Stock exchanges and private equity: two different universes
Stock exchanges and venture capitals, the adult and the kid, the father and the son.
Both are opportunities to finance companies. The first is usually referred to big companies that already have a well-organized structure, while the second is referred to start ups and early stage companies that want to transform their ideas into something bigger.
Although in both cases a long auditing process is required, the equities that the investors possess have different demands and potentials.
In the case of stocks exchanges, equities are put in an exchange market that is full of liquidity, demand and capable investors that are keen to speculate over the most renowned companies’ stocks. Investors can easily trade and take profits according to the performance of the company.
By contrast, when a venture capital (a type of private equity) decides to invest into a company he is aware, that the equity will not be traded as on stock exchanges but it could lead to much larger profits than stocks over the time.
Photo by Austin Distel
The potential of investing in early stage companies
Investing in early stage companies could be a rewarding experience, not only in the economic aspect, but also for social change, because you help an entrepreneur to make his idea real.
However, the economic aspect is the most important and, according to the an article of Tanya Prive on Forbes.com it is possible to have 3x cash-on-cash returns over 5 years and 9x return over 10 years.
It is important to highlight that returns are never guaranteed and the risk factor is very high. However, it is possible to aim for returns that exceed 20x or even 100x.
In the crypto world, start-ups funded through “ICO’s” (initial coin offering), can have returns of the 179% during the first day, referring to the ICO price.
It is important to remember that investing in ICO could be even riskier than investing in traditional start-ups, due to the likelihood of dealing with scams and the volatility of the cryptocurrency.
Illiquidity, middlemen and fees; the difficulties of small companies’ equity market
Usually, when you want to invest in an early stage company, you have to deal with private equity funds composed by funds and investors that directly invest in private companies.
Private equity funds have a similar fee structure of hedge funds; hence you will run into management (around 2%) and performance fees (around 20% of the profits). Moreover, this type of funds charges an annual fee based on the capital invested, usually it is around the 2 percent mark.
However, the main problem for investors is the illiquidity of the market.
But what is liquidity? it is the cost of reversing an asset trade almost instantaneouslyafter you make the trade. Consider it like the cost of the buyer’s remorse.
However, equities of smaller companies are not tradable like stocks, because these types of equities don’t have the same interest and visibility of the stocks exchange.
Exchanges are not only a place where it is possible to trade stocks and derivates, but also to showcase companies. In the crypto world, the reputation of a small coin is also credited to its gained popularity on the exchanges on which they are listed.
How TaoDust uses the blockchain technology to bring liquidity
So our question is: How do we bring liquidity to an illiquid market? Does the blockchain technology allow us to solve that problem?
Blockchain allows to tokenize (to digitalize into coins) equities and store their data on it. Transaction will be recorded on the single file database that assure safety through it peer-to-peer structure. This makes the digital representation (token) of a reallife value tradeable. Exchanges and trading platforms offer almost instant trade.
TaoDust offers the ability to tokenize equity of companies that want to undertake a crowdfunding campaign on our platform.
The next step in which TaoDust engages is the secondary market which allows tokenholder to trade their shares instantaneously. Once the equity will be tokenized, it would be extremely easy to trade it like a cryptocurrency on exchanges.