ICOs, Fraud or the Future?

If you were to ask me what I did this summer, and I were being honest, I would have to say I spent the summer regretting. I regretted the classes I took, the time I wasted, the clubs I joined, and more. What I regretted most of all though was not listening to Nate Rush. Nate is a fellow M&T who lived a floor below me who also happened to be UPenn’s Ethereum evangelist and blockchain guru. I can’t tell you how much time I spent wishing I bought Ethereum when Nate said I should have. Every day, every night as I saw prices soar towards $400, I asked myself what if I had only put in 5k when one ETH cost $7? It was a pointless question to ask because the past is behind me now, something I try to remind myself of whenever I regret making a poor decision. However, the FOMO induced by missing out on ethereum, and then Bitcoin Cash, is what led me to my first initial coin offering (ICO): 0x protocol, and their token ZRX. I’ve been actively watching the cryptocurrency market now, and to date have participated in three subsequent ICOs, one of which was actually a fraud, and none of which I’m sure I will break even on. What I’ve learned is that the ICO marketplace, and the world of crypto, is the wild west. There are next to no rules or laws, and scams abound, but this is where the future lives. I have never witnessed more groundbreaking potential.

Much of the discussion on cryptocurrency markets hovers around whether they are a bubble or not: they are. I sincerely believe that anyone denying that has his or her head in the sand. That doesn’t mean that cryptocurrency isn’t the future. The Dot-com bubble was just that, a bubble, but one would be crazy to say the internet has not fundamentally altered the way we live and conduct business. Cryptocurrencies are the same; the technology and systems being devised by hundreds of companies can, and will, change the future even if companies are being overvalued on paper. ICOs have raised ridiculous valuations, totalling billions of dollars in capital. On July 13th, Tezos’ ICO raised about 66k bitcoin and 361k ethereum, which at the time was worth roughly $232 million. The value of those coins now (at 6pm) is $406 million. Never before has a seed round yielded that much money before. Companies that ICO skip the whole process of finding an angel investor, then going through a seed round, then funding rounds A, B, C, D… and go straight for the IPO. The only difference is that this isn’t an IPO at all. There is no big bank underwriting the sale; there is no massive prospectus outlining all of the financials; there is no filing with the SEC. Tens of millions of dollars are made on whitepapers, often only a few pages long.

That being said, when discussing ICOs, I believe a lot of people are missing the big picture. This finally leads me to what I wanted to write about: what we learn from ICOs. Initial coin offerings already surpassed early-stage VC funding in size 4 weeks ago, and will continue to grow despite the regulations cracking down on them. What matters is that people are finding new ways to invest their capital, in large numbers. Instead of pouring their savings into a Vanguard mutual fund, people are entering the cryptocurrency world. Low interest CDs and bonds are no longer attractive; people want to be a part of the future, and they expect bigger returns. For this reason, I think ICOs could be the future of the venture capital industry.

Global VC investment volume took a nosedive in 2016 with reductions in both the number of deals and the total deal volume. Pension funds and high net-worth individuals are moving away from venture capital where high returns are concentrated in a handful of winners holding equity in unicorns. Investors often finding themselves locking their money into 10 year funds which can take up to 13 years (because of extensions) to completely return earnings which creates a large amount of risk if the investor happens to need the capital. Many people are already announcing the death of venture capital as new startups are going straight to the public, but ICOs might actually be VCs saviors.

Millions of people have shown that they want to invest in early stage companies, and are willing to put the capital forward to do so. Venture capitalists should take advantage of this trend. One such person, Fabien Dureuil, has already done so with his company Genevieve which issued an ICO for its token GXC. Whether or not they will provide investors positive returns won’t be known for years to come, but what they have achieved is remarkable. An ICO is better than the traditional model for funding VC firms for a couple of reasons.

First of all, having tens of thousands of investors versus just a few, drastically increases the likelihood of success for the VC fund. This is because those investors have a vested interest in seeing portfolio companies succeed which means they are more likely to download these companies’ apps, use their services, buy their products, join their networks, and tell everybody about how great the companies are. This is a very very powerful effect. These companies essentially have thousands of users right out of the gate.

Additionally, the second reason why ICOs are a great source of funding for venture capital is that they substantially decrease investors’ risk. If an investor needs capital now, rather than in 10 years, he or she can sell the token on a secondary market, whether that is a centralized exchange like poloniex, a decentralized exchange like EtherDelta, or one of the many OTC books operating on the 0x protocol. Random people who hear about a company or are avid users of their product/service, can buy the coins of funds that hold equity in the startups, thus becoming investors themselves. On the other side, those who do not like their VC’s portfolio can sell their coins. The creation and sale of tokens creates a mostly efficient market around early-stage investing that does not currently exist.

Cryptocurrencies may be in a bubble, but blockchains are the future, and the ICO is a powerful funding tool that should not be ignored.