The financial system is changing. We need to accept that. Ever since 2008 and Satoshi Nakamoto’s whitepaper (Which by the way, fantastic read) was released, people across industries instantly became fascinated with the Blockchain and its fascinations. Although, the secrecy, complexity, and obscurity, of the Blockchain, hindered its growth and development in its early years. The introduction of the Ethereum Network has provided a relatively simple way for Blockchain projects to receive funding, and will soon become the standard way small business owners raise capital.
Small Business Needs
There are a few important factors a small business owner needs to consider when looking at options to raise capital. We will use Joey’s Subs as a case study business.
Joey runs a smalltime sandwich shop just outside Toronto and is looking to expand his reach and move into a bigger shop to be able to service more customers. Joey’s business has strong fundamentals, cashflow positive for several years over several years of operations, profit margins comfortably above industry standard, and carries a loyal customer base who are always open to Joey’s ideas.
There are four “traditional” paths Joey can take to finance this expansion:
Joey could finance the business himself, taking a huge chunk out of the business. Advantages being: no debt, no loss of equity in the business, incredibly straightforward and easy to do. Funding the business himself seems like an incredibly attractive option for Joey, except for the one obvious caveat: Joey would need to have enough money in the first place.
So Joey searches on, looking for a financing solution that doesn’t involve breaking out his chequebook.
Small Business Loan
Possibly the most common source of financing with outside money, a small business loan solves the issue facing bootstrapping, Joey now has outside money. Although with the outside money comes to interest, collateral (Often backed by equipment or equity), and debt that Joey’s Subs now carries on its balance sheet. Small business loans also rarely come with the additional guidance that some of Joey’s other financing options do.
The idea of possibly losing his entire business, tarnishing his credit, and taking out a large loan, worry Joey, so he continues to look for alternative options.
These can be very attractive, Ultra-Low/Middle Market Private Equity firms, angel investors, even just wealthy friends and family, all can provide Joey with the money he needs to expand his business. They check off a lot of our boxes, outside money, experienced investment, privatized loans, and in the case of some private equity lending, investors are incentivized to provide guidance to Joey and help him succeed.
All these solutions rely on Joey having one thing, however: A Network. If Joey has dedicated his time to perfecting his craft and making the best damn sub in the GTA, instead of attending restauranteur conferences, he may have trouble drumming up interest from private investors.
This is becoming an increasingly popular method of financing small businesses, particularly in Canada. It is currently legal in Ontario and falls under two categories:
This is where investors receive a certain perk for investing in the business, be it permanent discounts, ideas for management, Joey’s Subs T-shirts, etc.
Incredibly similar to our private investor case, but made open to the public.
The trouble with crowdfunding is it can be incredibly messy to set up, requiring lawyers, bundles of paperwork, and a mess for Joey when all he wanted to do was open up a bigger restaurant and make sandwiches.
In comes the Blockchain, Incentive-Based Financing, Outside Money, Guidance, without the hassle of the traditional methods.
Clearing up Confusion around Blockchain
No, I am not proposing we turn Joey into a cryptocurrency trader and shifting his business model from making subs to generating alpha trading obscure crypto derivatives products. While trading cryptos is one of the first things people think of when they hear “Blockchain”, all that the Blockchain is, is a peer-to-peer network that removes a central figure from online transactions. While this does facilitate trading cryptos, it is not the only application of the Blockchain. We can use it to help Joey get the funds he needs to open up his new location.
Introducing the Ethereum Network
The Ethereum Network is one of the best things to happen to the Blockchain since the Blockchain. Ethereum really is the second coming of the Blockchain. Now you didn’t need to be a Ph.D. programmer and have an extensive background in cryptography to use distributed ledger technology. All it takes is a couple of hours of fooling around in Solidity and you can get a token launched on the network on a weekend. Ethereum brought smart contracts to the world, contracts that could be triggered by many types of events.
Applying Ethereum Network Token Creation to Joey’s Subs
Joey can now raise funds using the Ethereum network in a few easy steps.
- Create an Ethereum Token, this can take quite literally 30 minutes and requires no programming background on Joey’s part, although there are many online services and freelancers that offer token creation.
- Set his parameters, Joey can run his crowd sale up until a certain date, until his capital goals have been met until he has a certain number of unique investors or any number of other parameters that he can work into his smart contract.
- Set his Exchange Rate, the beautiful thing about the Ethereum Network is that it takes the volatility out of cryptocurrencies. All tokens created on the Ethereum Network are exchanged for Ethereum, relatively stable crypto that is highly liquid and can be easily transferred into USD, CAD, GBP, or any number of other currencies.
- Advertise his Token Sale, This can be done very similarly to traditional crowdfunding, Joey just needs to market his sale of SubBucks (As far as I can tell, this isn’t currently in use so any sub shop owners, feel free to take this name) to investors and provide a link to his particular Ethereum token. His investors can then easily exchange Ethereum for SubBucks, and gain access to all the perks that Joey will be offering his investors.
- Collect his funds, Joey’s raised Ethereum can be put in an Ethereum wallet (I personally use MyEtherWallet) and then exchanged into the currency he needs to purchase the new land for his restaurant.
- Provide the perks, this is where Ethereum shines, Joey can now easily identify every single one of his investors, and offer unique perks based on their invested amount.
There you go, in the span of 30 minutes’ development plus marketing time, Joey successfully used the Ethereum Network to finance his expansion. It has the advantages of outside money, beating out paying for it himself, requires no collateral, unlike small business loans, and depending on how he set up his contract, it could mean no interest paid, or even any principal paid back at all.
Issues Facing Ethereum and the Blockchain
It’s not all rosy, there is one big issue currently facing the Blockchain as pertaining to Joey’s particular use case.
At least in Ontario, capital raising on the Blockchain is currently a mess, we need legislation to catch up with the evolving technology. This is currently a legal grey area that needs careful consulting on each particular use case to determine whether the application falls within the OSC’s guidelines of creating a “security”.
Joey could realistically ask for the equivalent of 50 CAD, from a thousand of his loyal customers, in exchange for lifelong half-price sandwiches, and pay for a downpayment on a new location, all from a laptop and without the mess of paperwork that crowdfunding through the government requires. This is the future of capital raising, the future of money, and is a perfect example of how Blockchain will revolutionize our financial system