CityBlock Capital: Venture Capital for the Digital Age
February 6, 2019 | Blog

CityBlock Capital: Venture Capital for the Digital Age

As Blockchain technology gains widespread, real world adoption, we will see significant changes in many industries, including how investors buy and sell assets. Specifically, Blockchain allows for tokenization-- turning anything of real value into a tradable asset by creating a digital unit of ownership known as a security token. Tokenization of traditional assets offers several potential benefits: greater liquidity to asset owners, 24/7 markets, lower transactions costs, fractional ownership, automated and quicker settlement, improved compliance checks, and intriguing possibilities with smart security contracts. One industry that stands to benefit significantly from tokens is venture capital.

Benefits of a tokenized venture capital fund

Cryptocurrency and Blockchain make it cost effective to securitize or tokenize common assets. Venture capital funds have been notoriously illiquid as investors must wait many years before they see a return. A tokenized venture capital fund could allow investors to purchase fractional portions of the portfolio and sell those investments much faster than traditional funds. As a result, more people can participate in this asset category because funds would not lock up their money for the historical 5 to 10-year horizon.

CityBlock overview

CityBlock Capital is a venture capital firm connecting traditional venture capital with Blockchain technology. The company recently launched its first tokenized venture fund – the “NYCQ fund,” which exclusively makes investments in early-stage Blockchain infrastructure companies which CityBlock believes will replace the technology platforms behind capital markets. All NYCQ investments are either equity or digital equity; the fund will not invest in protocols or cryptocurrency. The NYCQ’s investment team is headed by industy veterans Nikhil Kalghatgi and Ateet Ahluwalia, who boast decades of experience in investments and asset management. The two men also respectively serve as Partner and Managing Director of CoVenture Crypto, a multi-strategy cryptocurrency asset management firm backed by Softbank. The firm is helping build key components of tokenized finance including a cryptocurrency index fund designed to make it easy for more traditional investors to gain exposure to top digital assets.

What is CityBlock’s investment thesis and philosophy?

The funds’ investments illustrates its desire to operate at the intersection of capital markets and Blockchain. CityBlock believes the next evolution of capital markets will occur on the back of Blockchain and is investing in companies developing such technology. Thus, the NYCQ Fund is targeting the $160 billion in annual revenue generated by companies that currently make such infrastructure for the financial services industry. The equity piece of the equation is critical to CityBlock’s value proposition. Whereas current existing Blockchain-focused funds include some exposure to cryptocurrencies, the NYCQ will not invest in these assets. So NYCQ investors can access the Blockchain ecosystem without the risk of cryptocurrencies and their volatility. The fund is planning to invest in startups focused on products using Blockchain technology applied towards following functions within the capital markets supply chain:

  • Clearing Houses – Intermediaries between buyers and sellers of financial instruments. These third-party entities are responsible for settling trading accounts, clearing trades, collecting and maintaining margin monies, regulating delivery of the transacted instrument, and reporting trading data.
  • Depositories – Institutions responsible for and legally allowed to accept and hold customer monies and securities and assists in the trading of securities.
  • Securities Services Firms – Broadly, any entity that provides services related to the trading of securities, including clearing and settlement, custody, and other related services.
  • Market Aggregation Tools – Tools that combine data from multiple sources into one place so as to derive new insights and discover new relatonships or patterns.
  • Data Analytics Companies – Providers that use varying techniques and processes to draw insights from raw information sources.
  • Index Providers – Beyond a comparison point, portfolio sponsors can attempt to create portfolios that mirror components of a certain index, allowing investors to buy a security likely to perform in tandem with the market as a whole or a specific sector
  • Exchanges – Marketplaces in which securities, commodities, and other financial instruments are traded. Primary focus of any exchange is to provide fair and orderly trading and efficient dissemination of price information for any traded assetIssuance Platforms – Provide solutions that assist in the process of launching security tokens. These platforms include integration of regulatory requirements including KYC, anti-money laundering, investor management, and securities compliance

Can you highlight comparable projects or funds to CityBlock?

CityBlock operates in a relatively nascent space with limited directly comparable funds. Two tokenized funds currently exist – SPiCE VC and Blockchain Capital, whose BCAP token has already begun trading on limited exchanges.

As the industry grows, we expect more tokenized funds to emerge. For example, ICONOMI and Taas are two projects both attempting to digitize shares in private equity funds. However, we have not grouped them with BCAP and SPiCE because we’re not sure if these projects actually issued security tokens.

Taas, a hedge-fund focused on trading cryptocurrencies, raised over $7 million in their 2017 initial token sale but like ICONOMI, the tokens’ legal status is not clear.

What are the risks involved in investing in a tokenized venture capital fund?

In theory, investors face risks from both the venture capital side of the token, as well as the technology-specific side. Since the tokens’ value should fundamentally reflect the performance of the underlying portfolio companies, a stumble at any one of these firms could, in theory, reduce the net asset value (NAV) of the entire portfolio. The token would thus command a lower price. Furthermore, we haven’t as yet witnessed complete lifecycles of venture capital funds focused on Blockchain technology. Effectively, there would a risk associated with investing in a new asset category or a new class of investments.

From a technology perspective, tokens would require a compliant and secure trading exchange to facilitate secondary trading. And without exchanges, investors will see a lot less liquidity for their tokens, which was the technology’s primary purpose in the first place. Additionally, market volatility and pricing pressure in cryptocurrencies could affect fundamentals of underlying portfolio companies, which in turn would create headwinds for the NAV appreciation.

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DISCLAIMER: This report does not contain a complete analysis of every material fact regarding any issuer, industry, or security. The opinions expressed in this report reflect our judgment at this date and are subject to change. The information contained in this report has been obtained from sources we consider to be reliable; however, we cannot guarantee the accuracy of all such information.

Any securities offered are offered by SharesPost Financial Corporation, a member of FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management are wholly owned subsidiaries of SharesPost Inc. Certain affiliates of these entities may act as principals in such transactions.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative and involves a high degree of risk. It should only be considered as a long-term investment. You must be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid, and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks. You should complete your own independent due diligence regarding the investment, including obtaining additional company information, opinions, financial projections, and legal or other investment advice.

Investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.

SharesPost, the SharesPost logo, My SharesPost, the SharesPost Index, SharesPost Investment Management, the SharesPost 100 Fund, and the SharesPost 100 List are all registered trademarks of SharesPost Inc. All other trademarks are the property of their respective owners.

Copyright © SharesPost, Inc. 2019. All rights reserved.

Rohit Kulkarni

Rohit Kulkarni

Rohit is the Managing Director, Private Investment Research for SharesPost Research LLC. Prior to joining SharesPost, Rohit was a Vice President, Senior Analyst at RBC Capital Markets.
Please Read These Important Legal Notices and Disclosures

CONFLICTS: This report is being published by SharesPost Research LLC and distributed by SharesPost Financial Corporation, a member of FINRA/SIPC. SharesPost Research LLC, SharesPost Financial Corporation, and SP Investments Management LLC, an investment adviser registered with the Securities and Exchange Commission, are wholly owned subsidiaries of SharesPost Inc. SP Investments Management is the investment manager of the SharesPost 100 Fund, a registered investment company, and other funds.

Recipients who are not market professionals or clients of SharesPost Financial Corporation should seek the advice of their own personal financial advisors before making any investment decisions based on this report. None of the information contained in this report represents an offer to buy or sell, or a solicitation of an offer to buy or sell, any security, and no buy or sell recommendation should be implied, nor shall there be any sale of these securities in any state or governmental jurisdiction in which said offer, solicitation, or sale would be unlawful under the securities laws of any such jurisdiction. This report does not constitute an offer to provide investment advice or services. Registered representatives of SharesPost Financial Corporation do not (1) advise any member on the merits or advisability of a particular investment or transaction, (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax, or transactional advisory services.

Information regarding companies in the SharesPost 100 List available on the website has been collected from or generated from publicly available sources. The availability of company information does not indicate that these companies have endorsed, supported, or otherwise participated with SharesPost. Company “thesis” is the opinion of SharesPost and is not a recommendation to buy, sell, or hold any security of such company.

Investors should be aware that, at any given point in time, the SharesPost 100 Fund (the “Fund”) may or may not have an ownership interest in any of the issuers discussed in the report. Accordingly, investors should not rely on the content of this report when deciding whether to buy, hold, or sell interests in the Fund. Instead, investors are encouraged to do their own independent research. Before investing in the Fund, investors are cautioned to carefully consider the investment objectives, risks, charges, and expenses before investing. For a prospectus containing more information about the Fund, please visit www.sharespost100fund.com. Read the prospectus carefully before investing.

ANALYST CERTIFICATION: The analyst(s) certifies that the views expressed in this report accurately reflect the personal views of such analyst(s) about any and all of the subject securities or issuers and that no part of such analyst compensation was, is, or will be, directly or indirectly related to the specific views contained in this report.

Analyst compensation is based upon various factors, including the overall performance of SharesPost Inc. and its subsidiaries and the performance and productivity of such analyst, including (1) feedback from clients of the SharesPost Financial Corporation and other stakeholders in our ecosystem, (2) the quality of such analyst’s research, and (3) the analyst’s contribution to the growth and development of our overall research effort. Analyst compensation is derived from all revenue sources of SharesPost Inc., including brokerage sales.

DISCLAIMER: This report does not contain a complete analysis of every material fact regarding any issuer, industry, or security. The opinions expressed in this report reflect our judgment at this date and are subject to change. The information contained in this report has been obtained from sources we consider to be reliable; however, we cannot guarantee the accuracy of all such information.

Any securities offered are offered by SharesPost Financial Corporation, a member of FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management are wholly owned subsidiaries of SharesPost Inc. Certain affiliates of these entities may act as principals in such transactions.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative and involves a high degree of risk. It should only be considered as a long-term investment. You must be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid, and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks. You should complete your own independent due diligence regarding the investment, including obtaining additional company information, opinions, financial projections, and legal or other investment advice.

Investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.

SharesPost, the SharesPost logo, My SharesPost, the SharesPost Index, SharesPost Investment Management, the SharesPost 100 Fund, and the SharesPost 100 List are all registered trademarks of SharesPost Inc. All other trademarks are the property of their respective owners.

Copyright © SharesPost, Inc. 2019. All rights reserved.