Blockchain HACK Fund Aims To Provide Liquidity To Startup Investors

FinTech, Innovation, Investing, Regulation | October 3, 2018 By:

HACK Fund is a blockchain venture fund that aims to raise $100 million USD to invest in seed-stage global technology companies.

The key is that it wants to be a US fund to give global venture investors liquidity in a historically illiquid asset class.  Typically, most private company assets are illiquid, with gains only achievable when a company is purchased or goes public. By tokenizing venture investments and allowing them to be easily transacted using blockchain technology, liquidity is hopefully unlocked and funds can more freely flow across a multitude of investments.

HACK Fund has kicked off fundraising across Asia, Middle East, Latin America and to a small number of accredited investors in the US. HACK Fund also has the option to purchase shares in their existing well-performing funds. This enables HACK Fund to begin investing soon after the token sale, rather than having to wait until new startups are engaged.

HACK Fund was created by the founders of Hackers/Founders, the world’s largest network of entrepreneurs, with over 300,000 members in 49 countries and 128 cities.  Hackers/Founders built a portfolio with a market cap of $600M from its previous four funds, which had a 30 percent return for five years running.

Founder Jonathan Nelson answered a few Block Tribune questions.

BLOCK TRIBUNE: Why should somebody go through your venture versus traditional venture capital?

JONATHAN NELSON: Aha. Great question. We’re actually building this fund this way because so many entrepreneurs are not served by traditional venture capital. I never have to ask a portfolio or an investment what is your exit strategy? I have to ask them what are your plans to grow and grow quickly, the difference being is that because our fund essentially is already publicly traded, it’s essentially going through an IPO, my portfolio companies don’t have to. What I need them to do is to measurably and accruably grow and grow quickly so that my share price increases in value.

This also means that I don’t have to force my companies to be in Silicon Valley where the vast majority of the world’s mergers and acquisitions happen. They can actually be anywhere in the world, and preferably that’s really close to their customers. That’s the reason why we’re actually building our fund. I think we just need a better product because so much of the world’s technology companies are not being served by today’s venture model.

BLOCK TRIBUNE: You’re focusing on emerging markets. Why that particular area?

JONATHAN NELSON: I’m thinking of emerging markets as not Silicon Valley, not New York, not London, not a major startup hub. I would consider the US Midwest as something of an emerging market when it comes to startup financing. Why that is, I have been in the middle of this global explosion of tech entrepreneurship over the last decade or more via our Hackers/founders community and I’ve seen … We’ve had events in 140 cities across 45 different countries. Several hundred thousand entrepreneurs have attended our events.

Capital still remains very, very centralized and very focused on Silicon Valley, New York, London. Whereas, the innovation is increasingly becoming decentralized and happening all over the world. I think we need to come up with better ways to actually finance companies to be able to do that. When I say emerging markets, yeah, sure, poor countries, developing countries, middle-income countries, but also I’m thinking of people who just aren’t in Silicon Valley and who aren’t part of the Stanford/Harvard clique, where it’s actually really hard to get in and to get in front of some of these people as well.

BLOCK TRIBUNE: How many investments do you anticipate making each year? Do you have any ballpark numbers in mind?

JONATHAN NELSON: Yeah, for a hundred million dollar fund, I’m targeting about 300 investments over four to five years.

BLOCK TRIBUNE:  Okay, so somebody has a great idea and they want to be a part of this. What do they do?

JONATHAN NELSON: What they actually need to do is they’ll need to fill out an online application, which will be peer reviewed by other entrepreneurs in a relatively bias-free fashion. We remove names, ages, genders, schools from the application that’s reviewed by other entrepreneurs and scored and every person who applies gets that score with the idea that people should improve their scores and apply every few months, if they would like to.

If the scores are high enough, then they will actually talk to three to five investors via video chat, investors that we’ve worked with in the past, investors on our team, or investors in our fund. They get scored as well based on those conversations. If the scores continue to be high, then we’ll sit down with them and we’ll ask them what kind of company are you interested in building, and do we think that we can add value.

If you are building a photo-sharing app for cat pictures, I’m really just not going to be that engaged. Our team isn’t going to be that excited, and we’re probably not the fund for you. If you’re actually building something that has a real product, that has real customers, that’s growing revenue, then chances are we can actually probably add a bit more value and help you get to more customers around the world.

BLOCK TRIBUNE: What happens when you do make that investment in a company? First of all, how much equity do they surrender? What happens then?

JONATHAN NELSON: We’re targeting anywhere between 2% to 20% ownership of a company on the investments. We’re going to be writing checks between $25K to $2 million. After we actually make an investment, we’re following the process that we’ve actually developed the last five years. In our previous portfolio, where we have an initial deep dive, we take a really long, hard look at the technical, the legal, the legal stack, the corporation documents, making sure that you have investing schedules in, making sure that you have option goals for your employees.

We take a look at our technology stack. We take a look at your business model, your revenue. We spend a couple of hours really doing a deep dive and then we actually start making referrals to specialists that we think can actually help you with basically what it is that you actually feel that you need. We take a very problem-focused approach. What are your biggest problems as an entrepreneur, as a founder and CEO or CTO of this company? Then we just try to help you get through those problems and address those problems as best as we can and then lather, rinse, repeat.

We, at this point in time, are just a Portfolio 55 Company. We have a team of 25 employees in three different countries to support them in their goal community. We plan on scaling that team up just so we can be very hands-on and really provide a lot of value and support to our portfolio companies around the world.

BLOCK TRIBUNE: Now, you’re referring to these investments as token securities, which is kind of a word that people are shying away from. They’re preferring to call it a utility token because of fears of regulators. Why did you choose to call it that?

JONATHAN NELSON: This is very much a security. I served for a couple of years on an SEC Advisory Committee and in the United States, a security is defined by are people going to buy your thing because they’re going to make a profit off of what you do. That is the definition of a security so the SEC has actually said statements like … The head SEC Commissioner has said statements like he has not seen and ICO that he did not think was a security office.

We’re just being explicit about this. We’re being explicit that these are digital securities. Our fund is a digital security. We are following the rules in the United States. I’ve talked to the SEC about this issuance. I’m being compliant with the SEC rules. We’re only letting a hundred wealthy investors invest in our fund from the United States and then we go to jurisdictions that actually don’t have accredited investor definitions. We can be a lot more liberal in who can actually invest in our fund.

Then with our companies, we can do Seed and Series A investments, but if they need ten, 15 or 20 million dollars, then let’s just call it what it is. It’s a crypto IPO. It’s a public offering of a stock, but let’s actually issue a digital stock certificate and do a public offering of a digital stock, following the same compliance mechanisms and the same compliance rules we’re using for a fund.

BLOCK TRIBUNE: You’ll be domiciled in the U.S. You’re not going to Malta or anything like that?

JONATHAN NELSON: No, actually, we are domiciled in the Cayman Islands. I think that specifically they’re already a global-known fund destination and they have a couple of laws which make it very, very beneficial to us. One is that publicly traded funds can be traded in the Cayman Island but they are not regulated so buyer should beware. They need to look at the funds they are investing in to be sure that they’re actually on the up and up.

The second law that they have in the Cayman Islands is that they cannot distinguish between a digital document and a paper document, so you can create digital stock certificates, which is what we’re doing. Those two pieces of law in the Cayman Islands actually make it very straightforward for us to actually create a publicly traded fund that has digital stock certificates.

BLOCK TRIBUNE: All companies have ups and downs. What mechanisms do you have in place to prevent the rush to the exit if there’s some bad news?

JONATHAN NELSON: What we’re actually doing is we are having a third party, Carta. They will be doing a rules-based valuation on our portfolio on a quarterly basis. They also make it really easy for us to have that rules-based valuation audited. We will be reporting quarterly audited valuations of our aggregate portfolio.

Just because to protect our founders’ privacy, I don’t want to report the vagaries of one company going up or down. That would be up to the individual company if they want to disclose that. What we’re going to be doing is reporting aggregate quarterly valuations of our entire portfolio.

If there is a material event that we think will significantly affect the price of the portfolio, then we actually have to report that as well, but we are taking the approach as if this were a publicly traded fund in the UK under their regulatory regime and then even actually talking with the London Stock Exchange to see if we could actually list it. We think we’re probably a couple of years ahead of the market on that, but it’s a conversation I want to have.

BLOCK TRIBUNE: Do you have any other revenue streams beyond the equity that you’re taking in these companies?

JONATHAN NELSON: Uh-uh (negative.)

BLOCK TRIBUNE: No?

JONATHAN NELSON: No, we’re all in.

BLOCK TRIBUNE: Okay. What is your time frame for rolling this out?

JONATHAN NELSON: We’ve actually raised $2 million in the fund that’s created. We have an initial tranch. It’s going to be crowd-funded or made available to the public through a company known as BRD Wallet. It’s one of the larger groups of currency wallets in the market right now. We are doing that on October 15th. We’re opening that allocation to them.

BLOCK TRIBUNE: How long will that go?

JONATHAN NELSON: Two weeks.

BLOCK TRIBUNE: Two weeks?

JONATHAN NELSON: Yep, and we’re going to do it in tranches. We’ll be fundraising until we get $100 million at least.

BLOCK TRIBUNE: Do you have anything you want to tell me about that I didn’t ask you about?

JONATHAN NELSON: No, that’s it. I’m probably, just because of my background serving on an SEC Advisory Committee for a number of years and the 18 to 20 months I’ve spent looking at global securities while I was at 12 law firms in ten legal jurisdictions, I’m probably a world expert on global securities laws. We’re very interested in bringing to the foreground digital securities that are compliant, that are auditable, that can actually be much more of a trusted asset as opposed to some of the fly-by-night ICOs that we’ve actually seen in the last two years.

I really believe that digital securities created on a blockchain are really the future of finance and this is really just the vanguard of that. We’re working with a number of partners, BRD, [inaudible 00:13:15] Markets, Coinbase, to actually start creating a lot more infrastructure for these digital securities to be much more widely traded.

BLOCK TRIBUNE: Are there any particular sectors for blockchain companies that you’re focused on, like health or finance or whatever?

JONATHAN NELSON: No. We’re going to be investing in startups. Some of those startups are going to have a blockchain product; some of them aren’t. We’re not just focused on crypto companies. Our innovation is the startups are going to have, if they get to a certain size and if they need that kind of capital and if they are solid companies, then we will actually help them issue digital stock certificates and do a crypto IPO as well. We tend to invest in whatever comes through our pipeline and whatever community tends to be working on. That’s where the majority of our deals will come from.