Enhancing Venture Fund liquidity through tokenisation w/ Texture Capital & Cosimo Ventures
Cosimo X Token is making early-stage investing in Crypto Companies easier. On this episode of Market Spotlight, host, Paul Gordon is joined by guests Richard Johnson, CEO of Texture Capital and Robert Frasca, Managing Partner, Cosimo Ventures to discuss how they are working together to…
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Cosimo X Token is making early-stage investing in Crypto Companies easier.
On this episode of Market Spotlight, host, Paul Gordon is joined by guests Richard Johnson, CEO of Texture Capital and Robert Frasca, Managing Partner, Cosimo Ventures to discuss how they are working together to tokenise the Cosimo fund; taking the first steps to make these types of opportunities more accessible.
The Problem Texture Capital Seeks to Solve
(00:42) It has often been cited that early-stage investment opportunities are a closed shop to non-accredited investors. Until companies come public, most of the opportunity to profit from them have already been reaped by institutional funds.
The last couple of years, Texture Capital has been working on a solution to this problem and are ready to go live with a securities token issuance platform licensed out of New York. The first offering is a tokenised equity product by Cosimo Ventures in partnership with Texture Capital.
What is Texture Capital?
(01:16) Texture Capital is FinRa member broker-dealer and SEC-registered broker-dealer with a science of trading system. The company is focused on providing tools for tokenization and secondary trading of digital securities or security tokens to institutional and accredited investors, starting from the US. As a fully licensed entity, the company is in a unique position as one of a handful in the US authorized to issue equity tokens.
The journey towards authorization has been winding for Texture with the FINRA approval process spanning a period well over a year. This timeous process was expected as the SEC and regulators in the US, in general, had been very hesitant about blockchain and crypto, contributing to doubled and tripled the timelines than would usually take.
(02:11) In October of last year, Texture got its approval and have since then been in the go-to-market process. A security token was launched in February to test the implementation of the features they already had. And then just recently, Texture announced a partnership with Cosimo to become its first client on the platform to help them raise capital and help investors trade their tokens in the secondary market.
How Cosimo Started
(02:59) The founder of Cosimo Ventures on the other hand has been in the internet business for a long time. As an early dot.com pioneer, Robert has been a serial entrepreneur building companies since the 90s.
“I started the very first financial service on the internet in 1993. I went down to New York and got the exclusive on stock quote information and put one of the first stock quote servers up. It was embedded in a NCSA mosaic, sold that company to Intuit and did all their internet strategy,” Robert claimed.
Robert had been building tech companies for 30 years since then.
Six years ago with his four partners, he started Cosmo ventures.
(04:32) The company is founded on the thesis that blockchain is the single largest value creation event in our lifetime, even bigger than the internet itself.
The partners knew from the beginning that if they were going to create a fund, blockchain would be a crucial part of it. But the decision to tokenize a venture fund was made only two years ago.
What is Cosimo X?
(05:32) Cosimo X, the company’s tokenized early-stage venture fund, is focused on blockchain and deep tech companies.
The establishment of Texture in the US as a broker-dealer is what allows Cosimo to get distribution, help trade the token, get liquidity and manage it.
(07:08) “We believe that early-stage investing itself is broken. The Apple computer company that went public, today cannot. It didn’t have the revenue or scale. It didn’t have what’s needed to go public. And so we have this highly bifurcated market where all these venture investors get in on all these great deals early and the public can’t. By the time they get into it, the VCs have gone through and taken a lot of the profit,” Robert said.
(07:47) The ICO craze of 2018 showed us the global pent up demand for this asset class, he added. Cosimo then allows the global investor to invest early in this “largest value creation event in our lifetime.”
How Cosimo X is different
(08:58) The Cosimo X fund is different for several reasons. First, the fund is evergreen as compared to some other venture funds out there. This means if people want to buy in, they can do so at any time.
(09:12) Secondly, it can create liquidity on a deal by deal basis.
“When there’s an exit in the fog, we take our carried interest out in fees out, and then we keep 50% of the fund. We recycle that for more investments. But the other 50% goes out on the market and we buy back the tokens and burn them.” Rob said
(10:04) This gives the token holder the option of liquidity on a deal by deal basis and accommodates the timing issue of people coming in and out of the fund.
” In the typical VC fund, everybody comes in at the beginning and everybody leaves at the end here. You’ve got people coming in at different times, so you have to be able to accommodate that.” Rod added. If Cosimo got a lot of capital from its Assets Under Management (AUM,) it could use that AUM to buy out any cell pressure or anybody willing to sell on a pro-rata basis.
Compliant DeFi Innovation
Texture Capital is making this possible by taking a full compliance approach to US securities regulations and hopes to take advantage of all the innovation coming out of Defi.
(13:25) Texture has in its near term roadmap the integration of stablecoins for settlements.
“If a seller and buyer go into our ATS and they are both willing to make a trade, each can submit their stable coin. If a match occurs, Texture can atomically swap the security token from the seller’s wallet to the buyer’s and vice versa. This makes instantaneous Delivery versus payment (DVP) settlements possible, which cannot be done even in the public markets right now.
Instantaneous or shorter settlements like that solve some of the settlement delays that require collateral that forced brokerage firms to shut off trading, just to manage their risks in the case of GameStop.
The innovation in DeFi that Texture wants to create can be likened to that of submitting ether to the MaKER protocol to withdraw DAI stablecoin.
(14:50) “..submit a security token in and withdraw a stable coin, then you’ve got kind of decentralized margin…and then go another step once that token has been deposited, it can be lent out. Going back to GameStop again, the advantage here is that the token is recorded on the blockchain so even though it’s being lent out, it can’t be lent out more than once and you can’t have something like 140% short interest,” Richard added.
Scaling Texture and Cosimo X
(19:19) The global crypto market penetration is between 10% and 20% and its ability to scale is really about liquidity, Rob argues. “…once the FINRA regulated mainstream market sees the benefit of what tokenization gives liquidity, transparency, compliance fund accounting and this is being done in a decentralized, resilient and transparent way, then it’s just a matter of going from 10%, right to 80%,” Rob noted.
Is there more Support from Regulators?
There was zero guidance on what to do when Texture capital started, Richard said. In the course of that journey, the SEC especially has made some progress in that regard.
On December 23rd last year, the SEC provided a pathway for custody of digital assets securities, a progress from a regulation written as far back as in the 1930s, Richard noted.
The new SEC Chair Gary Gensler, who taught a 24-part lecture series, “Blockchain and Money” at MIT in 2018 is welcoming of the technology and would hopefully see to reasonable regulation from SEC, Richard added.
Thought on Coinbase IPO
(26:11) “Coinbase is like AOL sending out millions of CDs and every magazine saying, get on the internet. What I love about Coinbase is, is that they’ve made it incredibly easy for us investors to get online,” he said. As more access is given, through companies like Coinbase, the market would go mainstream.
Who Can Buy The Cosimo X Token
(28:29) The Cosimo fund with a minimum of USD 200,000 allows family offices who want to get exposure to space. It’s a huge step up, from the more traditional crypto funds that ask for $5 million to $10 million checks and lock your money up for 10 years, Richard said.
Cosmo is giving much more flexibility with a much lower minimum, and liquidity options throughout the life cycle.
(29:47) The token remains for accredited investors only as part of the regulatory framework as progress is slowly being made to convince regulators to give access to retail investors. Interested accredited investors and institutions such as family offices. can visit Texture Capital to register their interest for the token that goes live in about 2 weeks.
Reactions from Existing LPs on the Tokenized Fund
Existing LPs of Cosimo Ventures are all over it, Rob said.
(30:32) “…we brought in Rochester Institute of Technology, a major university in the state of New York. They might be the first university to invest in a tokenized fund” Rob added.
Cosimo is not a hedge fund but more on the lines of venture capital active management and in many cases is giving investors preferred equity and the opportunity to follow on that investment.
(31:28) “… one of the interesting things about this is because it’s evergreen, it has a portfolio and that portfolio is growing…what happens is like for instance, we were in Casper Labs early. And a lot of folks are coming to us and saying, I couldn’t get into Casper, but I can get into your fund because you have a position there.” Rob said.
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