The venture capital model is broken: 95% of VCs aren’t profitable.

That’s no secret.

For the brutal realities, just look at these  graphics in TechCrunch: only 5% of funds make the 3x returns that are needed to make this risky and high-effort form of investing worthwhile.

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VC fund return on investment
Source: Techcrunch and Gil Ben-Artzy, Money Talks

 

It’s not all rosy for startups either; many find the VC model unsatisfactory, too. They spend months chasing potential investors, rather than running their businesses, all to give up control of their companies.

And yet we see more funds and more funding rounds because there aren’t many good alternatives. Crowdfunding? Debt? An Initial Coin Offering? None of these has really replaced VC funding in a major way.

Until now. Maybe.

The idea

London’s Consilience Ventures has a new idea: a member-only funding club for startups, investors and advisors. Risks is pooled and money circulates around the club using a blockchain-based token (bear with us).

The concept takes a while to explain — but hold with us.

60 startups

500+ investors

1200+ experts

Consilience Ventures carefully selects a group of startups (probably around 60) investors (500+) and about 1200+ experts — advisors, accountants, lawyers — for the club. You can’t apply, you can only get in if you are referred by someone trusted.

Then Consilience creates a mini financial ecosystem for this club, based around a blockchain token. Investors put in money (a minimum starting investment of £25,000) and the startups all put in a portion of equity (1-3% to start with) in their companies. In exchange everyone gets these blockchain-based security tokens, CVDs. (Hold in there.)

The token’s value is based on the collective value of all the startups in the club. If one startup does really well, the value of the token goes up (a bit) for everyone. If one startup tanks, it takes the value of the token down (a bit) for everyone. But the risk is pooled, so in theory this is less chancy than putting all your money in just one startup.

The tokens can be bought and sold within the system, creating some liquidity for investors and startups. If a startup needs more money, it can sell more equity for tokens within the system, in theory with much less hassle than going on a six-month investor roadshow to raise its next round.

Investors, meanwhile, can sell their holdings (provided they can find a buyer within the system) more quickly than they can do with traditional VC investment, where money is locked up for a long time — 13 years is typical.

If a company is bought or IPOs, everyone in the club gets a share of the proceeds, according to how many tokens they own, making venture investing easier.

Kevin Monserrat, CEO of Consilience Ventures
Kevin Monserrat, CEO of Consilience Ventures says the point isn’t the token, it is the community.

The big question is — will it work?

Kevin Monserrat, chief executive of Consilience Ventures, admits he is facing initial scepticism.

“Investors are worried because this is such a new, unproven model,” he says.

He’s also very worried about the venture simply being dismissed as another ICO or cryptocurrency venture. There have been previous attempts at tokenised equity as a way of investing in startups but none has taken off in a big way. Blockchain Capital raised part of a VC fund like this in 2017 but the following year reverted back to a more traditional model.  

But Monserrat says the point isn’t the technology or the token. You could be using coconut shells or bottle caps as tokens if you wanted. The it is the combination of token and network quality that is the point.

Success will depend on just how good the companies in the club are. Pooled risk or not, if they all fail, the value of the token will be nil before too long.

So does Monserrat have a secret for ensuring really high quality? Not really.

“I am not going to say that we have some method that makes us better at choosing companies. But we will be better at helping them outperform,”

“VCs all claim that they have the secret sauce that makes them the best at spotting winners, but in reality they are all pretty similar. Their network is the difference. I am not going to say that we have some method that makes us better at choosing companies. But what I would say is that we will be better at helping companies outperform using our sprint financing model,” says Monserrat.

This is the other big idea. Everyone helps each other — shares ideas, makes introductions, collaborates on tech — because everyone in the club has a vested interest in making sure the value of the token stays as high as possible. Monserrat’s theory is that this will give the portfolio a higher success rate.

Encouraging collaboration between portfolio companies isn’t itself new. Over in the US, Kleiner Perkins and First Round Capital have been brokering relationships between their startups for yonks — and just this week SoftBank revealed it plans to do the same.

Kindred Capital network
Kindred Capital network

Back in London, Kindred Capital makes every founder it invests in a “co-owner of the fund”, allocating them carry. And sure, those founders do occasionally meet up and offer each other advice — but is that really edging Kindred closer to being one of the magical 5% of funds that do return 3x? And would helping each other out really get Consilience there either?

So far Consilience has secured a few initial investors and is in talks with more. It’s also selected three startups to invest in — but needs to find plenty more before launching later this year. It’s a long shot. But hey, VC needs all the innovation it can get.

What do Sifted readers make of it: Good idea? Bad idea? Would you invest in it? Would you put your startup in the pool? Tell us in the comments field. 

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Tyler Menzer
Tyler Menzer

I feel as if nothing in the description necessitated the use of a token or blockchain technology. The simple fact that you have a small group of trusted people makes blockchain’s anonymity and verification completely pointless.

They are just throwing around buzzwords to make their thing sound new.

Jean Parpaillon
Jean Parpaillon

Token / blockchain is not the core but it is a good tool to fluidize exchanges in the ecosystem.

Jorge Vargas
Jorge Vargas

This is the same model the hack fund from hackers and founders works. They have been running it for several months now. It’s great for everyone involved except two things. The nature of startups is to fail therefore my “successful” company is linked to those failing directly making me less attractive than the equivalent who’s losses are stored in the fund. Second this locking of capital is exactly the reason you go to a VC they will stick with the company thru good and bad times the market where you can sell could drive the down in those moments the… Read more »

Dr. Sam Arafeh
Dr. Sam Arafeh

I second this view opinion. I think it works best with less risk of applied to on going businesses or industries that are underperforming due to operational inefficiencies, but are ripe for digital transformation. The mix of owners, investor and experts can transform to outperforming where everyone wins, while keeping the flexibility of in and out the group. Think of the staffing/HR industry.

Kevin Monserrat
Kevin Monserrat

Sorry Jorge, it’s true that they could be H/F tries to offer liquidity to their investors but You will also have seen it is a closed end fund listed on the London Stock Exchange so its liquidity will depend entirely on the secondary market created and historically such funds often trade at large discounts. Moreover they are very expensive vehicles to set up and operate. More importantly, Consilience Ventures is not an exchange, it’s an economy for entrepreneurs and the currency makes us very different when it comes to align the success of top industry experts and technologists with these… Read more »

Adam
Adam

Oh you mean like the hyperion investment fund, which has a token which represents the value of equity and crypto holdings that they have invested into? The issue is liquidity. You can only exit if someone is willing to buy or you wait for the fund to be wound up and a distribution of all sold equity etc.

Kevin Monserrat
Kevin Monserrat

Adam, it is true that liquidity is a problem for crypto investors, however, we only work with accredited investors under the FCA definition such as HNWIs, Angels, family offices, wealth managers etc… And they are well aware of the liquidity problem indeed.

Ajulio
Ajulio

Ideal roubar a vossa família. Vigaristas.

Saeed Yousefi
Saeed Yousefi

Absolutely

Massimo Todaro
Massimo Todaro

All these new schemes and shamanism… Don’t get me wrong, new VCs like in any other industry have to do what they can to stand out. But the only thing me as an entrepreneur look at is if my potential new partner can make me grow fast! In b2b is “can they help me land dozens of new accounts?” In b2c is “can they find me a good CMO and get me the cash to burn in marketing I need?”. That’s it. Everything else is smoke