The business pitch for fintech startup Otonomos is to incorporate companies on a blockchain, replacing paper-based corporate service providers. But that’s just the starting point, its executives say. The ultimate goal is to create electronic markets for limited companies: the legal special-purpose vehicles that wrap around airplanes, buildings and other privately held assets.
One investor who took a pass on Otonomos told DigFin that, although he liked the company, he was unsure about the timing. “Is this a case of a company being too far ahead of its time?”
Founder Han Verstraete says Otonomos is already doing these things. “SPVs are just companies,” he told DigFin. “In a way, they are easier” because their specific nature means they don’t need much ongoing governance or maintenance.
Moreover, single individuals or corporations often own multiple SPVs, making these lucrative clients for Otonomos. Han – he requested he be referred to by his first name, saying “nobody uses my surname” – used the example of a company producing a movie. This activity may involve dozens of corporate entities, all used for invoicing, subcontracting, shipping or catering. “It’s off a conveyer belt. They need a lot of companies.”
Finding the conveyer belt
Jan-Arie Byloos, head of business development, said the company has over 200 paying customers across multiple markets.
One vertical in particular that Otonomos is targeting is the shipping industry. Not only does each vessel require legal incorporation, but Singapore, where Otonomos is based, is out to compete with the traditional registration system used by countries such as Liberia or Panama, notorious for sticking their flag on container ships with little governance.
Otonomos got its start in 2015 incorporating fintech companies, using the “conveyer belt” of accelerator programs. It has done work for companies in Singapore, and for Australian entrepreneurs setting up in the Lion City. It also does business in the U.K., Cayman Islands, British Virgin Islands and, this year, Hong Kong. The next goal is to go live in the U.S. state of Delaware by the end of the year.
It relies on blockchain and smart contracts to provide a fully digital, encrypted, decentralized service to companies and their shareholders, says Byloos. “We do all the KYC,” he said: customers upload their identifying documents and Otonomos uses Thomson Reuters’ Worldcheck program for confirmation; it may need to make extra phone calls or searches if they cannot readily confirm a person’s claim.
As Otonomos has gathered fintech clients on its digital registry, it has made it easy for anyone else on the blockchain to subscribe or redeem companies’ shares.
From governance to capital raising
This is opening startups to new ways to raise capital, be it from venture capitalists on the blockchain or individuals investing from personal accounts. Clients use their personal keys to authorize transactions. Clients can upload pitch books, financials and other documentation, and invite venture capital or wealthy individuals to engage in seed or Series A funding. (Linklaters, the law firm, drew up standard documents whose terms and conditions customers can tweak.)
As the platform segues from corporate services to capital raising, it is also looking at fund structures. Han says Otonomos has already put a Cayman-registered collective investment scheme on the system, and is in talks with a trust in Hong Kong. “There is demand for venture-capital structures,” funds in the $20 million to $50 million range, looking for cheap set-up costs.
He declined to talk about revenues but says the company is close to breaking even.
The would-be investor’s questions about the company were several. He noted aspects of the corporate services business will be tied to paper requirements because of regulation, which might place a limit on Otonomos’s business. He also questioned the ability of the business to scale given the mishmash of regulatory practices across jurisdictions.
“The more ambitious parts of the business could take many years to play out,” he speculated.
Shanghai-based Fenbushi Capital and Singapore’s Dymon Asia Venture each contributed seed investment, in May 2016. The company has about $166,000 in total equity funding, according to Crunchbase. Fenbushi and Dymon Asia declined requests for comment. Otonomos is planning a Series A round later this year.
Han, a Belgian, a former investment advisor at Goldman Sachs and founder of several startups in Europe, acknowledges there continue to be manual processes, which Otonomos has to live with. By finding verticals in digital-friendly regimes such as Singapore, the company can offset costs in more paper-intensive environments such as Hong Kong or Delaware.
Ultimately he is betting that the prize will be worth the short-term costs. “Around 85% of the world’s wealth is wrapped up in limited companies,” he told DigFin. “If we can make these like an MP3 file [in music], it becomes transferable and peer-to-peer – because it’s now on a decentralized blockchain.”