Killing Angels. Are Initial Coin Offerings (ICO’s) the death of early stage investing?
Imagine a startup that aims to build a decentralised cloud storage network, essentially disrupting platforms such as Dropbox and Box. The startup, not having a working product or any traction yet, decides to raise funding. It does this very successfully raising $257 million. In the past year, this and stories like it have dominated the funding discussions thanks to Initial Coin Offerings (ICOs). Yet most traditional Venture Capitalists (VC’s) and Angels missed out on these ‘opportunities’ and have started questioning where their role sits moving forward.
At the annual World Business Angel Forum coming up in February, you can be sure that amongst the normal topics of macro trends, impact investing and philanthropy, that ICO’s are going to be the amongst the hottest conversations both at the conference and in the hallways and bars afterwards.
With ICO’s overtaking early stage Venture Capital it is a topic that everyone is keen to understand
As opposed to equity/debt financing, ICOs are events where a startup raises funding through issuing tokens to the public. These tokens do not represent a stake in the company; rather, it primarily serves either as a securities or utility token. Securities tokens attempt to provide investors with returns for holding them while utility tokens act as “gas” for using the system the startup builds. Either way, investors aim to profit off these tokens on the various crypto exchanges. According to data from ICObench, ICO proceeds increased 141-fold, from $9.7million in Feb 2017 to $1.3billion in Dec 2017.
With more than 180 new ICOs scheduled to launch in 2018 it is easy to see why it is dominating conversations.
Of course, it is not just just early stage investors that are watching this space closely, governments too are beginning to notice. Late last year, South Korea joined China in banning all forms of ICOs.
But for every South Korea and China, there is Switzerland or Estonia, the former known as Crypto Valley for its political stability and support for ICOs , the latter recently announcing to launch est-coin in its bid to be the global ICO hub.
The question for investors and for governments is whether this is another unsustainable bubble or whether it is some much needed innovation in a sector screaming out to get more funding into the hands of those creating value. The lack of regulation certainly presents potential investors with another risk factor.
For those looking for a safer way to get involved, one option might be funds such as Polychain Capital and Fenbushi Capital. They specialise in blockchain vertical only portfolios. These funds also do invest in pre-sales, enjoying discounts on token prices and occupying an advisory seat on a startup’s board. This in turn provides the startup with more credibility, boosting demand and eventually prices of the tokens. It doesn’t hurt to diversify into blockchain startups if it falls within an angel’s or a fund’s thesis.
Proper Governance Models; Angels and VCs may look to invest in startups before they raise ICOs once milestones are met or come in at a later stage post-ICO when traction is gained. Alternatively, funds may be locked up in a cold wallet and voted to be released as milestones are reached. This model has not been explored yet but it could offer stability and trust. However, looking beyond the core business and seeing who is on the Board, or what partnerships are already in place is also very important.
Either way this is a fascinating time to be involved in the scene. If you want to be involved in the conversation then it is well worth heading to Istanbul to join the World Business Angel Forum 2018
Where: Istanbul, Turkey
When: 18 – 20th February 2018
How: Tickets at http://wbaf2018.istanbul/
World Business Angel Forum is an official partner of AsianEntrepreneur and supports Entrepreneurs around the world.
This article is part of the World Business Angel Forum media partnership with AsianEntrepreneur.org
If you would like more information about WBAF, please contact Callum Laing WBAF High Commissioner for Singapore. [email protected]