The business idea by Vertalo is simple as many genius ideas. In traditional investment, there is a register called cap table, it has all owners of large corporations, down to the tiniest bits. Maintenance of cap tables is manual and cubersome. A blockchain based cap table is a saviour to many large corp. Dave Hendricks, CEO Vertalo, offers exactly this, a cap table on blockchain. Read what he told to Digital Asset Live Editor-in-Chief:
Q1: You have stated that a distributed ledger is your ‘core database system’. Will you explain to non-fintech readers how exactly it works? What competitive advantage it gives in comparison to other providers of cap table solutions?
A1:Vertalo uses blockchain technology to accomplish what ‘blockchain’ does best: keeping track of who owns what, securing it by private keys, and making sure that two people don’t own the same piece of the asset at the same time.
Cap Tables are ledgers that tally ownership of an asset or entity, making sure that the ownership adds up to 100% – and not more or less. Up until now, the entries in cap tables have been manually entered, often subject to a chain of emails or board resolutions that are rarely back-checked for accuracy.
Mistakes in cap tables from accidental omission or data entry errors cost companies, their investors and their employees 100s of millions of dollars a year, and that doesn’t count the legal costs resolving them.
When an investor wants to sell its holdings that are represented on a traditional cap table, the company and its lawyers have to enter into an expensive and time-consuming job to merely transfer the asset to the investor in the form of a paper certificate.
Obtaining permission to sell such an asset is even more time consuming and expensive.
As a ‘distributed ledger’, blockchains like Ethereum are excellent at keeping up with the changes in ownership that happen in near real time – something that manually entered spreadsheets and traditional cap table tech has not solved.
Vertalo’s blockchain-enabled cap table combines, ownership, identity, and compliance data in a secure system that keeps track of transactions and reduces reliance on corporate secretaries and lawyers to keep up with the trades.
By placing the ownership of the asset through a distributed ledger confirmation process, and storing the results in a wallet, the ownership of a blockchain-based asset is rendered ‘direct’ and the investor has control over its trading and transfer subject to the ‘smart contract’ that governs its sale.
Q2: Vertalo is two years old. How did the company grow? What do you consider your major successes?
A2: Vertalo started as a ‘Distributed Ledger Cap Table’ for HR data, like employment contracts and NDAs that are the documents that most companies mismanage and have trouble producing for investors when they are performing diligence.
We delivered our first MVP in July of 2017 and started writing our whitepaper in August of 2017 in anticipation of running an ICO in the fall.
One of our Co-founders is a former SEC attorney and didn’t think that an ICO was a legal way to raise funds, so in October 2017 SeriesX (Vertalo’s parent) started to work on one of the first truly SEC-compliant Security Token Offerings.
My Co-founder & CTO, William Baxter, couldn’t find anyone with any technology to help us, so we built everything ourselves – smart contracts, tokens, cap table, distribution and legal tech – and issued Vertalo’s TALOS token to 53 investors, team members and Founders in March of 2018.
The experience was so profound and the holes that we found in the provider landscape were so huge that we decided that our cap table and compliance technology would be a necessary element of the regulated digital asset ecosystem.
So we productized our platform and processes, but largely stayed away from calling ourselves an issuance platform, seeing that as a crowded market that was left over from the ICO era.
The biggest accomplishment we have made to date was the avoidance of an ICO and the subsequent education we invested in when we launched Vertalo v2 in April of 2018.
We left the previous product behind at that time, despite coming in 2nd at the SXSW Blockchain challenge in March 2018. We had successfully run a real security token offering and had avoided tail-risk by not issuing an ICO or taking illegal broker-dealer fees like so many issuance platforms had done before they wised up.
Q3: You have recently announced integration of your cap table software with a major blockchain project Hedera Hashgraph. How will this integration work? What will it give to both parties?
A3: Hedera Hashgraph represents a step function improvement in governance, fairness, and speed. In the world of digital asset ownership and trading, those are core and critical values. We already support several underlying blockchains.
It is Vertalo’s mission to offer broker-dealers, issuers, and investors the most optionality when choosing how to issue, manage, and trade their digital assets. Hedera Hashgraph is a big part of this future.
Q4: Vertalo has partnered on various projects with Securrency, Entoro, SeriesOne, US Capital Global.
We see quite a few news these days in partnerships, integrations and in general, consortia/alliances among providers of distributed technologies, many more than last year. What is the reason behind this increase in cooperation between the major players?
A4: If any provider tells you that they are ‘end to end’ in terms of digital (or traditional) asset issuance, management, and trading don’t walk away, run. There is no such thing. The process of raising money, managing investors, managing compliance, managing issuance modality, secondary trading, and custodying assets in a way that satisfies issuers and regulators alike – that is a team sport.
Vertalo is an API-first company. We were designed from the ground up to connect an ecosystem of partners so that our broker-dealer and issuer clients have the most options to choose from.
We are particularly focused on the large broker-dealer and crowd-funding market because they are often the first stop for fundraising. While we have plenty of direct issuer clients, we find that the Broker-Dealer has the resources – and gets paid enough from success fees – to afford to perform diligence on their issuers.
We would rather white-label Vertalo’s technology for Broker-Dealers to help them onboard investors, create cap tables, and issue digital assets, at lower cost.
Those Broker-Dealers have their preferred custody, compliance and exchange/ATS partners, and working with Vertalo they can connect to those providers.
Q5: What would be your conservative assessment of the market cap in tokenized assets in fintech, short and long term?
A6: I know that we are working on about $2 billion of digital assets at Vertalo now. We think that substantially all private assets that live on cap tables will be digitized in the next 5 years.
I have no idea how much that is, but I would say that within 2 years from now it will exceed $500 billion, and that will probably mostly consist of pools of debt that is owned by banks who struggle to trade it using the current processes.
The reason that it hasn’t happened sooner is because the market hadn’t developed the tools that lawyers and CFOs need, namely cap tab
Q7: What skills are most required now in fintech DLT? What skills will be required in the future?
A7: An understanding of capital markets and regulations is essential, at least for product-oriented professionals. Just as essential is an understanding of human behavior. It’s useful to understand how cap tables work and why private assets have been illiquid to understand how direct ownership and direct listing will revolutionize markets.
Of course there are technical hurdles, but the biggest problems won’t be solved by mere React, AWS, Solidity, PostgreSQL, and GraphQL, but if you know anyone with those skills, send them to Vertalo.com
Q8: How do you see Vertalo in five years time?
A8: In five years Vertalo will be 7 years into its mission of improving private asset liquidity by bringing direct asset ownership to investors and direct listing to companies. And if I am lucky I will still be the CEO working alongside my team and partners, creating value across the ecosystem.