Whether you’re an entrepreneur, advisor, executive, board member, or even a fund manager, you would be interested to find out what it takes to make scale-ups work.
On Thursday, July 29th, Strategy Tools hosted a one-hour webinar “Why Tokenize Sweat Equity” with some of the world’s most experienced industry experts – Kevin Monserrat (expert and founder of Consilience Ventures), Rick Rasmussen (UC Berkeley, Scale Up Coach), Scott Newton (Partner, Strategy Tools), and Christian Rangen (Founder and CEO, Strategy Tools) – to address important issues and challenges in the world of Scale-Ups.
This power-packed session left participants with some valuable ideas on how to break down barriers and grow with the help of new tools and technology. Here, we have compiled some important insights from the event in case you’ve missed it or just want to revisit it.
The Scale-Up Journey
Startups and scale-ups can begin their journey in a number of ways. It can start with an idea that forms into a team, a team that has an idea, or simply a problem in general.
In the end, they all work equally well as long as the next step is to identify a true problem with a realistic solution that is much better than what is out there in the market.
The next key step in the journey is to go through additional customer and market validation to ensure product-market fit, and develop a scalable and repeatable sales process. It is at this point where things get interesting for professional investors.
From here on, a company or scale-up can take a lot of different directions that are highly dependent on the executing team. At this point, a company can either go all the way from high growth express path to IPO to the other side of slow market uptake, valley of despair or potentially close down.
Reflecting back on The Steve Blank Methodology or The Customer Development Method, it is important to get into each one of these gates to make sure the company doesn’t fail.
“A lot of companies fail because they don’t have a product worth building, or they don’t have a repeatable, sustainable and scalable sales process,” says Rasmussen. This is often the point of scaling up at which professional investors become interested and a true company actually comes into being.
The next step in the process is venture capital and structure which usually involves a series of limited partners to provide funds to a venture fund. That fund then uses general partners, venture partner associates, and others to make investments in individual startups. Money is made when those startups and scale-ups exit.
So what does it take? Who else is out there?
In addition to the core professional paid general partners and venture partners, the best venture capital firms engage others such as advisors, mentors, and coaches to get to that product-market fit and go ahead and scale up. However, it doesn’t stop there. There are professional development experts, industry experts, and mentorship teams who talk about the overall scope of where things are headed.
Investors usually select the board of directors, CEOs, or co-founders, and they also hire executive staff such as attorneys, accounting firms, PR firms, recruiters, and others that are professionally paid. However, in order for a scale up to be successful, they also need to enroll and engage a whole series of advisors. So, how are these advisors compensated?
What these advisors are providing is essentially sweat equity. They’re working and sweating, but how do scale-ups go ahead and compensate them? Companies can either tap into their personal networks or use karma points to pay forward, but that only goes so far as it doesn’t build wealth. They can pay cash, but scale-ups are inherently short on cash. Stock options are tricky since they have to be bought first. Companies can provide stock grants, but the grants usually exist in the company the advisors are advising in the first place.
So, how do scale-ups solve that problem and compensate all the people who are helping them?
Solution: Tokenizing Sweat Equity
The world is all about entrepreneurship and helping the next generation solve its biggest problems, which is why it’s important to understand how companies can take off with less dependencies on money and how to tokenize sweat equity to develop growth.
“When I was working at Microsoft, I observed that some companies were paying sweat equity. Some of the mentors and advisors of the program kind of realised that this is how the value was locked into sweat equity”, says Monserrat.
What happens if you remove the need to raise money?
What entrepreneurs essentially need are publicity and profits. In order to obtain those two, they need people and people need money – otherwise they’re not going to help produce or advertise.
In most parts of Europe and the UK, most of the VCs and IPs are conservative and ask startups to get traction before getting funded, which proves to be a real problem and puts companies back to square one.
So how do scaleups get traction without people and money?
“At Consilience Ventures, we believe this is the real opportunity to tokenize sweat equity and get surrounded by the right people at the right time and get traction, money and funds which allows scale-ups to hire more people and retain them”, says Monserrat.
One of the most underestimated things is the power of momentum. What first time entrepreneurs don’t realise is that they have the power, equity, and invisible ends to raise money – which is what’s so exciting about tokenizing sweat equity. If scale-ups use equity as money, all of a sudden they get the momentum and get the necessary funds.
In simple words, tokenizing sweat equity is about turning equity into money. It gives scale-ups the required cash and expertise, and helps them reduce the risk involved in scaling up. These companies need to increase their speed, performance and valuations in order to raise money when they need and avoid getting diluted too early.
Another reason to tokenize sweat equity is to create liquidity and trust. You may ask why liquidity and trust, and why do they go hand in hand? Liquidity is what makes the wheel turn. It is the exchange, trade and barter, and it has to be trusted, just like how trust works in any other relationship. That is the reason why blockchain is the best technology out there to create trust and liquidity.
Of course, entrepreneurs may have networks and ideas of their own, but they may not have the best mentors and advisors. What they can do is create a mechanism to reward those people by paying sweat equity.
The World of Cryptocurrency
There are different schools of thought in the crypto, cryptocurrency and blockchain world. It’s a vast world that can create liquidity in more than one way. There are people who are interested in Ethereum, Bitcoin and other Crypto assets and old assets. Of course, those people love liquidity, which comes with risk. Entrepreneurs don’t want to create too much liquidity or volatility because that is an indicator of risk, and entrepreneurs are already taking enough risks.
“When we were exploring the different concepts for Consilience Ventures, we started to think about one token per startup and we didn’t really like that idea. There are various reasons – some entrepreneurial and others more technical,” says Monserrat.
The stock market today works with the legal burden and pain of compliance and reporting, and early stage startups don’t want this enforced on themselves. It’s too heavy and would require the data of every single startup. If there are too many people selling tokens of one startup, it would send out the wrong signals and make it impossible to get the money the startup is looking for.
“What if we create one token for all startups? What if we tokenize sweat equity worldwide and create the currency for entrepreneurs. That’s what we at Consilience Ventures have thought about – to tokenize the entire portfolio and build an evergreen portfolio which is founder centric, fast and agile. It should be 100% focused on the customer needs which are the startups in this case”, says Monserrat.
If there is resource exchange in the middle, then there is 100 percent alignment between startups, experts, and investors. The whole point is to connect the world. Your network is your net worth. If the company can manage to build a global network of people who love and like the product, and also have skin in the game, that network will help the company to soft land.
What’s happening under tokenization is smart contracts. If startups are hitting milestones, they are going to automate and systemize their financing using that. They are going to move away from waterfall to sprint fundraising.
It is going to be a bit more challenging in terms of data and transparency, but it will work out in the benefit of the company in the end. It’s understandable if a company fails due to a lack of customers, but not because they are unable to raise money. If they hit milestones, they should be funded.
“This is the whole concept of tokenizing shares using smart contracts to help companies raise tokens against milestones and then stop going to demo days, incubators and accelerators who are only good at putting companies in front of inventors”, says Monserrat. “This is about helping companies be entrepreneur centric and making sure they help move this world.”
Limitations of Tokenizing Sweat Equity
In terms of governance, as long as companies touch blockchain and smart contracts, they have to be pretty clear about what governance they want to adopt. Most companies are testing, learning and scratching the surface of governance. Just like Decentralised Autonomous Organisation, there are others. However, a protocol like blockchain can be quite a democratic one.
In order to utilise blockchains and tokens, it’s important to learn how to use the new tools that are in place for security reasons. No one can retrieve someone’s private key or seed phrase. It is for this reason why investing in UX is going to accelerate the use of blockchain.
The key benefits are for all. It is not just for experts who will make more money, startups who will raise with less pressure on their cash flows, or investors who will take less risks. It’s for the entire ecosystem. It’s about innovation and creating more successful entrepreneurs and bigger companies, especially if they share their profits and risks through sweat equity.
In this space and time, early-stage investments are booming and value creation through IPOs is increasing the digital avenues. If you are looking to equip yourself with the right tools and insights to navigate this landscape globally, don’t forget to check out the Strategy Tools Scale Up! Coach Program. Here you will get the chance to meet real life investors, interview experts, talk to VC funds, analyse a lot of real life cases and access powerful tools developed by Rick Rasmussen and Christian Rangen. Sign up here and use code “SUCO25” at checkout for a 25% discount.
If you are a start-up and require both funding and support at critical stages, check out Consilience Ventures. Through its community, it accelerates value creation and aligns incentives, leading to attractive rewards shared equitably among all the stakeholders.