Simple Agreements for Future Tokens (SAFTs) are a new way for venture capitalists (VCs) to enter booming initial coin offering (ICO) markets, which will near 4 billion USD in revenue this year. SAFTs mean VCs invest in startups for ICO tokens. As startups prosper, and customers use tokens, VCs are betting their held coins will return big profits. SAFTs appear to be a mid-point between traditional initial public offerings (IPOs) and bitcoin-inspired ICOs.
SAFTs Allow VCs to Enter Booming ICO Market
If Goldman Sachs, The Global Venture Landscape: Decrypting FinTech, Oct. 24, 2017 is to be believed, venture capitalists have all but missed out on the ICO funding bonanza. Two startups managed to raise a paltry 100 million USD in total VC investment Fall 2016 through Fall of 2017, Goldman reported.
VCs might be forgiven, however, because prior to the Satoshi Revolution of a few short years ago, none of this existed: blockchains, cryptocurrencies, tokens, smart contracts, etc. The learning curve is steep, long.
Distributed ledger tech has been lauded for its logistical applications, but money professionals are beginning to grasp the revolution finance tokenization is creating. Unique units of value can be sold, allowing customers to be quasi-investors. Companies too can assume their own exchange medium, creating its an economy of scale.
It’s fair to insist great companies of tomorrow will have exchangeable tokens as part of their fundraising schemes. ICOs are a substantial deviation from friction-filled traditional startup-to-market finance, where gaggles of regulators and lawyers and banks eat at cherished early profit margins.
SAFTs then are yet another variation on that theme. SAFTs stake VCs’ rights to future company coins. Set asides are baked-in for VCs as a company launches an ICO.
SAFTs in the Real World
ICOs take their acronym from initial public offerings, IPOs, the until-now fastest, most keen way to bring a company public. The company sells shares of itself, stock, the way ICO startups are tokenizing. The public can then hold, buy, sell coins like stock but without brokers, banks, regulators slowing everything down.
The added finance wrinkle for SAFTs is its incentivized nature. Investors are paid if, and only if, a coin grows in value. Companies, teams, affiliations, known or unknown personalities are largely irrelevant. All that counts is the token and its value. Bitcoin itself would be the perfect case study. SAFTs refocus VCs on the technology propelling the coin rather than personalities involved.
Sequoia Capital’s Matt Huang explains, “One of the big distinctions between equity and tokens is that there are more protections around equity. Investing in SAFTs is new territory, and I think what you’re seeing is that a lot of this ecosystem is learning in real time how best to structure these things.”
Sequoia is a leader in the SAFTs space, using them to fund Filecoin and Orchid Labs. In the case of Orchid, “SAFTs are particularly useful for investing in products like the Orchid protocol, which ultimately could become an open-source project supported by a community of engineers rather than a structured team,” Business Insider detailed.
Perhaps the highest profile introduction to SAFTs came with Overstock’s ICO rolloutexpected to generate as much as 500 million USD. Tzero’s SAFT, in fact, is scheduled to go live on 18 December 2017. Readers can bet Tzero will be watched closely by both venture capitalist and ICO communities.