Return to search

Can an ICO replace early-stage VC? 500 Startups alums hope so

An alumni group from the 500 Startups accelerator program is hoping to be for early-stage venture fundraising what Blue Apron is for home cooks.

Instead of investors selecting individual portfolio companies, 22X Fund comes pre-assembled, like a recipe-meal kit. The fund is a portfolio of 30 of the 36 companies from 500 Startups’ 22nd batch that graduated from the accelerator program in the fall. The 30 companies banded together and are hoping to raise $35 million through an initial coin offering.

ICOs have been heavily hyped as an alternative to traditional fundraising. But they are still so new that it isn’t clear what the future holds for them. The SEC is giving them a hard look, arguing that some coins are in fact securities under its purview.

The 22X Fund has embraced the SEC view that coins are securities and has partnered with, a platform that enables qualified investors to buy and sell tokens in compliance with U.S. and international securities laws. Securitize Capital, a subsidiary of, is 22X Fund’s investment manager.

Although the companies are all 500 Startups accelerator alums, 500 Startups does not endorse and is not involved in the token offering, according to a press release.

The idea for the fund emerged last summer at a 500 Startups Tequila Friday event, as some of the founders huddled over a graph that showed blockchain startup funding from ICOs had overtaken early-stage venture funding for internet companies.

Fast forward five months and the fund’s token pre-sale launched on Jan. 26. Accredited U.S. investors can commit $100,000 or more while qualified investors outside the U.S. can invest $10,000 or more. When the public sale opens on March 9, the minimum amounts will drop by half.

For early investments of more than $1 million, investors get up to a 30 percent bonus in the form of tokens. U.S. investors must wait a year after the tokens are distributed before they can begin to trade them.

“It’s a startup index,” said Ashwini Anburajan, CEO of OpenUp, a company that’s working on measuring offline and online advertising’s impact on purchases and is one of the companies in 22X Fund. 

“We’re creating liquidity in the market, enabling investors to buy, sell and trade the token itself,” she said. And since the token is tied to the group’s overall performance, “if you have an Uber in that group, that token is always going to do well.” Conversely, if one of the companies folds, that could hurt the token’s value.

22x Fund Batch 22 500 Startups ICO
Ashwini Anburajan, CEO of OpenUp.

The fund contrasts itself with the typical venture model, which charges a 1 percent or 2 percent management fee and 20 percent carried interest, usually once the fund has returned 100 percent of its LPs’ initial investment.

The fund administrator’s income is fixed, decreasing each year of the fund’s lifetime.

The 22X fund is aiming to raise a minimum of $10 million and a maximum $35 million through the token sale, on top of the roughly $22 million that the individual companies previously raised from venture and angel investors.

If the fund raises the full $35 million, an estimated $5 million will go to fees for fund administration, compliance and auditing.

The remaining $30 million raised through the ICO would be distributed evenly to the 30 companies in exchange for up to 10 percent of the companies’ equity, putting each company at a $10 million valuation, according to the entrepreneurs. Investors would then own a portion of each of the 30 companies’ equity in the form of tokens.

The fund’s website says that investors can “trade tokens as the value of 22X portfolio companies increase [sic].”

If the sale raises less than $35 million, the companies would receive a proportionally smaller amount of funding. If the sale raises more than $35 million, the excess funds would be returned to investors, according to Anburajan.

Five percent of each company’s tokens will be reserved for Tim Reynders, the fund administrator and co-founder of Securitize Capital, as well as advisers and others who helped with offering. The remainder of the funding will be deployed and invested in the companies when the token sale closes.

Reynders will be paid $1.2 million over the lifetime of the fund, with his annual payment decreasing each year.

The figures are estimates, however, since the token sale is still underway and there is no guarantee that it will raise the full $35 million. The total up-front fees could also cost more or less than $5 million, certain costs like legal and administration fees are fixed, and the fund could potentially triple its spending on marketing to raise the full $35 million, Anburajan said.

“Whatever fees we incur is subtracted, and the rest is going to the companies,” Anburajan said.

She expects the fund’s total fees to amount to less than $5 million, she added, “because our expenses are minuscule.” If the fund raises only a small amount, she said, the up-front fees could “potentially” be 20 percent, “but if we are raising more, then it could be significantly less.”

Some securities attorneys who spoke with VCJ found some of the language in the fund’s news release to be concerning, as well as the lack of certainty about how much of the funds raised would actually go to fees.

For example, the press release states: “In addition to gaining exposure to emerging companies, investors in 22X can expect lower fees compared to traditional VC or ICO investments. Another distinguishing factor of 22X is that unlike many other venture capital investments, it does not subject its investors to carried interest.”

Federal law prohibits a person from committing misrepresentation or making an “untrue statement of a material fact” in connection with selling or buying a security. There is no guarantee that investors in the 22X Fund will indeed pay lower fees, but that does not necessarily mean that the language used in the press release is in violation of the law.

“We can’t verify the truth or accuracy of this statement [that investors in the ICO can expect to pay lower fees compared to a traditional VC fund] because it’s so vague,” said Jeremy E. Deutsch, a shareholder with the law firm Anderson Kill and chair of the firm’s corporate and securities group.

It could be argued that the claim about lower fees amounts to “puffery” — a legal term for subjective statements that cannot be proven or disproven — which a reasonable investor would not be able to point to in order to claim a securities fraud violation, Deutsch said.

Adam Gana, an attorney and managing partner of Gana LLP, whose practice includes securities arbitration, had a similar take on the statement about lower fees in the press release. “There’s an argument that it could be misrepresentation,” he said. If it turns out that 22X Fund raises less than the targeted $35 million, and if an investor decides to sue, “it will have to be vetted out through the courts, in the event that they do end up charging more than your traditional VC,” Gana said.

An attorney with the Fort Worth Regional Office of the SEC declined comment, directing an inquiry to the agency’s published statements on securities and ICOs. 

VCJ asked 22X Fund and Reynders for clarification on how the language in question would not constitute misrepresentation in the case that investors end up paying more in fees. Neither Reynders nor the fund’s spokesperson responded. A request to speak with the firm’s legal counsel was also unanswered.

The companies in the fund span multiple sectors, including transport, fintech, digital health and agritech. Two of the companies in the fund are blockchain-related, Anburajan said. The list of 30 companies in 22x Fund is available on the fund’s website at

ICO VC Venture
Photo of entrepreneurs in 500 Startups’ 22nd batch courtesy of 22x Fund.

Each time a company in the fund exits, via acquisition or IPO, the software scans the blockchain to find all token holders, automatically dissolves a portion of their tokens and issues distributions.

The token is designed to circulate on the market for nine years, at the end of which all remaining tokens are automatically bought back and distributions issued. However, Reynders, the fund administrator, has the option to extend the lifetime of the tokens for another two years, Anburajan said.

Of the 36 companies in 500 Startups’ summer 2017 batch, six did not participate in 22x Fund. That was due to a variety of reasons, said Chris Rawlings, founder of Judolaunch, a participating 22x Fund company that makes a platform that enables businesses to increase sales from Amazon EU channels.

Those reasons include objections from existing investors in those companies who are uncomfortable with ICOs or cryptocurrencies, he said.

The entrepreneurs aren’t certain whether they will repeat the 22x Fund strategy for further fundraising rounds.

“We’re just laser-focused on the successful completion of the 22x Fund,” Rawlings said.

Photo of digital money concept courtesy JIRAROJ PRADITCHAROENKUL/iStock/Getty Images.