CashLink has launched a platform enabling venture capital investors to buy tokenized startup stock options. The main idea is to improve the accessibility of venture capital investments and cut down transaction costs and paperwork.
Raising capital is especially painful for startups. Costs are high, and the process can take a long time. But time equals money, even more so in the startup scene. Blockchain-based fundraising could become an attractive alternative for startups, as they can issue their shares through a Security Token Offering (STO). CashLink, a tokenization platform based in Frankfurt, Germany, has recently launched an STO platform targeting startups, fully compliant to German law.
Fundraising is costly and time-consuming and retail investors have limited access to venture capital
Michael Duttlinger, CEO and Co-Founder of CashLink, says a major pain point for startups in Germany are the costs of fundraising, especially the legal costs, and the enormous amount of bureaucracy and paperwork.
When CashLink first launched as a payment company and raised funds, at least one person had to work on fundraising full time, explains Duttlinger. Transitioning to digital markets, many processes can be automated and firms can significantly cut down transaction costs.
On the investor’s side, venture capital investments are currently mostly unavailable for retail investors. They usually come with high minimum investments and lack of liquidity. But retail investors don’t want to tie up large sums of money for many years in just one investment vehicle.
That’s a shame because venture capital investments can be attractive to retail investors. They can be highly profitable and often have a low correlation to traditional investment vehicles such as bonds or stocks.
Security tokens could therefore be a solution for both startups and investors. In a functioning token economy, investors could sell their tokens at any time on the secondary market, without much hassle or paperwork involved. That could make the asset class more easily accessible and provide capital for startups.
Tokenizing phantom shares
CashLink offers its services to startups based in Germany and to investors from all over the European Union. The platform tokenizes virtual stock options which many companies use for employee phantom share plans.
Thus, investors receive the right to participate in the exit proceeds when the company gets sold. In a cash event, the investor will receive his share of the total based on how many tokens he owns.
To show how it’s done, CashLink has now launched the private sale of their own security tokens. Among the investors are FinLab, Panta Rhei, seed + speed Ventures, and Deplains.
Duttligner believes over the years startups will start running hybrid models, issuing a part of their business as security tokens and funding the rest via traditional venture capital financing. The more token markets will develop, the more attractive the CashLink model will become.
CashLink limits its platform to institutional investors, at least for now
Cashlink’s concept makes sense. However, for investors and startups to truly benefit from Cashlink’s platform, there needs to be a well-functioning secondary market for security tokens, which is still very rudimentary at this point.
Also, at the moment, CashLink has only made his platform available for professional institutional investors, not retail investors. The reason, according to CashLink themselves, is that the company “takes consumer protection very seriously. Start-up investments are always associated with a high risk, which private individuals without venture capital experience find difficult to assess.”
That’s true, good on you, but institutional venture capital investors may just keep investing the same way they always did because they are familiar with it. The real pain is more on the startup’s side, not so much on the side of institutional investors.
Moreover, institutionals are tied by strict investment policies. Considering that Germany has so far abstained from creating clear legal guidelines for security token investments, how likely is it that such investors will take potential compliance risks by using CashLinks platform?
The concept is good, but it might just be a little too early. But it’s the early bird who catches the work. We shall see. If investors jump on it, CashLink could become a great success story.