Raising money is the first decision to take for a startup – but there is a variety of options to get funded: When does it really make sense to raise money from investors with security tokens and when shall other options be considered?
Security Token Offerings for startups
Instead of giving out equity via the classic way that includes a notary meeting for the investment, STOs can reduce the effort and the costs of collecting money. By selling digital shares in the form of a token, notary efforts can be reduced, a transferable object of equity can be created and it gets easier to include many different investors from different countries.
Nonetheless, conducting an STO is not always a good idea for a startup
Timing matters. If STOs are compared to classical public offerings on stock exchanges, tokens can heavily outperform the classical stocks in terms of efficiency. Both during the issuance, as well as for the management after issuing them.
When it comes to the early investment stages of startups, there is a high chance that a Security Token Offering might be far less efficient than classically collecting money.
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An STO is not the right option in the early stages of a startup
This oftentimes counts for the very early stages of a startup:
- Pre-Seed stage
- Seed stage
The amounts of money that are being raised within these stages are naturally lower. Consequently, the effort of issuing tokenized shares might not pay off. Many fixed costs are involved in setting up the infrastructure so that the classical way might be a better option.
Although it is very project specific, according to personal experiences, a Security Token Offering with a target amount of less than 500.000 US dollars is not a viable option nowadays. Since many Pre-Seed and Seed rounds are aiming for less, STOs are oftentimes not an option at that time.
When shall I consider an STO for my startup?
Apart from the general question whether you should collect money with an STO for your startup, the timing is important. Doing it too early can shift the focus from creating an exceptional product and value to build a complex STO infrastructure that is not necessary. On the other hand, many startups want to launch an STO early on to leverage the advantages it provides to them as well as the advantages given to investors. With the advantages, such as possibly higher liquidity, investors might take a closer look at the project than they would usually do.
The number of 500,000 US dollars as the minimum threshold to consider conducting an STO is not scientifically proven and rather an estimation formed on previous experience. Furthermore, I expect this number to continuously decrease over time. While the security token ecosystem is still in the early phases, the competition between stakeholders over the next years can rapidly decrease the costs.
Nonetheless, I personally prefer focusing on the product of a company and keeping the fundraising efforts lean. At a later point in stage, the a great product as a track record, combined with more resources, can enable a startup to create really great funding rounds in the future.
