Blockchain is defined as the ‘great chain of being sure about things.” by The Economist. We are moving towards a blockchain future where the marginal cost of a transaction drops to zero and peer-to-peer commerce is facilitated by ‘trustless’ transactions.
Blockchain’s pace of development continues to happen at a relentless rate as we enter 2017, with a myriad of test implementations across the financial sector and a horserace between emergent fintech players to become blockchain beacons.
One of the most intriguing areas for development is in the secondary market for private securities in startup and venture companies. Since SharePost and Secondary Market (which has since been acquired by Nasdaq) became prominent for their role in helping Facebook’s paper millionaires cash-in their shares, the idea of a liquid market for shares in private companies has become the holy grail. Such a market would remove the ‘exit strategy’ line from the first slide of every startup’s pitch deck and enable both founders and early-stage investor to cash in some gains before the company is sold. In short, it would revolutionize both enterprise formation and venture investing.
The growth of equity crowdfunding over the last five years, especially in the UK, shows there is a substantial appetite for investment in new companies for both accredited and non-accredited investors. OurCrowd, a global equity crowdfunding platform for accredited investors, did a study in 2015 highlighting this trend:
Given this movement of capital into private, illiquid companies, there is a clear role for secondary markets. The question is, what is the blockchain’s role in such a market and how long until we will see a global secondary market for private securities?
The role of the secondary market in the capital markets ecosystem is threefold:
- discovery of counterparties – see who is interested (individual investors, funds, etc) in buying and selling securities
- reducing complexity – without an official secondary market, the legal, tax and accounting complications for executing a deal between two parties can make deals extremely difficult to execute
- transaction costs – the costs linked to the above considerations (legal, tax and accounting) are not fully known without a secondary market, and these costs, cumulatively, could make certain deals for private securities uneconomical
An efficient, platform-based secondary market could solve all of these problems. That’s why the launch of Crowdcube’s secondary market is particularly timely for this era in global financial history – the platformization of markets. Especially given Crowdcube’s early-stage dealflow, the addition of a secondary market could create an additional incentive for investors to make bets on early-stage companies in the UK:
Crowdcube, one of two major equity crowdfunding platform for both accredited and non-accredited investors in the UK, has the dealflow volume and platform infrastructure to execute this type of secondary market, the first of its kind in the world. It’s no surprise that investor interest was so high:
Fast-forward five years. Imagine the continued growth of private venture capital for companies like OurCrowd and the inception of secondary markets on platforms like Crowdcube. Naturally, we would expect that investors on OurCrowd will want to invest in Crowdcube, and vice versa, then sell big winners on secondary markets.
This is where the blockchain will come in. Imagine a global platform for trading ‘startup securities,’ one that is liquid, crowd-based and fully compliant with national regulations:
To fulfill this vision would be impossible without blockchain. All of the various legal requirements, regulatory guidelines, transaction fees and other guidelines would make it impossible for global securities of non-public companies to be exchanged between investors, both accredited and non-accredited.
Blockchain will enable unification of all the individual ledgers for each individual platform and secondary market onto one integrated ledger, such as NEM‘s soon-to-be-launched Catapult blockchain: