Austin, TX— On September 23, 2021, Dave Hendricks, CEO and Co-founder of Vertalo, Inc., sat down with Kyle Sonlin, CEO of Security Token Market, for a special interview at the Digital Assets AND Securities Conference, which wrapped on the same day. Founded by experts in securities compliance, equity crowdfunding, FinTech, venture capital and crypto markets, Security Token Market is a subsidiary of Security Token Group, an organization focused on developing the Security Token industry.
After congratulating Dave and the Vertalo team on the “resounding success” of the first-ever DAAS Conference, Kyle asks Dave to go into more detail about Vertalo and its mission:
“The Vertalo mission is to connect and enable the digital asset ecosystem,” says Dave. “We serve as glue between different participants in digital asset securities. We’re an API-first platform; we designed our platform so that other market participants — broker-dealers, RIAs, issuers, custodians, and ATSs — can plug into the Vertalo platform, build businesses, but really move data around seamlessly with the lowest friction possible. It was never our mission to tokenize the world. We love the idea of democratizing access to private investment, but what we really want to do is to serve as a trustful partner to [those] that make this whole ecosystem function. We’re a Transfer Agent at our core, but it’s a lot more than that. Really it’s a platform that enables other teams to fulfill their mission, to build their business. It’s a cool place to sit in this ecosystem because we get to work with everybody — and that’s fun! You’ve been in this for years, like we have. And what we all learned is that this takes time and it takes relationships….Our role is to facilitate the seamless, lower-friction operation of all those parties in concert together to help investors ultimately succeed.”
SONLIN: “All of that makes a lot of sense, and I think that your mission is fantastic. I want to hone in on that term ‘Transfer Agent’ — you’re a Transfer Agent (TA) at your core. And for people that may not know….can you talk about exactly what role a transfer agent plays in the process?”
HENDRICKS: “So a transfer agent maintains the books and records on behalf of an issuer for the securities they’ve issued to the investors. What that means is it’s kind of like a cap table; it’s really a ledger of holders. And when someone trades or transfers those shares, either external to the TA or from the TA’s platform, the TA is the system of record for who owned and who owns a security.”
SONLIN: “Do you also manage post-issuance services like dividends or others like that?
HENDRICKS: “We can. We have APIs, so sometimes an issuer might be working with an escrow agent or a custodian or a fund admin that might handle that for them — they might do it themselves. The thing about us is we’re not rigid as to whether we have to do it or somebody else has to do it. Vertalo is a B2B SaaS data management system. We have APIs. The players here can hit those APIs and if one of the purposes of hitting those APIs is to get data to establish how long someone owned a share, a digital asset security, and how much they should be paid via dividend, then we can facilitate either directly through our system or through one of the issuer’s other service providers.”
SONLIN: “From a digitized cap table perspective, clearly there are many different industries where that could be really relevant. Where are you seeing the most interest and adoption in the platform you’ve built so far?”
HENDRICKS: “Real estate is probably our biggest sector. Real estate is like trillions and trillions of dollars — I don’t even know what it is. And it’s so illiquid. Buying and selling interest in properties is a very painful process. It’s a lot easier to get your money into something than to get your money out. So, you know, we do have a particular focus on real estate, but that’s in response to market demand. It’s low-hanging fruit because it’s the same pretty much anywhere in the world. It’s always been that people own real estate or partial share in a property. And maybe for whatever reason they want to sell that and invest it in something else, or maybe they need the cash for something. And until now, selling your interest in any private asset, especially in real estate, can take weeks if not months. And almost always you’re selling at a discount because the people that are buying it from you also know that when they want to sell it they’re going to sell it at a discount. They’re factoring that in because it’s just not easy to redeem these things. One of the best applications of digital asset securities is in making it easier to redeem, to have always on-trading, to transfer to another owner… And so that’s one of the things that our technology does. There are some other industries that are super interesting. This week we released a research report on direct listings on ATS’s.”
SONLIN: “Yeah, it’s been a common theme! It’s a fascinating topic.”
HENDRICKS: “Yeah, it’s a really fascinating topic. We had a team that’s been working in our offices here in Austin, and we reached out to 11,000 VC’s, independent board members, and the executives and founders of their portfolio companies. We did this with Qualtrics — it was a structured research report and a questionnaire that took about 15 minutes. It asked a lot of ‘impolite’ questions about people’s businesses — ”
Kyle and Dave share a smirk.
“ — and we got some really interesting data back from that. One, a lot of VC’s, board members, and founders/executives did not know that you could actually take your private venture-funded company and digitize and tokenize it and sell it on an ATS. Most folks have thought that there are two ways that you can get liquidity in a venture-funded company: M&A or IPO. But, you know, the chances that you’re gonna IPO are very low. There’s a hundred IPOs, this year a little more because of SPACs. And every year you’ve got another 5,000 companies created. And what we found was that there’s this ‘Gulch of Death’ that companies get into. Below, say, 100 million in market cap — you know, your last round of funding, there are quite a few M&A opportunities. You’re basically getting bought, though, you’re not selling. And a lot of times those outcomes are not as good. They buy you for the amount of money that you raised, and then who knows what happens to your team, do your employees make any money from their options…So M&A is sometimes really amazing, and sometimes it doesn’t work out. The other side of that, historically, has been IPO, and everyone’s like, ‘I’m gonna unicorn and I’m gonna IPO.’ And, you know, that’s a great outcome for a lot of companies. But unless you’re at least a billion dollars in market cap, your IPO is out of reach. And once you stop growing 40% a year, there’s this thing called ‘power law’ which, you know, VC’s like to look for 40% annual growth of something, it’s kind of a rule of thumb. And if your business stops growing that fast and you get kind of unexciting, then they’re going to move onto something else. Which means that your valuation is not going to go up from another round of funding, it means you might lose some of your people, and it means that you’re not on your way to being a unicorn. So, in that ‘Gulch of Death’, let’s say between a hundred million and one billion, there are right now about 15,000 companies in the United States who raise money starting from 2006. And they’re just stuck there. And those companies now have another path besides M&A and IPO, and that is a direct listing on an ATS like tZero, Texture Capital, Oasis Pro Markets, like Templum, Symbridge, Planet Wealth, like Merj, and I think maybe soon INX. So the number of secondary venues for these private equities is growing.”
SONLIN: “Yeah, we estimated 30 internationally that will be going live in the next 12 months. We already tracked 12 on STO Market, so there’s definitely a lot coming out. You can make a lot of sense there. The question that I have is very similarity related, and that is, with your platform you’re API-focused, you’re tech-focused, and a lot of this stuff is really optimizing antiquated financial processes. How does this actually change for the end-user? For the average person that’s watching this that may buy or sell some things, what are the changes for them? What’s the ‘so what’ about all that we’re doing here?”
HENDRICKS: “Well, for a seller of VC private equities, it means a ready market if those shares have been listed for trade. For the buyer, it means that you can buy interest in private companies, whether that’s VC-funded companies or real estate interest, much more easily. You can discover them more easily, you can buy them and then if you don’t like the performance or if you need to do something else with the cash, you can sell them. And you can do it electronically and in a far shorter time. Today, the process of buying and selling, say, stock in a VC-funded company can take three or four weeks, and it’s also really hard to find a buyer. So, for investors, we’re used to being able to buy crypto on our phone, you can go to Robinhood and buy equities on your phone. You know, while the light is red you can ape-in on some dogecoin on Robinhood, right? It’s like a month to ape-in to VC-funded stock, and then people get cold feet. So, imagine that you found a buyer for your shares — well, you know, something happens in this long process and then you get cold feet and, there ya go, you gotta start all over again. So…ready markets!”
SONLIN: “Ready markets — that’s fantastic. All powered by Vertalo and all of the great partners that have been here at the event and many of those that were not able to attend, we’re all in this together — that collaborative approach, that global intraoperative ability, I totally agree is the biggest and most important part of what we’re building today.”