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The exit of start-ups is full of challenges, and the rapid popularity of DeFi has provided open and flexible new ideas for exit strategies.
Written by: Cyrus Ip, Head of Marketing, Convergence Translation: Samuel
For start-up entrepreneurs and VC/PE funds, exit is one of the most critical steps. It may be a key factor affecting investment results and overall financial goals. However, withdrawal seems to be the most under-discussed topic in this field. Although there seem to be more and more ways to make early investments safe, exiting has become more and more challenging. Thanks to the rapid popularity of blockchain, encryption and open finance, decentralized asset protocols such as Convergence Finance can provide creative, open and flexible ways to formulate successful exit strategies.
What does it mean to quit
Perhaps exiting is the last thing startup entrepreneurs are willing to spend time thinking about. These entrepreneurs may spend most of their time on obtaining sufficient funds, financing and perfecting products, rather than thinking about how all the hard work will end. However, for start-up entrepreneurs and investors, a perfect exit is of vital strategic significance.
For investors, knowing that there are feasible ways to profit from investment is a prerequisite for participating in many VC/PE. In terms of entrepreneurs, their exit strategy may drastically change their business structure and revenue model. If a start-up company does not have a proper exit strategy or poorly executed exit strategy, years of hard work may become futile.
Exit strategies are still rich and varied
Traditionally, founders and VC/PE organizations have several ways to exit the business or profit from investments, including IPOs, mergers and acquisitions, and direct acquisitions. Even if the real economy can barely maintain its development momentum, all of the above-mentioned areas are still relatively hot.
According to a report by the multinational law firm White & Case, there were 2027 PE-related transactions last year, including exits and acquisitions. The total value of the target is close to 460 billion U.S. dollars, and the transaction volume has fallen by 8% year-on-year. But the transaction volume remained stable.
Among them, IPO has become an increasingly preferred exit method for most startup shareholders. A report by the financial data company PitchBook shows that although the number of IPOs is still relatively low, private equity institutions still recorded an exit value of at least 74.5 billion U.S. dollars, almost reaching the highest level in a decade.
Source: Pitchbook, *As of the first half of December
Rising valuations make the challenge more difficult
Although exit via IPO seems to be beneficial to start-ups and PE/VC, an overheated market may also have an adverse effect.
A study by McKinsey McKinsey took 2017 as an example and pointed out that private equity institutions had completed 2,475 exits during that year. However, the report pointed out that the greater the number of listed transactions, the greater the challenge for investment institutions to successfully exit.
This is because when the valuation of the transaction rises, the seller’s expectations also rise. Sellers usually demand better terms when the market is hot, and this ultimately reduces the chance of a successful exit.
In addition to the uncertainty of valuation, investment institutions need to go through a series of processes to withdraw from startups. For example, the 18-month IPO preparation evaluation, management exit and preparations after the transition period, also need crisis management solutions to prevent any unpleasant surprises. All of these may increase unpredictability and time-consuming extra work.
Every challenge is an opportunity. Successful exits seem to be increasingly demanding and becoming more complex. Even so, as open finance and decentralized protocols mature, a ready-made solution can be provided.
The market has recently noticed agreements such as Convergence Finance. Convergence Finance is a decentralized platform that allows real-world assets to be linked to DeFi liquidity. These agreements provide more than 1.5 million DeFi users with new investment opportunities, allowing them to invest in the latest start-up companies, and investment institutions can see them as another way to withdraw from investment.
Using decentralized platforms such as Convergence can bring some benefits to start-up entrepreneurs and investment institutions at the same time.
Simple and protected : Whether through IPOs, mergers and acquisitions or exits, all these methods are accompanied by lengthy legal and accounting processes, which may result in high costs. As mentioned earlier, decentralized exit (for example, through Convergence) can eliminate red tape. Since the assets on Convergence exist in the form of Wrapped Security Tokens, this means that they are still legally recognized and protected.
Reduce interference : Traditionally, when a start-up company is gradually preparing to exit, shareholders will shift their focus to financial gains instead of focusing on the business and operations themselves. This shift may have a negative impact on the business. Decentralized exit can reduce this risk and help shareholders refocus on business foundation and value creation.
Greater market access : The decentralized financial DeFi market has been expanding, and it is still expanding rapidly. If investment institutions or business owners withdraw, or even withdraw part of their investment through decentralized platforms such as Convergence Finance, it means that they have opened the door to one of the fastest-growing DeFi markets with millions of active users. A more diversified exit can be achieved.
Real use case: Soul Capital
The market has seen that VC institutions have begun to experiment with decentralized platforms. Soul Capital is one of the early practitioners. The family VC headquartered in Hong Kong has been focusing on investment in innovation and emerging technologies. The companies it invests in include some well-known start-ups in the Asia-Pacific region, such as Hong Kong van rental app GoGoVan, 3D video game production agency EPIC Games, and Indonesian e-commerce giant Tokopedia.
Soul Capital has announced a partnership with Convergence Finance. Through this cooperation, part of the assets in the portfolio of startups invested by Soul Capital can be traded on Convergence in the form of encapsulated securities tokens. Any DeFi user with an accessible wallet may be able to invest a small portion of the equity of those startups, which means that retail investors can use their crypto assets for such investments for the first time. At the same time, this can also be seen as an alternative to traditional exit strategies.
Soul Capital’s move is only the first step, but this may mean that the entire VC field will undergo a radical change. Imagine that early investors in some large unicorn companies can follow in the footsteps of Soul Capital and resell the shares of unicorn companies to millions of DeFi users through Convergence. This may be a breakthrough development in the entire VC field.
Figure 2: Soul Capital’s official website and some of the startups invested in, source: soulcapital.vc
to sum up
Traditional finance and decentralized finance are more closely integrated than ever before. These combinations can bring about change, make asset management more creative and flexible, and provide opportunities that were previously unavailable. Soul Capital is just one of many examples of using decentralized platforms like Convergence. As the market further accepts open finance, it is expected that there will be more exit cases associated with decentralized platforms (such as convergence). Looking to the future, it is expected that more and more real-world assets will enter the DeFi field to obtain liquidity, and platforms such as Convergence may benefit a lot from this.
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