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Funding Services Startups

The available funding sources for startups

Nowadays the possible funding sources for startups have expanded and diversified: new opportunities have arisen largely made possible by the internet and the fact that we operate in a globalized world.
In the startup growth process, there is a tendency to use a phase-based approach in which new financing is progressively sought. In the initial period (seed) the founders mainly draw on their entourage, apply for grants and try to enter incubators and accelerators.
In this regard, it is useful to check the Crunchbase website which lists the 100 best accelerators in the world.

But for the next steps, what are the possible funding sources for startups? With regard to the search for capital, venture capitalists are undoubtedly still an important source, corporate venture capitalists and crowdfunding are another effective option to consider, as well as royalty-based financing and new ways of financing based on blockchain and cryptocurrencies.
In any case, whichever way you decide to follow, it should be considered that after the financing has taken place, a part of the company and/or its future profits or its future products or services, have in fact been transferred.

Venture Capital financing

Venture capitalists (VCs) finance companies that show high growth potential and the main sectors in which they invest are biotech, semiconductors and “tech” and “digital media” in general. VCs first ask for equity and places in the Board of Directors of the companies they have selected and financed and, once they have granted the capital, they expect the startup to be able to use it efficiently.
It should also be kept in mind that receiving funding from a VC involves the establishment of a very close bond whose term and conditions will be decided by the VC, moreover, the liquidation of his investment will take place only at the time of the sale of the company or its IPO, therefore, this type of investment usually lasts between 5 and 10 years.

Over the years, even non-financial companies have started to invest (Corporate Venture Capital) directly in startups, financing companies in their sector used to experiment with technologies and business models to be eventually bought and integrated into their own company. For the financing company this is a further way of doing research and development, and also serves to have control of technologies avoiding that they end up in the hands of competitors. Examples of some large companies that practice corporate venture capital and have internal units dedicated to this function are Google, Intel, Salesforce, etc.

The website Foundersuite has a database of over 120,000 investors and provides a range of tools to get in touch with those who are interested and to manage the relationship.

Venture financing via royalties

Royalty-Based Financing (RFB), on the other hand, consists of acquiring financing in exchange for sharing the revenue with the lender. The costs of financing are lower than those of equity financing, but higher than those of a bank loan. This method has been widely used in life science and energy companies. First, you agree with the lender the percentage of monthly turnover to be returned to him, how long and in what range will be the total amount that will be returned. Typical figures are 2-20 % of the turnover for 3-5 years, with a total figure in the range between 1.5 and 2 times the capital granted.

Crowdfunding

For some years now crowdfunding has become another important tool to finance startups and projects. It is a method to collect small amounts from a large number of people using one of the hundreds of dedicated internet platforms that act as intermediaries and retain a percentage of the funding. In a crowdfunding campaign you must first define a deadline and the amount you want to reach by that date. As far as the lenders are concerned, they contribute small amounts and receive incentives in return: discounts, early availability of products and equity.

A further effect of a crowdfunding campaign, however, is that you also get feedback from users and significant visibility. In fact, this tool can also be considered a marketing tool as it tends to turn lenders into customers and the financing becomes a sort of pre-order for the product that will be realized. Before considering crowdfunding as a source of financing it is important to be well aware that if you don’t already have a significant follow up on the internet and at least one prototype of the product, you will hardly be able to be accepted by a platform.
There are 5 fund-raising models: donation, reward, debt, royalty, equity.

The reward model provides that the investor receives a non-financial reward (early access to the product, discount, merchandise, etc.).
The main platforms that are based on this model are Kickstarter and Indiegogo: the first one requires to have a working prototype and if the campaign does not reach the objectives it is cancelled and the money returned. The average contribution of an investor is 70 dollars.
In the debt crowdfunding, the company receives a loan that will be returned with some interest, between 3 and 8%.
In the royalty crowdfunding you will give the investors rewards based on turnover as soon as you start selling.
In the case of equity crowdfunding, on the other hand, you give equity to the investors. This model is particularly suitable for startups at an advanced stage and for this type of financing some platforms only give access to accredited investors. In fact, accredited investors are venture capitalists who use the platforms and are also those who usually have access to the best opportunities.

Blockchain-based crowdfunding

Blockchain-based crowdfunding is a decentralized and international crowdfunding system that, if successful, can very quickly raise large amounts of money. The mechanism used by this system is the Token Sale. A Token Sale can only be proposed by startups that have their roots in blockchain technology and through it startups can sell to the public their tokens that are not a currency intended as a means of payment, but a kind of coupon that can be converted into company products or services (utility tokens). Initially, startups publish a white paper in which they describe both the company and what they intend to make and on this basis the public can adhere to the proposal made by deciding to buy tokens. To take advantage of this financing method it is necessary to have a business based on blockchain and the support from experienced lawyers to avoid the violation of regulations that are different from country to country and are often unclear. Switzerland is currently the most advanced country in this respect.

Conclusions

It is clear that it is impossible for a startup to grow without adequate capital. In this regard, a certainly positive factor to consider is that today you can find capital at a global level, although then obviously also the competition will be global.
Moreover, incubators, accelerators, Capitalist, Corporate Venture Capitalist, crowdfunding and all the options described so far, can certainly help in a concrete way to progressively grow a startup. After having deepened all the possibilities of choice, the startup can follow the path most appropriate to its characteristics, also considering its willingness to give up participation within the company.

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Europe & Market Legal Framework

Digital finance package: the innovations introduced by EU

The European Commission presented a new Digital Finance package on 24 September 2020. It is a package that is positioned at both a strategic and regulatory level and which overall aims to standardize financial services regulations and support their digital development in order to produce concrete benefits for both citizens and businesses. All this by seeking to ensure financial stability, respect for privacy and the fight against money laundering.

The corpus of the digital finance package is developed along four main lines: the Digital Finance Strategy, the Retail Payments Strategy, legislative proposals for a common regulatory framework at EU level on crypto-assets and a proposal for a regulatory framework on operational resilience.

The Digital Finance Strategy

The Digital Finance Strategy aims to stimulate the digitalisation of financial services, stimulating innovation and competition between the various competitors in the European Union, whether they are traditional operators or from the digital world, i.e. the Fintech sector. The strategy is based on the “same activity, same risk, same rules” principle, creating a level playing field between all financial services providers. A further objective is to ensure that the new financial environment supports the new industrial strategy for Europe and encourages the development and growth of highly innovative digital startups.

The strategy considers digital innovation a pillar in the world of finance. In fact, it is now clear that innovations based on Distributed Ledger Technology, artificial intelligence, but more generally those based on Information and communication technology (ICT), are able to improve services for consumers and businesses that therefore benefit from easier access to financial services and greater control over their assets. The push towards a European financial area that promotes Open Finance also implies the proposal of a European digital finance platform: by 2024 the European Commission envisages the introduction of new licences with an EU passport that will allow the birth of a European digital platform.

The Retail Payments Strategy

The second theme of the digital finance package presented by the European Commission is the Retail Payments Strategy: the strategy for innovative retail payment services and solutions.

The objective of the European Commission is to achieve a homogeneous retail payment system across the European Union that includes solutions for instant cross-border payments. This strategy should therefore ensure digital, immediate and efficient payment systems, operating at pan-European level, creating innovative and potentially more competitive retail markets.

Markets in Crypto-Assets (MiCA)

The European Commission presented on september 24th, 2020 a new legislative package to support Digital Finance, the so-called Markets in Crypto-Assets (MiCA) regulation which aims to achieve a regulation of crypto-assets (digital identity, open Finance, stablecoin, blockchain-based assets), applicable at European level in all member States, which should come into force by the end of 2022. This is the most extensive regulation of digital assets ever made to date and seems to promise great opportunities in terms of development and growth for the entire financial ecosystem.

The European Commission aims to reduce the legal fragmentation of the digital market that still exists among many EU member States. Before the MiCA agreement, companies operating at national level often had to adapt their international business to the financial policy of each Country and this entailed high costs. This regulation, which is directly applicable throughout Europe, can concretely reduce the difficulties faced by Fintech service providers. In addition, the greater uniformity of the European financial regulatory framework will promote a level playing field between financial operators, which is lacking when heterogeneous regulations coexist.

The regulation introduces the possibility to define a pilot regime for crypto-assets, tokens, and Distributed Ledger Technology solutions for the capital market like tokenized securities, trading and post-trading and the reclassification of token, stablecoin and CBDC definitions. In these experimental environments both the technological infrastructure and the adequacy of regulations can be put to the test.

Digital resilience framework

The regulatory framework on the digital resilience of technological solutions in the financial sector is designed to contribute to the increase in operational security safeguards. In essence, every company operating in the financial sector will need to ensure that it is able to cope with or limit the damage caused by any type of cyber- attacks or disasters related to its technological infrastructure.

New challenges and risks

The regulatory framework of the digital finance package highlights new challenges related to digital finance that are necessarily associated with potential risks to be faced: first and foremost that of financial stability, which is more complicated to safeguard when the digital component comes into play, as well as the protection of privacy, consumer safety and the integrity of the financial market. The European Commission will therefore propose by mid 2022 the necessary adjustments to the existing legislative framework for financial services with regard to consumer protection and appropriate rules to protect end users from the risks of digital finance, safeguard financial stability, protect the integrity of the EU financial sector and ensure a level playing field.

Although the digital finance package has just been presented, it shows great opportunities and a regulatory principle for crypto-assets that could soon put them on the same level as existing traditional financial products.

Categories
Europe & Market Legal Framework

What is the Central Bank Digital Currency

From cryptocurrency to CBDC

The traditional monetary and financial context was faced, just over 10 years ago, with the advent of Bitcoin, a peer-to-peer digital currency system in which the latter can be transferred without the intervention of an intermediary relying on a shared protocol between the network participants based on Distributed Ledger Technology (DLT) and Blockchain. Bitcoin has thus introduced an innovative ecosystem based on completely new logics, initiating the world of cryptocurrency and disintermediation by solving the problem of trust in the counterpart. The revolutionary features of the DLT allowed the birth of the token economy, based on the “tokenization” of physical or monetary assets, thus shifting part of the physical economy of the digital world through the Blockchain itself.

The idea behind cryptocurrencies, the creation of a private digital currency, has inevitably led the monetary context and financial institutions to perceive a potential threat to their business model: banks feel defrauded of their institutional role and total digitalization through cryptocurrencies is also perceived by institutions as a risk for clients.

For example, the advent of stablecoins, the cryptocurrencies that ontologically have the characteristic of price stability, has aroused great interest from the public, but many doubts on the governments and central banks side, this was clearly observed in particular when Facebook announced the project for a private stablecoin, the Libra Coin.

Central banks have therefore felt the need to explore innovative solutions to limit the loss of control of the system: their response to the rapid spread of these new innovative models lies in the introduction of the Central Bank Digital Currency (CBDC) concept, a new form of digital currency released by central banks as a complement or substitute for fiat currency. Many central banks are studying, and in many cases experimenting with, this kind of solution, the adoption of which may take place in the coming years with different timeframes and implementation models.

The CBDC is therefore a concrete response to the crypto wave. The interest of central banks in digital currency has therefore progressively increased in recent years, driven by the desire to secure control over the money supply, while offering a modern payment system that is part of the digitalization process that is spreading at all levels.

CBDC features

The CBDC is a new form of currency that allows anyone to make electronic payments using digital currency and can be classified into two categories depending on who has access to it: the wholesale CBDC, whose use is limited to financial institutions and the interbank market, or the retail CBDC, designed for universal use involving direct public access to central bank liabilities.

A CBDC thus combines the characteristics of a legal currency issued by a state or central bank with certain characteristics of cryptocurrencies.

Advantages and disadvantages

CBDC offer some positive aspects: efficiency, for the convenience and ease of payments similar to cash payments, accessibility, for ease of access by anyone who wants to use it, resilience, due to the redundancy of the technological infrastructure, especially in the case of decentralized architecture, and interoperability necessary for conversions to other CBDCs and international payments.

The CBDC also guarantees financial inclusion and some consumer protection: unlike banking liquidity and reserves, the retail CBDC gives central banks the role of trusted lender for households and small businesses. This means that in a potential financial crisis, central banks will be able to provide support directly to clients, ensuring greater financial stability. The latter is undoubtedly an indispensable dimension that the CBDC would ensure: a government-supported digital currency that is widespread in the domestic market limits the possibility of adopting private digital currencies as stablecoins that pose a risk in the financial and monetary domain.

While recognizing many advantages, one of the CBDC’s weaknesses is its lack of anonymity, which can never be equivalent to cash or cryptocurrency anonymity.

CBDC and retail banks

The CBDC and its features are highly dependent on the real interests of consumers, so they must ensure an efficient and accessible system that can be a valid response to market demands. For this reason, the currency promoted by central banks must be a modern payment system that must be based on DLT and blockchain: the ease of money transfer without intermediaries and the low costs that they guarantee make its use indispensable. The issuance of digital currencies by central banks can have many advantages for users, but its impact on the banking system could be negative for retail banks: if consumers can hold money directly from the central bank, the function of retail banks would be at risk and this could cause the crisis of the traditional financial environment. The possible massive adoption of CBDCs would lead to a reduction of assets managed by retail banks, endangering the private credit system with potential consequences on business credit and therefore on employment.

For this reason, ongoing studies and experiments are mainly aimed at understanding the best way to implement CBDC to avoid the system destabilization but giving concrete benefits for consumers.

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Market Research & Development

What is Decentralized Finance (DeFi) and why it is innovative

Introduction

In the last few months DeFi (Decentralized Finance) has found more and more space in the economic and market context. This trend is now in steady growth and is generating a real revolution in the field of finance with such a development potential for that a future mass adoption, currently still in its embryonic stage, is expected.

What is DeFi?

DeFi is an innovative financial ecosystem that refers to financial applications based on the Distributed Ledger Technology and Blockchain. More precisely, the concept of Decentralized Finance refers to an approach that aims to create open source financial services through public and decentralized, permissionless and transparent platforms that are publicly available and operate without any central authority and without the intermediation of financial institutions. In this scenario, users would therefore retain full control of their financial activities by interacting with this ecosystem through decentralized applications, the so-called Distributed Applications – DApps (P2P) that operate exclusively through blockchain.

The Ethereum platform and the smart contract

DeFi builds on Bitcoin’s and in general cryptocurrency pioneering concepts, but offers additional types of services. The DeFi system is not based on the Bitcoin network, but mainly on the Ethereum decentralized platform, that supports smart contracts, the software that are automatically executed by the network and that make up for the absence of the traditional intermediary making the financial transactions completely autonomous and free from administration overhead. The real paradigm shift is that the financial management takes place through an automatic mode implemented by open software verifiable by anyone, whose behavior is therefore predictable, based on pseudonym and the basic market logic. In short, the DeFi ecosystem completely eliminates the discretion of classic intermediaries, delegating the entire management of the system exclusively to smart contracts. This is only a first step towards the creation of a parallel financial system that is supposed to overcome those limits now evident and intrinsic in the classic financial modus operandi.

DeFi applications

DeFi’s applications are numerous, a major one is certainly open and decentralized lending and borrowing, which has clear advantages: by using public blockchain platforms the counterparty risk is minimized and lending and borrowing become consequently cheaper, faster and more accessible. Banking monetary services are also a common use case and include granting of mortgages and taking out insurances, once again eliminating the significant costs that in the traditional process are mostly caused by the involvement of the involved intermediaries: thanks to the use of smart contracts, underwriting and legal costs are significantly reduced. Blockchain technology through DeFi can also be used to issue and enable ownership of a wide range of conventional financial products, favouring projects that could, for example, enable the creation of decentralised forecasting markets. As outlined above, the greatest innovation and the resulting advantage of DeFi is the easy access to financial services. By avoiding the obligatory intervention of institutions as mediators, DeFi applications are much more efficient and faster, allowing users to maintain constant and direct control over their assets. In addition, another significant advantage is that the DeFi low cost and open system allow a particular ease of access to those people who remain for various reasons out of the current financial system whose services usually exclude low incomes citizens. In the DeFi approach, however, costs are significantly reduced. One of its main claims is in fact “bank the unbanked” which implies the involvement of low income potential customers.

Between innovation and risk

DeFi goes beyond the concept of open banking which, while guaranteeing access to data from banking and financial institutions and making new types of products and services possible, stand inside the traditional financial context. The world of Decentralized Finance offers users a completely innovative perspective to look at the financial world dynamics: the open finance, independent from the current infrastructure, is placed in the foreground and promotes new ways of interacting with financial instruments. The DeFi ecosystem, with its promise of decentralization, is certainly an attractive idea, but before we will see a real mass adoption of its new approach, there are some aspects to tackle: alternative investment systems create interesting diversified scenarios and are accessible to a very wide range of users, but the DeFi field, being extremely dynamic and autonomous, is necessarily potentially more subject to changes, exposing customers to a higher risk potential than the traditional model. A solid organization of DeFi with a clear information process to safeguard savings on decentralized financial platforms is the basis for the spread of a system that is already today evidently more performing than the traditional one due to its intrinsic characteristics.

Conclusion

Anyway, the DeFi is currently in continuous growth: traditional financial services and DeFi applications are moving on converging paths, separated by an ever decreasing distance. Whatever the future scenario that awaits us, we are undoubtedly already facing a progressive change in financial services, within which DeFi proposes a radical rethinking of the financial system: shifting the power of action from centralized organizations directly into the hands of the community and the individual himself, an autonomous and independent entity with the prospect of an increasingly less centralized and more automated future.

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Market

The Rise of #DeFi

Coinbase CEO Brian Armstrong said that the crypto-winter only exists for coin prices and that it’s summer for innovation.

This seems to be true, in fact, during the apparent calm, a lot of serious teams have been embracing and developing the underlying technology to achieve real results. One of the key developments that resulted from this period is the emergence of Decentralised Finance (DeFi) applications, who will likely drive the next wave of disruption.

DeFi is an umbrella concept describing financial services built on top of public blockchains like Bitcoin and Ethereum. Three core principles have been proposed to define the values of any company that wants to be part of the #DeFi movement:

  1. Interoperability and Open Source: Members of DeFi take interoperability into account when building their projects. This helps strengthen the compounding effects of all our projects as a whole. Open sourcing helps us reach this goal by allowing us to collectively understand how all of our products can be woven together on a technical level.
  2. Accessibility and Financial Inclusion : Members of DeFi strive to create a financial system that is accessible to anyone with an internet connection. The vision of DeFi is a world where value flows freely, regardless of one’s geographic location.
  3. Financial Transparency : Members of DeFi believe that financial services should not be built in opaque silos, but rather that market-level information should be transparent to all participants while still preserving individual privacy.

As mentioned DeFi applications aim to improve on different aspects of the current financial system through the introduction of a decentralised layer in order to disintermediate rent-seeking middlemen. As of today many different use cases for DeFi applications exist. Examples include:

Consistent among all of these services, is that it requires no third party, bank or clearing house, and often is entirely permissionless.

DeFi is advantageous compared to fintech mostly because it provides some extra functionality and fewer operational risks thanks to its decentralized nature of minimizing trust at the software level, which in turn reduces the bureaucracy compared to fintech (banks are still disposing of the apps users funds and data).

There is a number of other reasons giving DeFi application traction as a new tech layer set to re-invent conventional financial instruments. Some of them are:

  • DLTs are able to ensure that the individual is the sole custodian of their assets at all times (provided that the individuals directly control their private keys).
  • Due to DeFi’s open source nature, it caters to an increasingly large pool of developers, thus enabling virtually unlimited room for experimentation in the financial services sector.
  • Building on the previous point, it is likely that through DeFi, the digital economy will move from digitalised versions of legacy assets, to completely new classes of digitally native assets.
  • Blockchain assets are inherently accessible and transparent, so for example, issuances, repayments, and loan terms are both human and machine readable.

At the end of the day, DeFi is obviously in a very early stage, but is a promising movement that has the potential to redefine many aspects of the present day financial services and could subsequently drive mass adoption.

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Market Uncategorized

Areas of use of Blockchain technology

Blockchain has become a term so abused that it is difficult to understand, given the vast and indefinite technological environment to which many would like to apply it. This is due to the excessive hype that accompanied the initial discovery phase of this new technology, where blockchain was advertised as a magic recipe capable of innovating any business. In 2017 and the beginning of 2018 blockchain has enjoyed great popularity thanks to the prodigious increase in the price of cryptocurrency and the rapid and impetuous success of tokens.

All this has generated great expectations of innovation and technological improvement, so many companies have felt compelled to include blockchain in their marketing plan, indicating it as a factor in the success of their business, even before having evaluated and thoroughly tested it.
When the speculative bubble burst and the ambitious promises had to leave room for the evidence of the facts, it clearly emerged that blockchain is not the panacea for all businesses and that its best application is limited mainly to certain areas. Furthermore, it is clear that the illusions of its rapid implementation and consequent immediate success of the relative products derive from a poor study of technology and a superficial understanding of its limits and opportunities.

Let’s see below what are some areas in which blockchain today shows real added value compared to other existing technologies:

Digital currency

The first and still most important application of the blockchain technology is that of allowing the creation and transfer of cryptocurrency without the need for any intermediary. The cryptocurrency native to a specific blockchain (Bitcoin, Ethereum, Ripple, EOS, etc.) and tokens created in a personalized way, represent a new way of transferring value.
Most important use cases:

  • Payments
  • Exchanges
  • Loyalty Systems


Financial sphere

The traditional financial system can be rethought and rebuilt over a blockchain infrastructure that offers security guarantees, automation and programmability of assets, disintermediation, efficiency and speed, superior to current systems. The audit and transparency of these systems, combined with the borderless nature of technology, make blockchain the perfect financial protocol.
Most important use cases:

  • Digital Asset Trading Platforms
  • Automation of financial products and services with the use of Smart Contracts
  • Tokenization of physical and digital assets
  • Financial inclusion for unbanked


Crowdfunding & Fundraising

Financing of a new business project or raising capital for an existing company can be more effectively implemented using a token. It represents rights and / or utility that can be transferred and exchanged more easily and quickly on the market. The token offers to companies an opening to international investment markets. In countries where regulation is clear and lean, it offers more opportunities to start-ups, thanks to easier and faster access to potential investors.
Most important use cases:

  • Financing of a future project (ICO, DAICO, IEO)
  • Capital raising (STO)


Certification and Copyright

The certification or notarization of a digital data on blockchain creates a non-modifiable register that can be used as proof of existence of that data. This applies to certificates and educational qualifications, which can be rendered demonstrable and non-falsifiable. In the same way it achieve the confirmation of authenticity of a product in supply chains where counterfeiting is otherwise difficult to verify.
Most important use cases:

  • Academic and professional titles
  • Anti Counterfeit Products
  • Verification and economic management of copyright


Digital Identity & Privacy

Digital identity is an increasingly important and delicate aspect of our lives, crucial for security and privacy, fundamental for democratic access to the online world.
Current authentication systems require the registration of personal data and the sending of identity documents that are not born natively digital. The security and privacy of such data are often violated without the users being able to defend themselves in any way. Blockchain, through public and private key pairs, and a cryptographic management of data, can greatly improve the current situation and provide a more efficient ID in line with privacy. Furthermore, there is no central entity that owns the data and can therefore be easily attacked.
Most important use cases:

  • Decentralized authentication systems
  • Management of personal data
  • Recognition and identity documents
  • Healthcare data
  • Online voting systems


Supply Chain Management

The complexity and quantity of subjects involved in supply chain management is now resolved by a plurality of systems, both online and offline, which make management very demanding and data exchange is not very efficient and verifiable. Using a common decentralized infrastructure on which to build shared applications among the various parties involved in the supply chain, up to the consumer, constitutes a great simplification and a guarantee of greater reliability of the information exchanged.
Most important use cases:

  • Open protocol for product history
  • Traceability systems and transparent data connection


Integration with other technologies

So far we have listed some of the most well-known areas, which represent the most common cases of real use developed in the industry. However, there are other interesting areas of real added value for the application of blockchain technology. These areas can be closely integrated with other technologies, or represent different products and services.
Most important use cases:

  • Prediction Markets
  • Integration with the Internet of Things
  • Decentralized storage with IPFS
  • Videogames & Gambling online
  • Automation in insurance
  • Energy market management


Conclusions

Blockchain is a recently developed technology, not yet consolidated and far from a stage of maturity. At the same time, innovation is rapid and continuous, as is the potential discovery of new real use cases. This scenario offers great opportunities for companies that will first be able to effectively apply blockchain, increasing the added value of their products and services and thus improving their business.