From Centralization to Decentralization: The Future of Venture Capital and Private Equity Funds

Traditionally, venture capital and private equity funds have been limited to a select group of accredited investors, making fund ownership inaccessible to the average person. With the rise of decentralized finance (DeFi), fund ownership is becoming more accessible to everyone. In this blog we explore how DeFi protocols are transforming the venture capital and private equity industry and making fund ownership more inclusive.

Chapter 1: Limitations and access to traditional venture capital and private equity

Starting a Venture Capital or Private Equity Fund is a difficult and restricted process, even for the 90%+ of those who already work within the high-finance industry — let alone your average Jane or Jon Doe. If you find yourself working in finance today, give it another 10–20 years to reach the top of the ladder, build a network, create relationships, and have a solid track record of investing in successful companies and projects before you can even say the word Fund, let alone conjure up a sentence to say, "I want to start my own Fund."

In fairness, in the last three decades it was a lot easier if you tried. The 90s were a prime decade, and to a lesser extent the 2000s. But let's forget all of this and understand that we're now in 2023. Life is more sophisticated. Technology, finance, your smartphone, and now large AI language models have changed the economic landscape to such a degree that your only way of reaching the far-distant land of becoming a VC/PE investor is through your network of relationships — family, friends, quasi-celebrity status through Instagram or TikTok perhaps? Sometimes sheer blind luck will get you there.

Invisible barriers and walls — that's what they really are.

So, let's start with the basics: how does someone start a Venture Capital or Private Equity Fund anyway?

In a typical scenario, an executive-level individual such as a VP, Principal, or Partner at an existing Fund will usually be good at their job. Having spent 20+ years in the industry, they've built a circle of friends classed as High-Net-Worth Individuals (HNWIs) who they can sell the idea of pooling capital into a single new fund to grow their already enormous wealth. This person will usually have friends and colleagues with the same experience. They'll have a good track record of deal-making. A good eye to find the best talent — not simply the best ideas (everyone has good ideas!). Deep knowledge of upcoming and growing industries. People they know to employ and staff the Fund. Computers, good office space, internal KPIs, policies, projections, plans — and finally, let's not forget regulatory issues. Compliance, financial licenses, and following rules are king in this industry.

Together these individuals will create a social network of "high rollers" and will throw money at 10–20 investments. Usually, 1 or 2 of these investments will return them massive profits whilst the rest fail. That is venture capital or private equity dumbed down. Yes, there's a difference between venture capital and private equity, but that's a story for another day. Today, we speak of both as the same, since both have mostly similar underlying dynamics.

Although the above is the most common pattern, you'll sometimes find outliers — an individual who has inherited a large chunk of wealth, most likely passed down through family, which also happens to grant access to a large circle of friends within the global elite. These individuals will go at it alone, and sometimes with friends. Their investments are likely to be vanity projects or vehicles to grow already-large wealth. A good example is Margaret Ellison, a private equity financier — the daughter of Larry Ellison, billionaire founder of tech company Oracle. Her family wealth and geographic location created a woman who grew up on the doorsteps of Hollywood. Her hobbies and passion? Movies. What does she do? Finance and produce them. So yes, it's certainly possible if you find yourself outside the high-finance world — but you'd have to win the lottery of life and be born into this privilege.

If you pass the test for all the above, you should be ready to start your own Fund. If not, continue reading Chapters 2 and 3 and find out why we're decentralizing Funds and making them open and more transparent to Everyone, Everywhere, All at Once — pun intended. 😉

Chapter 2: The rise of decentralized finance

The world of finance has traditionally been dominated by the very rich, and by large institutions and banks. In recent years, however, a new actor has emerged onto the world stage: decentralized finance (DeFi), bringing with it protocols built on blockchain technology that are radically disrupting traditional finance and changing the way we think about money. Just ask the SEC or other regulators — though be cautious when you approach them; they're still playing sticks and stones in the stone age, so you may not find the answer to everything you want.

At its core, DeFi is about creating a more open and accessible financial system. Unlike traditional finance, where services are centralized and controlled by a very few large institutions, DeFi protocols operate on a decentralized network of computers, with no central authority or intermediary. This means that anyone with an internet connection can access, create, and use DeFi services to participate in an open financial system, regardless of their location, background, or financial status.

The keywords here are "location", "background", and "financial status" — remember these terms.

The reason DeFi is gaining traction and mass appeal is its ability to provide more transparent and efficient financial services. DeFi protocols capture transactions and record them on public blockchains, making them open for everyone to see, and more secure than traditional financial transactions. Most new blockchains also provide faster processing speeds than traditional banking, whose aged infrastructure moves money through clearing houses — the reason transfers take days. Most people have never heard of them, so it's worth Googling. Or, these days, GPTing?

Let's talk about how you see this money moving. Want to see where a transaction went and what its value was? Was it on Ethereum? Check Etherscan. Was it on BSC? Check BSCScan. Blockchain scanners like these allow anyone to check whether anything said or executed by a DeFi protocol is true and actually happened. In addition, DeFi protocols automate many of the processes involved in financial transactions, reducing the need for intermediaries, paperwork, and clearing houses. Think about how Aave revolutionized financial loans using only code and smart contracts!

Think of it this way — the traditional route into finance, investing in stocks, bonds, and other financial instruments, requires a significant amount of capital and knowledge. With DeFi protocols, anyone can invest in a wide range of assets without going through all the paperwork, onboarding, risk disclosures, and the bank plus multiple middlemen who end up taking most of your investment.

Chapter 3: The competitive advantage of DeFi in venture capital and private equity

So how can DeFi enhance the venture capital and private equity landscape for the everyday person? We've authored a short fictional story about DeFi. Someday a publisher might pick it up as best fiction of the year. Read the extract below.

It's the middle of summer. Tuesday evening, and our friend ol' Joe is sitting in his room thinking about what to do with the $20,000 he's saved up in his Binance account. He knows quite a lot about DeFi and decides to take a flash loan out using the Balancer protocol and starts making quick profits day-trading BTC with the loan. Tom, on the other hand, has $1,000 saved and is not much of a risky guy like Joe. He puts his investment into alt-coins, because he's been watching the latest bull run unfold. $PEPE coin? No. There are more gems out there for him. His portfolio goes 100x over the next month or so. At the same time, Tom's girlfriend Kate is watching him from the bedroom and begins feeling FOMO. She's saved $5,000 in commissions from her day job. She's smarter than our guy Tom and stakes half of her $5,000 into a Sushi staking pool. The other half she drops into the dHEDGE protocol and bets on a highly rated investment manager to trade crypto indexes for her. She's in good hands, since her index tracks low-risk baskets of several high-cap tokens to earn safe returns. Yes, she's smarter — but that didn't necessarily mean she made more than Tom! Our guy made risky bets that luckily paid off. There are always two sides of a coin, so everyone's either a Tom or a Kate.

Finally, down in the South and the Far East, we find Hector and Mohammed. Both more ambitious than the rest. Hector has $2,000 saved from working night shifts at McDonald's. Mohammed is a seasoned businessman who's generated hefty profits over the last two decades and has amassed $60,000 in his bank. They both want to invest in upcoming AI technology. Mohammed has no idea where to start, since all his life has been spent selling fresh veg at his store. Hector is a bit more tech-savvy. They both hear about a "Fund" protocol and find out all they need to do is connect their wallets, look at a project, and that's it. Funds deposited. They both now own an equity stake in the same AI company even though they don't know each other. They're worlds apart — geographically distant, from different backgrounds, in very different financial positions. Yet, unwittingly, both now own the same company, and that's all there is to it. All they did was find a VC/PE protocol, look at an interesting AI company, and decide they wanted to be investors.

Chapter 4: Ending remarks

The positives: we have greater freedom, transparency, democracy, and far greater liquidity when we pool funds from everyday people rather than letting the global elite control where money goes and what gets built in the real world. With technology, anyone can be whoever they want to be — especially in finance, where blockchain is concerned.

The negatives: of course, like any new technology, DeFi comes with its own set of risks and challenges. Smart-contract bugs, hacking attacks, and market volatility are just a few of the risks DeFi users need to be aware of. In addition, the regulatory landscape around DeFi is still developing, with many jurisdictions struggling to keep up with the fast-paced changes in the ecosystem. Protocols within the DeFi space will need to stay ahead or make peace with regulators at some point.

Despite these challenges, the rise of DeFi is a clear indication that the financial world is changing. With more and more people turning to DeFi protocols to access financial services, decentralized finance is here to stay. As the ecosystem continues to grow and mature, we can expect even more innovative financial products and services to emerge, making it easier than ever for people to participate in the financial system and take control of their financial futures.