Blockchain / Distributed Ledger

The Stock Market For Startup Stock

The investment that got away.

The uncle who should have bought into Microsoft in the early 80s, the cousin who could have gotten in at the ground floor with Google, the neighbor who was “this close” to making a killing with Facebook, but instead used the money to take an improv comedy class, the colleague who never thought shopping on the internet would take off and thumbed his nose at Amazon in the early days.

And yes, for everyone’s “once in a lifetime” idea, there are thousands who never make it to the launch pad, never mind take off and then ignite. You know the stats: 90 percent of new businesses fail with the first two years – maybe because they were bad ideas, maybe because they were a little ahead of their time, maybe they were just woefully undercapitalized. Even among those who make it past the two-year mark, the sort of headline-making astonishing unicorn exits are rare.

Even setting those risks aside, there is another hurdle for those entrepreneurial startups — attracting funding in the early days. Early investors need a lot of patience since it will take a very long time to get that magical payoff.

“Angel investors are in eight or nine years before they get paid,” Funderbeam co-founder Urmas Peiker told Karen Webster yesterday (October 12).

That long wait narrows the funnel for startups looking to raise those important early rounds of seed capital.

Entrepreneurs, Peiker noted, basically can borrow from a bank/SMB lender or fundraise.

“We thought,” Peiker told Webster of Funderbeam’s early days, “that companies needed capital and we needed to change something here so that we could connect like-minded investors across the globe without friction.”

And so three-years ago Funderbeam was born with an eye toward making it easier for entrepreneurs to invest, essentially by making it more tempting for investors to put up money in those all-important early days.

And all they had to do was build a secondary market for start-up shares that could trade on the blockchain.

The Three Pronged Attack

The secondary market for startup stock is the most novel thing Funderbeam does — but it is part of a tri-part system that basically offers three services to investors.

The first service is data — in the form of 160,000 startup profiles investors on the site can access that will describe the firms’ business lines, operating environments, nearest competitors — in short, Peiker told Webster, “all the due diligence publically available for free, automated and in an easy to understand, scrubbed and standardized presentation.”

That open bank of data supports the other two prongs in the attack – the marketplace for investors.

The first is essentially a primary market where firms can post their pitches and solicit investment. It sounds like crowdfunding.

But, as Peiker noted, Funderbeam — though it has a primary market element to its business — does not think of itself in crowdfunding terms.

“We prefer not to call ourselves a crowdfunding site.”

Instead, Funderbeam defines itself by what the founders regard as their signature innovation — a secondary marketplace where shares in small startups can be traded.

“We make the data transparent — and then we leave it up to the investors to decide how they want to invest in startups — as it should be, to either cash out or increase their stake.”

Powered By The Blockchain

The essential challenge Funderbeam faced when it started up three-years ago was with making it technologically possible to support secure instantaneous trading. In fact, Peiker told Webster, in the early days of Funderbeam the assumption had been that the technological capacity for a real-time trading marketplace was likely not going to be possible until 2017 or 2018.

Until they started playing around with the blockchain.

“And as we really realized that the blockchain could be the solution for our long term goal. It was like a time machine that jumped us a few years into the future.”

The way Funderbeam’s exchange works is pretty simple. Investors purchase tokens when they want to buy. Those tokens are purchased in Euros. Those, Peiker explained, are turned into bitcoin to trade on the blockchain, which becomes a tradeable asset.

“We sliver bitcoin into a million pieces in our tokens — which also insulates against the volatility of the price. Basically we turn bitcoin into an asset and then that asset becomes a security.”

But is it a security anyone wants to buy? That was Webster’s leading question — noting that with such small odds of success it might be difficult to convince investors into the market. Who wants to trade shares of something that has a 90 percent chance of being worthless?

But, Peitek noted — the “stock market” that Funderbeam has created has thus far revealed a variety of types of investors with a variety of strategies: Some folks seem to like to go long on companies or types of companies and vacuum up and hold share. Others assume a more day trading approach to the marketplace.

“When we started with the secondary market we were curious what was going to happen. What we saw is that there is actually a lot of activity on the market. There are clearly different investor types who are emerging and you can tell from the behavior.”

What Funderbeam Can Teach The World

Funderbeam is a new enterprise operating out of Estonia — with eyes on creating an international secondary stock exchange for firms in their early development phase. Not a small goal to be certain — but one that technology has enabled in the last half decade, where heretofore it would have been actually impossible.

Peitek says that with this possibility comes the inevitability that investors will want to pursue it — particularly given the reality of the actual public markets of the world today.

“Today stock exchanges work with a lot of intermediaries. Being listed is super expensive, trading is very expensive. As a retail investor you don’t have direct access to the market. But with the technology that is available today, you can take away a lot of the need for those intermediaries. “

And, Pietek noted, given the choice, consumers will often opt out of those intermediaries.

Especially if it ups their odds of hitting a winning lotto ticket — and never having to tell the story of the one that got away.

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Our data and analytics team has developed a number of creative methodologies and frameworks that measure and benchmark the innovation that’s reshaping the payments and commerce ecosystem. The September 2019 Mobile Order-Ahead Tracker, serves as a monthly framework for the space. It provides coverage of the most recent news and trends as well as a provider directory that highlights key players across the mobile order-ahead ecosystem.

 

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