Venture Capital Funding With ICOs
With the recent success of ICOs such as the Ethereum project, venture capitalists (VCs) are now beginning to show keen interest with this new method of financing new startup ventures. Traditionally, venture capitalists were rather skeptical of the ICO trend. However with the recent successes of cryptocurrencies startups such as NEM and Monero that saw investors getting returns as high as 2000%, there has been renewed interest in ICOs. Another reason for the renewed interest in ICOs by venture capitalists is because of the liquidity that cryptocurrencies offers. Instead having their funds tied up for the long term in a venture, ICOs allow venture capitalists to realize their returns faster. With ICOs, investors can choose when they want to convert their gains into Bitcoin or Ether on any cryptocurrency exchanges and from covert their cryptocurrency holdings to fiat currencies.
According to Investopedia, an Initial Coin Offering (ICO) is an unregulated means by which funds are raised for a new cryptocurrency venture. An Initial Coin Offering (ICO) is used by startups to bypass the rigorous and regulated capital-raising process required by venture capitalists or banks. In an ICO campaign, a percentage of the cryptocurrency is sold to early backers of the project in exchange for legal tender or other cryptocurrencies, but usually for Bitcoin.
There are also valid reasons why venture capitalists have generally shied away from ICOs. For starters, there is the regulatory uncertainty which surrounds ICOs. VCs are also faced with having to deal with various other factors such as undercapitalization, overvaluation and lack of controls over the project’s key operational matters. Finally, the ICO arena like any other industry has also seen its fair share of scams. Fortunately, much of the criminal activities have been mitigated by the due diligence and self-regulatory nature of the ICO cryptocurrency community as well as efforts by third parties such as cryptocurrencies research groups and rating agency.
In term of regulatory oversight, ICOs have been regarded as the new wild west of the financial industry. They fall into a gray area where regulatory bodies such as the U.S. Securities and Exchange Commission (SEC) are unsure as for how to regulate this new form of financial investment. One main problem which regulatory bodies have with ICOs is the fact that they are not legally defined as a “financial security” since ICOs do not offer investors any equity in the startup venture. What ICOs offer instead is a discount on the cryptocurrency tokens before they are listed and traded on cryptocurrencies exchanges.
Another thing which complicates matters is the fact that ICOs are traded globally and funded with cryptocurrencies such as Bitcoin or Ether which are decentralized. This means that anyone can invest in ICOs and they can also do it anonymously (technically, it is still possible to find out who has invested anonymously although this will require considerable effort and resources). In short, ICOs exist in an arena where it is not governed by any Anti-Money Laundering (AML) legislation or Know Your Customer (KYC) protocols. All these uncertainties have led to calls for these new financing schemes to be more tightly regulated. In order to protect investors, there have also been demands for investors to be given more control in the project once they have invested in these startups through an ICO.
On the other side of the coin, there is also support for ICOs as a new funding method for startups based on the argument that the rich are getting wealthier. For too long traditional VCs have dominated the Silicon Valley funding landscape and have been earning massive returns for their investments on the backs and sweat of startup entrepreneurs. One such VC firm which supports the democratization of the funding arena is Blockchain Capital. Working within existing financial legislations rather than circumventing them and using guidelines established by the Monetary Authority of Singapore on how to create cryptocurrency tokens, Blockchain Capital is conducting a $10 million fundraise through a month long crowd sale. The difference with this VC fund is that it is liquidity enhanced, meaning investors can invest in the fund with the BCAP tokens without having to tie up their investments for years on end.
There is no doubt the ICOs present a win-win situation for blockchain technology based startups. It allows them to raise capital without having their VC funders breathing down their necks. It also represents an ideal solution for non-profits organizations that want to use an open source software to help them raise capital. Already hailed by some supporters in the blockchain community as a means to decentralize and democratize venture capital funding, ICOs allow entrepreneurs to self-finance their projects in a way which will further drive market innovations.
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Maria Fonseca is the Editor and Infographic Artist for IntelligentHQ. She is also a thought leader writing about social innovation, sharing economy, social business, and the commons. Aside her work for IntelligentHQ, Maria Fonseca is a visual artist and filmmaker that has exhibited widely in international events such as Manifesta 5, Sao Paulo Biennial, Photo Espana, Moderna Museet in Stockholm, Joshibi University and many others. She concluded her PhD on essayistic filmmaking , taken at University of Westminster in London and is preparing her post doc that will explore the links between creativity and the sharing economy.