Tokenizing VC’s

Token Governance models

Tezos founders at Money 20/20 after the governance crisis

Tezos promised a new digital commonwealth that would solve the problems of governance that Bitcoin was facing through a Delegated Proof of stake system, and raised a record $232 Million in July 2017. Last week, it was revealed that they were facing a governance crisis and they are embroiled in a legal battle between the founders and the director of the Swiss foundation through which they raised money.

This legal battle can drag on for years and might never be resolved prompting a much needed wake up call to all ICO investors. Mark Suster, a renowned investor had talked about how ICO’s lack governance in his blog post - What do Boards Actually Do. In it, Mark made the following points:

Startup Investing is new for retail investors

I think retail token investors(including me) underestimate the importance of the issue of founder-to-founder conflict. Typically retail investors have the mindset that VC’s are greedy capitalists who want to make a cut of the founder’s profits. But the main reason I believe, is that since none of us started companies we don’t really know how companies really work. We drastically underestimate people issues and give precedence to tech/whitepapers/code generated. Even though there might be more mathematicians in the new founding teams, crypto firms are ultimately made up of people.

When teams like ethereum are building out their tech, the founding teams are pretty sure to have founder to founder disagreements. These disagreements can be over the future roadmap, they can be over using the right technology, or they can be over spending on marketing vs product development. Or they might disagree on how much they should spend on their next weekend party.

I am not hinting that any particular founding team is inefficient or that they cannot manage their money. But, founder conflict is the norm. HBR published a study which revealed that 65% of startups fail due to co-founder conflict. And this conflict cannot be resolved by tokens today.

Aragon Platform for governance

Today, the biggest crypto team tackling governance is Aragon which is in its early stages of developing a governance tool and is being used by other projects like district0x. Both these teams have regular livestreams with the community so that we, investors stay updated with their progress. They also share their development plans regularly and investors can vote on the developments that they want to prioritize. To an extent, Aragon can remove most administrative tasks and directly interface with its investors. However, it cannot address founder conflicts.

How can cryptotoken teams address founder-to-founder conflict?

The founders cannot have a vlog session and share their conflict and pain if they are having a huge fight amidst themselves. They would be uncomfortable with revealing such things publicly for everyone to see as they rightly should be. Even if they did reveal their conflict, what would we investors be able to do with that knowledge? We cannot vote on who’s right with our limited understanding of their personal problems. We cannot help heal that conflict or give a better direction for the founders. However, investors and VC’s excel at this through repeatedly helping solve these types of conflicts through years.

Governance should be part of the token sale

Lot of teams raise money from the market directly through an ICO without getting investment from VC’s. However, retail investors should invest only if these teams had a governance model properly defined from day 1. Backing of a VC implies that the investor is deeply invested in the company and will help the team through their entrepreneurial pursuit.

We should search for ways to merge VC investment into token ICOs. One of the ways that this could work is that ICO’s set up a 20% cap for investors. Only if these investors fill up their cap, should retail investors pursue investing in the token. VC’s can evaluate teams prior to investing after evaluating the teams and arriving at a discount . In my view, VC’s deserve this discount because they are going to back up their money with sweat and blood. They are going to put in the work of meeting the founders, help in resolving conflicts, help provide a direction to the founders.

Retail investors should be informed of the VC investors investing, the amount they are investing and the vesting period. There have been multiple investors in VC’s such as YC investing in Filecoin, Boost investing in Decentraland. Having a prestigious VC backing a project is a good sign for any retail investor investing in these projects. That would make the project less risky for me as an investor and I would be glad paying a premium to invest in projects which have a higher probability of success as they address one of the biggest reasons of companies failing. If most companies fail due to founder-to-founder conflict and we have a mechanism to avoid that by continuous feedback and direction, I would go with a lower return than a no return.

Today, all ICO’s seem sexy and a sure shot investment that are going to ‘moon’ but ICO’s are a new phenomenon and with time, we will see failures of most of these tokens. VC investors have already been through most of these boom and bust cycles and have learnt from their experience so why not have them onboard?

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