increasingly reluctant to remain locked into a single investment for decades. Certain conditions will be necessary to make this transition viable including aligning interests properly, establishing appropriate vesting periods, and ensuring professional execution of these new liquidity models.

The crypto sphere is setting a precedent for what the future will look like: a token-based economy where assets are fluid, tradable, and collateralizable.

The most significant challenge lies in transforming the mindset of the long-standing, traditional VC industry. Encouraging them to adapt and recognize the efficiencies of having liquid and tradable equity in their portfolio companies is crucial. Such a shift would not only enhance their business model but also allow them to adjust their exposure to specific industries more dynamically and adapt swiftly to changing market landscapes.


What is not going to change?

Drawing inspiration from Jeff Bezos's quote:

You can build a business strategy around the things that are stable in time simply asking yourself the question: 'What's not going to change in the next 10 years?'

What is not going to change:

  • Preference for Liquid Assets: Demand for liquid assets will remain a constant. Investors will always prefer having the option to convert their assets quickly and easily into cash. This trend is unlikely to reverse, as liquidity remains a key factor in mitigating risk and ensuring flexibility in investment strategies.

  • Regulatory Environment: The need for regulatory compliance will persist, especially as the crypto market continues to mature. Navigating regulatory uncertainties and adhering to legal standards will be increasingly important for the legitimacy and growth of startups.

  • Value Creation: Despite the current excitement surrounding crypto startups and their often inflated valuations, sometimes lacking clear business rationale, the fundamental requirement for startups to create and deliver real value, solving genuine problems and meeting market needs, will continue to attract investment and build customer loyalty.

Thank you for taking the time to read this article

Francesco Biviano

written by
COO & Co-founder of Arcton