Between Scylla and Charybdis: finance generating (only) other finance.

scilla e cariddi

It’s time for some clear statement about future investments and, above all, about the picture of the future startupper/entrepreneur we want to deal with.

Scylla and Charybdis were mythical sea monsters noted by Homer. Sited on the opposite sides of the Strait of Messina between Sicily and the Italian mainland, they were regarded as maritime hazards. Scylla was on the Italian side of the strait and Charybdis was a whirlpool off the coast of Sicily. Trying to avoid Charybdis meant passing too close to Scylla and vice versa.

At the moment, starting up is synonymous of innovation, enthusiasm and risk.

Well, this point of view is seriously endangered by two factors, two major risks surrounding startups.

With Uber shares sinking more than 15 percent below the stock’s initial price, in an article recently published in the NY Times the author hoped that the possible flop of UBER’s listing could represent an epitaph or at least a global warning for supporters of the “winner – take-all” venture capital style model. This distortive investment model, instead of focusing on finding good investment opportunities, aims to create an exclusive “super-unicorns club” (the unicorn is a startup company with an estimated value around 1 billion). This means that VC should only look for companies to be funded with checks between 500 million and 5 billion dollars, basically on the basis of some generic promises of future earnings.

Mainly we are talking about some self-fulfilling prophecies, where, by investing huge amounts in startups regardless of their economic results, many other investors are pushed to do the same. At the same time, these companies, including Uber, are given the opportunity to implement the strategy that was already Amazon’s one, such as benefiting their consumers with very affordable rates and products, simply because, thanks to the enormous funding received, their pockets are deeper than others. Being part of the club then allows this unicorn to do business, on paper very advantageous, with other companies like them, incidentally belonging to the same club.

In other words, we are definitely facing finance that generates finance, without many ties to the real economy and even less with innovation that should instead characterize startups.

This, in addition to diverting capital from really promising startups, and that’s too bad, would also send some wrong and distortive message to young entrepreneurs, something like “it is much better to be a showman than a entrepreneur“, and that’s even worse. a fundamental disconnect between public and private valuations. Not to mention the risks of domino effect an of massive loss of money that this huge disconnect between public and private valuations represents.

In other words finance that generates other finance

So much for factor nr.1

tra il martello e l'incudine

What about factor nr. 2?

Initial Coin Offerings (ICOs) have gained a lot of attention over the past months as an ideal crowdfunding solution but the floor fell out due to the lack of proper regulation putting the investor at risk that also paved the way for fraud. This represented a major economic loss for focusing for investors focusing on blockchain and cryptocurrency-related opportunities.

Despite this major problem, somebody say there is a new turning point, able to represent in a few years a real tsunami for crowfunding and, in general, for venture capitalist. This solution is called STO (security token offering). An STO is a token offering that is similar to an ICO but its main difference is that STOs are regulated, because whereas ICO tokens are sold just on the promise of future utility, security tokens are instead bought for the explicit purpose of making a return on investment.

And here is the new magic spell: tokenization of venture capital. It seems fantastic: in the end tokenization of VC portfolios happens on the blockchain, which offers some additional layer of security, investors can be safer and much more because you are going to invest on tokenized VC portfolio, which means security of investment through diversification, traceability of investments through the blockchain. And on this way, somebody says, we can solve the problems VC are facing: the way-out on their investments, and most of all, the lack of liquidity due to the relatively small percentage of their financed startups having a consistent market success.

Yes, fine, but in future we also would like to have real companies and not with zombies just kept alive with the help of finance.

If you look at pitching material of such tokenization platforms, their mantra is always the same: distributing risk, making the VC job looking like another widespread investment product. But what has this to do with financing “the bold and the brave” startupper? Not much.

Again, the impression is that we are dealing with finance generating other finance

Hope that VC will continue to play “traditionally” their fundamental role on the industrial system, certainly using also the opportunities deriving from technology and evolution of financial world, but always staying grounded on having with their choices an impact on  “real” economy. And good luck to all startuppers having, in addition to their heavy tasks, to navigate between such two hazards, being therefore between a rock and a hard place.

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