Securitize: A Complete Platform for Securitization
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The blockchain was supposed to democratize access to assets until it didn’t. First came ICOs. This manifestation equated to a guy standing in an empty lot selling tokens you could spend at the store he planned to build there. Once he collected everyone’s money, he moved to Mexico. Then came NFTs. Instead of tokens with nothing of value attached to them, these were tokens with pictures of rocks attached to them. No, not real pictures, digital ones. And people can’t buy the stuff fast enough.
Founded in 2017, San Francisco startup Securitize has taken in around $87.5 million in funding from a broad list of investors including Coinbase, Sony, Morgan Stanley, Santander, Nomura, Sumitomo Mitsui Trust Bank, Blockchain Capital, and SPiCE VC. That last name might not ring a bell, but it’s the first venture capital (VC) firm that digitized their portfolio and put it on the blockchain. They produce net asset value (NAV) reports so that anyone can see what the actual value of their tokens are based on the real assets they represent.
SPiCE VC is a key figure in today’s story because that’s where Securitize was spun out of.
The Origins of Securitize
The biggest problem with tokens/coins/crypto is that they’re typically not backed by anything of value. When you attach something of value to a blockchain token, suddenly it becomes interesting. For SPiCE VC, their value was the money given to them by their investors along with whatever companies they invested in. If all that value could be assigned to tokens, then you could easily track the fractional ownership of an entire venture capital fund along with the value of each token derived from the portfolio’s NAV. It was a novel idea, but easier said than done.
Since digital securities/security tokens didn’t yet exist, SPiCE had to discover a way to adapt the complex legal and regulatory structure used by the industry today to fit a firm issuing tokenized shares and recording transactions on blockchain. Co-Founder and Managing Partner of SPiCE VC, Carlos Domingo, says this first-hand experience also opened his eyes to the huge potential of tokenization and digital securities. So, he founded Securitize, the first complete platform for the securitization of assets.
What is Securitization?
One key feature of investment banks is their ability to create sophisticated financial products that match their clients’ needs. For example, commercial paper was a relatively recent invention where a company’s accounts receivables were packaged and sold to investors. Securitization is about creating financial products from pools of assets. If you’re a VC with a portfolio of startups you want to securitize, you’ll need to consider things like:
- Rules and regulations – Selling pictures of rocks is totally fine, but if you want to sell things with value attached to them, the government needs to be involved
- Liquidity – Whatever assets you securitize are worthless if you can’t find a buyer or seller. That’s the main problem with crowdfunding – a lack of liquidity.
- KYC / AML – These acronyms stand for “Know Your Customer” and “Anti Money Laundering.” There are strict rules surrounding relationships between brokers and investors.
Until now, companies have tried to solve various components of the securitization process. Financial institutions were then stuck trying to cobble together a solution using multiple vendors. That’s where Securitize makes it really simple. If you’re an institution that wants to securitize an asset, they’ll help you do that using blockchain technology while addressing your major pain points along the way – like an automated KYC process called Securitize ID.
The below chart gives you a sense of how big the opportunity is to start securitizing private market assets.
While the private market ($2.9 trillion) raises twice as much capital as the public markets ($1.4 trillion), it has only a fraction of the liquidity (330X less). Securitizing private market assets is the first step towards making them liquid. And with liquidity comes unlocked value. Investors typically assign what’s called a “liquidity premium” to liquid assets which can increase their value by up to 30%.
Blockchain provides a transparent ledger which never lies. That’s useful because transparency in the financial industry helps remove costs. Knowing who has ownership over things is beneficial for all parties involved, and blockchain makes that possible. More importantly, smart contracts can be used to automate processes. Less friction = less costs = less fees. It also allows for a great deal of creativity when developing new types of assets, like the 22X Fund.
Securitizing a 500 Startups Batch
Another problem with equity crowdfunding is that you need to invest in many companies to succeed. If the world’s most sophisticated venture capitalists only manage to have 1 out of 10 investments see a liquidity event, don’t think you’ll find the next Microsoft by cherry-picking a few startups to crowdfund during a lazy Saturday morning. Securitize proposes a clever way to solve this problem by packaging equity in multiple startups and securitizing it.
500 startups is an elite global venture capital seed fund with a well-known accelerator program headquartered in the Silicon Valley Vatican. With a 2% acceptance rate, only the best startups are chosen for the prestigious 500 Startups Accelerator program which takes place annually. Some founders from the 22nd batch of startups from the program – Batch 22 – came up with the idea of tokenizing the startups within their cohort. Thus was born the 22X Fund which represents equity in companies that participated in the 500 startups accelerator program in Summer/Fall of 2017. Some examples of companies the fund invested in include:
|Company Name||Description||Funding |
|VCV||AI-powered robot recruiter||1.9|
|TEXEL||Social streaming and viewing||3.1|
|ShortPoint||No-code tool for building intranets||2|
|REVER||Community of motorcycle enthusiasts||2.9|
|reDock||Uses AI to help produce RFPs from content||1|
|Quantyzed||Create tax-advantaged, renewables assets||Unknown|
|Myndlift||ADHD treatment using wearables||2|
|Fyodor Biotechnologies||Urine malaria test||Unknown|
|FreightRoll||Paperless trade documents||Unknown|
|Fincheck||Automagically does expense reporting||Unknown|
|COR||Helps creatives manage projects, teams, and finances||5.7|
|Agentbong||Online home service market in Asia||0.8|
That’s quite an interesting collection of vetted and funded startups. Seems far more compelling than investing in companies that do little else but show ads on Facebook – hamburger flipping robots, master AI algorithms, and reinvented vending machines to name a few.
If there was an award for naming your startup with the most appropriate name possible, Securitize gets first place. The business model is what it says on the tin. Aside from capturing a clever name, a few things stand out about the firm. Participation from institutional investors is a big vote of confidence. Morgan Stanley’s first blockchain investment was investing in Securitize. And Japan’s Sumitomo also became an investor after using their platform to create Japan’s first credit-rated security tokens earlier this year, making Securitize the first blockchain company to receive major institutional funding from North America, Europe and Asia-Pacific.
Probably the biggest reason to take Securitize seriously is the extent to which they’ve gone to receive full regulatory approval across their entire offering, so they don’t need to subcontract or rely on processing by third parties. In 2020, they acquired a broker-dealer and alternative trading system. That decision was made after Securitize spoke with more than 40 companies trying to find a platform – with all the appropriate regulatory approvals – they could use to trade securitized assets on. Very few of those companies actually launched a platform, and those that did weren’t particularly successful in driving liquidity. So, Securitize found an entity that had just received the approvals they were looking for and bought them.
Over the past four years, over 300,000 verified investors have used the Securitize platform to support over 150 companies. One example is Exodus, a company that developed a crypto wallet similar to what Coinbase offers. With a Regulation A offering, Exodus was able to raise $75 million from retail investors using the Securitize platform. That hints at a future where Regulation A offerings aren’t just the scraps that VCs won’t touch. Successful companies can raise capital from their customers who already believe in their value proposition. What’s been missing up until now is an industrial strength platform like Securitize that can vet participants to screen out companies chasing Regulation A offerings by running Facebook ads in hopes of drumming up investor interest.
Early manifestations of blockchain technology have largely been solutions looking for problems. What most failed blockchain business models have in common is that nobody seems able to explain the value proposition in simple terms. In the case of Securitize, they’re promising what we originally envisioned blockchain would bring to the financial industry. It’s a value proposition that’s easy to understand with a blue ocean total addressable market that could help free up several trillion dollars of illiquid assets.
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