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Open Finance: A New Element of a Successful Exit Strategy

Open Finance: A New Element of a Successful Exit Strategy

Overview

Exit is one of the most crucial steps for both startup entrepreneurs and VC/PE funds. It could be an influential element affecting the outcome of the investment and the overall financial goal. However, exit also seems to be the most under-discussed topic in the space. Although the market appears to have increasing ways to let early investment be realized, exits are getting more challenging. Thanks to the rapid adoption of blockchain, crypto, and open finance, decentralized asset protocols such as Convergence Finance could provide a creative, open, and flexible way to formulate a successful exit strategy.

What Exit Really Means

Exit, perhaps, is the last thing that a startup entrepreneur wants to spend time on. Owners could have spent most of the time getting sufficient funding, financing, and refining their products, rather than thinking about how all the hard work will end. Yet, having a good exit is strategically vital for both startup entrepreneurs and investors.

On the investor side, knowing to have a viable way to profit from the investment has been a prerequisite for many Venture Capitalists or Private Equity (PE) funds. On the entrepreneur side, their exit strategy could significantly alter their business structure and revenue model. Startups with a poorly executed exit — or without any exit strategy at all — could turn years of hard work into a futile endeavor.

Traditionally, founders and investment firms have several ways to exit and take profit from their investment, including initial public offerings, mergers and acquisitions, or a direct buyout. All these areas remained surprisingly active even as real economies took a beating in 2020.

 

Reports from international law firm White & Case shows that there were 2027 private equity-related deals in 2020, including exits and buyouts. The deals were valued at almost $460 billion, representing an 8% year-on-year drop in volume. Given the economic shocks of 2020, this value remained relatively steady.

Amid this dealmaking activity,IPOs have been an increasingly popular exit method for most startup owners. Reports from financial data firm PitchBook show that, despite the deal count remaining somewhat low, PE firms have booked at least $74.5 billion in exit value, almost reaching a decade-high.

Figure 1. IPOs led by PE firms exiting startups

Source: Pitchbook; *as of the first half of Dec.

Higher the Valuation, Tougher the Challenge

Although exit through IPO appears to favor startups and PE/VCs, an overly-heated market could also create setbacks.

study from McKinsey used the year 2017 as an example, pointing out that PE firms have completed 2475 exits that year. However, the report stated that the more the listings, the more challenging it could become to conduct a successful exit.

The phenomenon is fairly straightforward: when the valuation of deals goes higher, so do the sellers’ expectations. Sellers usually ask for better terms when the market is hot, which could ultimately decrease the chance of having a successful exit.

Besides the valuation uncertainties, a going-to exit startup also needs to go through a series of processes. These include an 18-month readiness scan, management exit and post-transition preparation, and crisis management solution in case any unpleasant surprises occur. All these could add extra layers of unpredictability and time waste.

DeFi: An Outside-the-Box Solution

Every challenge is an opportunity for innovators. Trying to have a successful exit is becoming more and more difficult as sophistication increases. This is where the maturation of open finance and decentralized protocols could provide an outside-the-box solution.

The market has recently seen protocols like Convergence Finance, a decentralized platform that allows real-world assets to connect with DeFi's liquidity. These protocols open new investment opportunities for over 1.5 million DeFi users to invest in the latest startups, while investors could see that as an alternative way of exiting an investment.  

Other examples include…..

Leverage on a decentralized platform like Convergence could provide certain advantages for both the startup owners and investors.

Simplified and protected - Regardless of exiting through IPO, M&A, or buyout, all these methods come with a lengthy legal and accounting process, which could be costly. A decentralized exit, such as going through Convergence, could cut through a lot of the red tape. Assets on Convergence exist as wrapped security tokens, meaning that they are still legally recognized and protected in [certain] jurisdictions.

Fewer distractions - Traditionally, when startups move forward to exit, owners shift their focus to financial earnings rather than focus on the business and operation itself. This shift could negatively impact the business. A simpler decentralized exit could reduce the risk on this front and help owners refocus on business fundamentals and value creation.

Greater market access - The decentralized finance market has been multiplying, and it's still swiftly expanding. If investors or business owners exit, even just partially, through decentralized platforms like Convergence Finance, that means they open the door to one of the fastest-growing markets with millions of active users, allowing a more diversified exit.

Soul Capital: A Real Use Case

The market has seen VCs starting to get a taste of decentralized platforms. Soul Capital is one of them. The Hong Kong-based family-owned venture capital has been focusing on innovative and emerging technology investment. Its portfolio contains some of the most well-known names in the region, such as van hailing app GoGoVan, 3D video game producer EPIC Games, and Indonesia E-commerce giant Tokopedia.

Soul Capital has announced the partnership with Convergence Finance. The collaboration allows some of the assets in Soul Capital’s startup portfolio to be traded on Convergence in the format of wrapped security tokens. Any DeFi users with a connected wallet will be able to invest a fraction of those startups, making it the first time retail investors can make such investments with their crypto assets. At the same time, this can also be considered as an alternative to traditional exit.

Soul Capital’s move is only the first step, and it could mean big changes for the whole VC landscape. Imagine those early investors of some major unicorn companies could follow Soul Capital’s footsteps, making shares of unicorn companies available to millions of DeFi users through Convergence. This could be a groundbreaking development for the whole VC space.

Figure 2a: Soul Capital’s website                                     Figure 2b: Part of the portfolio of Soul Capital

 

Souce: soulcapital.vc 

Conclusion

Traditional finance and decentralized finance are getting closer than ever. These ties could bring transformation, allowing more creativity and flexibility in asset management, presenting opportunities that were simply unavailable before. Soul Capital is just one of the many examples of taking advantage of decentralized platforms like Convergence. As the market further embraces open finance, it’s expected to see more exit cases associated with decentralized platforms like Convergence. Looking ahead, more real-world assets are expected to tap into the DeFi space for liquidity, potentially benefiting platforms like the Convergence.

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

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