Is 'Crypto-Equity' the Next Big Thing in Raising Money for Your Business?
Joel Dietz and his four business partners have a lofty goal: to revolutionize the future of finance.
How? Through their new site Swarm, a crowdfunding platform that operates on a Bitcoin framework.
While they face many of the same headwinds as other startups, Swarm has the added task of making two emerging concepts -- crowdfunding and cryptocurrency -- understandable to the general public. It also has the challenge of navigating complex and evolving regulations. But the team, which was in Berlin for the soft launch last week, is convinced that, when they do, the platform they have created will help transform the way entrepreneurs raise money.
Dietz, who is originally from Philadelphia and worked in both software engineering and economic policy research, envisions Swarm to be a step toward "democratizing" finance – a way of leveling the playing field for inventors and entrepreneurs who may not have access to funding through the hierarchical layers of the current finance model.
“To me, the original idea of the United States is awesome. Democracy. Everyone has this individual autonomy and being able to choose -- and freedom is awesome," he says. "But then, actually, the means of control are very tightly controlled from the top down. We need to have this revolutionary spirit a little bit to say the little guy has a chance again and really start a fire.”
The crypto-equity platform’s revolutionary spirit comes through very loudly in its founder’s manifesto, complete with a missionary-like call to arms: “If this appeals to you, we invite you to join us. If not, we ask you to stay away.”
Swarm, which has raised about $750,000 in funding through its own platform, allows entrepreneurs to create digital, cryptocurrency tokens to distribute to investors. Because the token is digitally programmable, an entrepreneur can give value to their investors in any way he or she wants to, whether that’s in the form of dividends, voting rights for executive decisions in the company when it grows larger, a product or service relating to the company, or any other creative reward for investing. Rewards can increase or contract over time depending on the relative success of the project.
According to Dietz, what Swarm offers that other crowdfunding platforms don’t is the flexibility for an entrepreneur to determine how they define “equity.”
"[Swarm] is a totally new technology -- what we are calling crypto-equity,” says Dietz, who came up with the idea while on a personal yoga and reading retreat in the hills of Assisi, Italy. “Equity is in this narrow legal framework: this is what equity is in a company and these are the rights that apply to it and you have to do such-and-such and fill out this paperwork. Crypto-equity is this new thing. Here is a token that represents the success of your project.”
In addition to giving entrepreneurs the ability to build their own individually tailored, creative reward structure for investors, Swarm makes international collaboration more fluid. The entire platform is a second-generation Bitcoin technology, meaning not only that users purchase Swarm tokens with the popular cryptocurrency, but also that users can securely distribute tokens that they build themselves. Entrepreneurs raising money on Swarm don’t have to hassle with multiple currencies and exchange rates.
Because Swarm hovers between crowdfunding and equity investment and above a background of cryptocurrency, it’s in a veritable regulatory quagmire. Global regulators are still in a kerfuffle over how to handle cryptocurrency, and in the U.S., equity crowdfunding is only legal for a limited set of elite investors. Dietz and his team are aware of the regulatory battles they are headed for. “No one knows what regulations apply to crypto-equity yet. We are planning to innovate even though it's all a bit murky and grey because someone has to.”
If and when Swarm begins hosting projects, an entrepreneur will have to create a project page, and explain how much money he or she is trying to raise and how the funds will be used. Swarm will hold the funds a project raises in escrow and release it to the entrepreneur when he or she reaches certain predetermined benchmarks of progress.
Once the Swarm teams works its way through its launch tour, including stops in Vienna and London, Dietz and his four other co-founders will headquarter the business in Palo Alto, Calif., right in the heart of Silicon Valley.
In the meantime, they have their work cut out for them in just educating people about their platform. Without widespread understanding of either crowdfunding or Bitcoin, Swarm’s goal of looking to revolutionize finance may be putting the cart before the horse.
Dietz and crew are aware that they are not going to be mainstream in the next couple of months. “There are people who don’t really use their computers and have trouble using email and probably that is not going to be our target audience,” he said.
But for the set of global investors and entrepreneurs for whom crowdfunding and cryptocurrency are not scary ideas, Swarm has big ambitions. “We really want to make it so that it is a Kickstarter on steroids.”
Catherine Clifford is senior entrepreneurship writer at CNBC. She was formerly a senior writer at Entrepreneur.com, the small business reporter at CNNMoney and an assistant in the New York bureau for CNN. Clifford attended Columbia University where she earned a bachelor's degree. She lives in Brooklyn, N.Y. You can follow her on Twitter at @CatClifford.