ICOs are the new series B while they create new bubbles they are also unlocking new kind of value as we speak. This is how Naval Ravikant, CEO of Angel List and one of the most influential thinkers in silicon valley described ICOs. Before I go about explaining my take on various ways in which ICOs will influence startup markets let’s have a quick primer on what are ICOs.
ICO [Initial Coin Offering] is a way to raise funds where-in a startup or an existing business sell tokens to public or private entities in exchange for ether/bitcoin or fiat money. ICOs are a recent phenomenon and the first ICO happened in 2013 with Mastercoin ICO. Some of the big projects which have raised money using ICOs include Ethereum, Stratis, Stellar lumens, Ripple and many more. Tokens offered do not give you any ownership in the companies and hence cannot be treated as security.
ICOs exploded in 2016 with many startups joining the bandwagon to sell tokens and raise money coinciding with the boom in Crypto-currencies and lured by easier money availability, fewer regulations, etc.
Below are the six ways ICOs have/might impact Startup Funding:
Easier Access to Money in short term
ICOs or token sales have suddenly created a new funding mechanism which is far easier to access than any traditional funding methods.You suddenly have the whole world as a possible investor.
With money raising strictly dependent on demand and supply dynamics and a large demand fueled by Crypto boom of last two years, Founders have never had it easier with large demand for anything blockchain and everyone looking to make quick money the whole ICO space has snowballed into tons of dumb money chasing projects.
VC Unfriendly/Open Source projects getting funded
While ICOs have eased access to capital and lot of dumb projects are getting funded It has also created a great way to fund ideas with no immediate commercial viability or ideas which VCs think are unpopular.
ICOs can be a great way to fund new protocols or next generation of smart technologies which will lay the foundation for a new wave of applications and products to be built on these new technologies. ICOs might be the best thing to happen to open-source projects adding a much needed incentive layer for developers.
Disrupting the existing VC model
ICOs are disrupting the existing VC models where Venture capital firms traditionally not only provide seed capital for MVP and building a product market fit but also growth investing to grow the business.
With ICOs and token sale as an alternative entrepreneurs with running businesses can just launch a new coin and raise funds required for growth. Token sales result in no dilution of equity and provide a great way to build community the value creation shifts from stakeholders to coin holders. It is entirely possible that community might become a strong moat for businesses in future and token holders will signal real value of the company.
Also some of the core open source projects can raise money without worrying about how VCs might dilute their vision.
Community Development becomes integral to Startups
Two skills which are going to become integral to blockchain startups are technical expertise on new set of technology and skills to build, nurture and harness communities. Startups which can build strong communities will have access to funds, new customers and new business at fraction of the cost.
Velocity and Value of the tokens will be directly linked to how strong and connected your community is to your product which can bring in new and unique network effects.
Lot of Scams in the Short Run
As is with anything path breaking it attracts a lot of unwanted folks and scamsters lured by easy money, fame or both. ICOs driven startups are going to have a fair share of scams. Not just scams majority of startups will not be able to deliver on promises. The deluge of ICOs hitting market include scamsters, failed ideas which could not raise money in traditional ways, forced token ideas where tokens are not required even blockchain is not required.
So brace up for many scams and failed projects in the short to medium term until the dust settles and sanity prevails and we are able to see the real gems. This is very similar to what happened during the heydays of the internet boom.
New Governance Models for startups
While in traditionally funded startups there were checks and balances built with early stage investors have a board seat and experiences VCs/Investors not only providing money but also helping with setting up processes and governance mechanisms.The new Crowd funded startups will have not have an obligation to investors and hence will create new challenges on oversight and governance sides.
How will token holders keeps teams honest. Will token holders be able to influence roadmap or prioritization. How much influence can token holders have on founders and the executive team. Can they throw out CEO for non-performance these are all very interesting questions.
Finally, ICOs are at a very early stage of evolution and almost all players are making their moves. Some of the best VCs have already started investing in tokens and leading early round of token sales. Entrepreneurs who want to raise growth funds are watching on the sidelines watching intently on how this evolves and does it create new options for them to grow their business. Finally regulators are grappling with how to treat token sales.
They are not securities in the traditional sense. Some tokens have utility on the platform other apparently do not have any utility so regulating token markets is going to be another area which evolves in due course of time.
About the Author
Sarabdeep Singh is ex-Head for Digital Marketing and CRM for Ebay India. He Co-founded Bodhik.com an online mutual fund investment service. In his spare time he is building sipacoin.com a simple service to set up Bitcoin Price Alerts. He tweets infrequently @sarabdeep