Taizo Son helps to democratize startup investing

Kaidi Ruusalepp (Left) and Taizo Son (Right)

Kaidi Ruusalepp (Left) and Taizo Son (Right)

Imagine AngelList, Nasdaq and Bloomberg merging to form a new company whose purpose is to increase global liquidity in startup ventures. That’s what Estonian Kaidi Ruusalepp aims to accomplish with her fintech startup, Funderbeam. One would not give her new venture a second thought, had it not been for the recent two million euro investment made by well-known Japanese serial entrepreneur, Taizo Son.

What gives?

Only a small group of well-connected investors get to invest early in the best startups. They rub shoulders and scratch each other’s backs. By the time independent investors find out about them, startup valuations are often already too high to jump on the bandwagon. Funderbeam aims to help level the playing field by building a global stock exchange for startups. They also hope to make information about startup companies more available.

Funderbeam has so far helped to raise over two million euro in funding for eight global startups, one bond fund and one startup accelerator fund (itself included). Trading volume of shares on the secondary market exceeds 190,000 euro, equivalent to 559 trades in six startups. All are encouraging signs of proof of concept.

Ruusalepp describes how the firm manages to avoid complicated and costly financial regulatory oversight: “We create an investment vehicle for every startup. The vehicle becomes the only shareholder representing all the investors in the startup. Investors vest in the vehicle. Their investment is backed by shares in the underlying asset (i.e. the startup),” she explains. A ‘no-action’ letter obtained by the firm from the Estonian regulators allows Funderbeam to operate within legal exemptions. “The legal structure allows the raising of funds globally and then global trading. That’s why we introduced the syndicated investment model,” says Ruusalepp.

Most countries regulate domestic financial activities only, allowing global startups and worldwide investors to trade internationally through Funderbeam. Only America’s Securities and Exchange Commission regulates financial institutions beyond national borders. Funderbeam is not licensed by the SEC, hence does not allow ‘US persons’ onto its platform. Investors from all other countries are free to trade.

The company relies on blockchain technology to record beneficial share ownership and trading activity. Financial regulators, still suspicious of blockchain, wonder if the technology is robust enough to protect investors. Even forward thinking Estonia may be forced to restrict future use of blockchain because of tightening EU directives (it is an EU member state). So Funderbeam’s ability to continue trading rests on global regulatory trends.

The firm is conducting a global search for the most favorable regulatory environment in which to operate going forward. “Right now we use the Estonian legal structure, because everything is online in Estonia—it takes only a couple of minutes to set up a company. Also Estonia has 0% capital gains tax. It’s a very efficient system,” notes Ruusalepp. “Our goal is to find the best place to operate under license, because we don’t want to operate under the exemptions. That’s why we are very interested, for example, in the regulations of Singapore and Sydney,” she says.

Ruusalepp tells the story of how she came to launch her firm. She was born in Estonia when the nation was still under Soviet influence. After independence in 1991, Estonia fast tracked its brightest students to help rebuild the country. The government office hired her as its first IT lawyer. “I had to see that everything was in compliance with state IT policy,” she says. One of her first tasks was to co-authorize a Digital Signatures Act. Then, “I fell in love with IT and the power of it,” she says, adding, “When you smartly use IT, you can make miracles happen.”

Five years later, she was hired by the Estonian Central Securities Depository (CSD) to head a project building the nation’s funded pension information systems. The CSD was part of the Estonian Stock Exchange. Some years later, she also became the CEO of the Tallinn Stock Exchange. During her 11-year tenure, “The Finnish stock market purchased the Tallinn Stock Exchange. The Finns were bought by the Swedes; then the Swedes were bought by Nasdaq. All of a sudden we were a little branch of a huge corporation. Then I decided, ‘OK, now I need to have my own journey’,” recounts Ruusalepp.

She brought together a team whose first idea was to build a stock market game to teach late teenagers how to avoid pitfall investing mistakes. But after mocking up some screenshots, the team decided to create an actual stock exchange for startups. “That’s how it all started,” she says.

Funderbeam still has a long journey ahead. Information about global startups is sparse, rudimentary, and difficult to find. Without enough company information, investors may shy away from using their platform. Ruusaleep remains passionate to build a one-stop shop combining liquidity with the latest startup information. “It’s a marathon,” she says, adding, “We’ve run not even 100 meters.”

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