Tokenize This: Week 72 ~ Tokenized Venture Debt

The current macro picture is forcing startup bridge rounds.

The global macro whirlwinds have been interesting, to say the least, all of 2022. What I have my eye on today is the private markets with an emphasis on venture-backed startups and firms. Having our own Regulation Crowdfund offering live **here**, the entire team has seen what it takes to fundraise in this environment, and certain overlooked pieces of the puzzle have come onto my radar specifically.

When I envision startup funding, I’m picturing equity. The most straightforward instrument. However, we can’t overlook the role that venture debt plays in the economy and private assets ecosystem. Especially in an environment where raising capital has gone from seamless to arduous, companies and firms may be finding themselves struggling to close a round at their desired equity levels and plans. That’s where venture debt can step in, and that’s where we want to focus the 72nd edition of *Tokenize This* on today.

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The role of venture debt can take numerous forms. For some startups, they accept debt to finance initial overhead and required assets on the path to building their desired foundation. For others, it’s more of a bridge financing source to close the gap between larger equity rounds.

Understanding that the private capital markets have been drying up, there may be some reason for venture debt to shine over the next couple of years — however, I use this time estimate extremely loosely if the past 18 months are any indicator.

Nonetheless, we’ve seen what’s been happening in the fixed income markets regarding tokenization. We have companies like BBVA, Societe Generale, and Intain tokenizing bonds. We have Goldman Sachs working on institutional solutions by tokenizing debt products on its books. We even see a number of real estate-backed debt products come to market through the likes of Robinland, YieldCrowd, and others.

Much like we make use of the pre-IPO shares case for toeknization, we can do the same with pre-IPO debt. In fact, at this point in time, Venture Debt issuers like Silicon Valley Bank, Hercules Capital, and Mercury are probably procuring much more favorable terms than they have the past 2–5 years. This makes the market extremely ripe for a product offering for a couple of reasons:

1. Startups across the board are generally no longer in the choosing stage of fundraising — capital is more scarce and operational expense needs trump pickiness. This will likely provide lenders with favorable, above average returns in relation to easier equity markets.
2. Lenders will likely offer a 4–5 year repayment period to companies, which should be helpful in bridging the equity financing gap over a few years, pending how quickly the private markets rebound and stabilize. This timing gives the lender a couple of years to tokenize and offer the loans to the general public (or targeted investor audience) while they prepare to deploy capital into other focuses.

Initially, a 10% return on debt will be useful to the lender, but these returns may pale in comparison to equity investments in even 3 years from now. By tokenizing a loan to a startup, the lender has rights to fractionalize and offer bits and pieces of the loan to the general public in exchange for capital. Should the lender begin seeing a rebound in equity markets, they may choose to recoup principal on the loan and deploy that capital elsewhere — which is one feat of toeknization.

Additionally, if things aren’t recovering, or are even worsening, the lender may offer a 10% fixed income product to the market, raise capital off that, and lend to another startup or venture firm at a 12–15% rate. Again, this feat is enabled and simplified via tokenization, and just adds another weapon to a venture lender’s arsenal.

The important takeaway is that we are seeing a noticeable increase in debt-based products in the security token market. Of the 200+ assets tracked on **STM.co**, there’s been an uptick in debt products across all sectors (even real estate) vs. equity offerings. Additionally, firms like SocGen and European Investment Bank (and other investment banking names in the works) have been issuing public bonds on the blockchain. That is yet another validation stamp for the industry, and one that will continue to spillover into the private markets on both the early-stage and late-stage fronts.

Disclaimer: This is not financial or investment advice and should not be interpreted as such. Please do your own research on investments and financial decisions before partaking in any ideas or ventures depicted in this publication.