In case you have been on an internet cold turkey all year, the startup buzzword of the year is ICOs — Initial Coin Offerings — which is an alternative way to raise funding from the public (like an IPO; though usually there is no transfer of equity) allowing startups to skip the usual VC route.
How it works is that companies issue cryptocoins (hence the term ‘Coin Offerings’) to the public, in exchange for their cryptocurrency — for example, ether or bitcoin. The funding campaign usually runs for a specified period, after which the project will launch, the cryptocoins will start trading on a cryptocurrency exchange, and investors can wait for their coins to rise in value or sell them off immediately.
As you can probably figure out by now, ICOs currently take place in an unregulated environment, and governments around the world are either looking at it pensively, or striking it down with the ban hammer. Their cautions and fears are legitimate — the wild west of ICOs are breeding ground for scams and could eventually form a bubble.
At Slush Singapore, a panel of two investors and one founder discuss how the ecosystem should think about ICOs, its applications, and what the future holds for it. They are:
- Joo S.Wong, Investor Partner at True Global Ventures, an early-stage VC;
- Emmie Chang (Moderator), Co-founder and Managing Partner at Superbloom Capital, a blockchain startup-focussed VC;
- David Moskowitz, Co-founder of Attores, smart contract-focussed blockchain startup.
Here are some key takeaways from the discussion.
On whether ICOs are a legitimate alternative funding source
Moskowitz, who has been in the blockchain industry since 2013, said that he initially faced difficulties raising funding for Attores. He then turned to the cryptocurrency community for assistance, and managed to secure the necessary funding.
“You need to have an idea that connects to a community’s vision for a future,” he said. To that end, Attores’ plan to propagate decentralisation was well in line with the cryptocurrency community’s vision.
Moskowitz said that a vibrant ICO landscape would allow speed up rate of innovation and decentralisation, and speed up the rate of tokenisation.
Wang said he found it hard to give a unilateral answer. ICOs are a brand new space and, like any investment opportunity, investors should understand the profile of the business they are putting their money in.
“It opens the space up to retail investors, the more interesting companies have been in private domains of VC, so this gives individuals the chance…ICO also opens up opportunities for companies that are struggling to raise funds,” said Joo.
“If you look at companies that have IPO’ed, only 1 in 3,000 become big companies like Facebook. If you look at the VC stable you could probably get 1 in 3 chances,” added Joo. Although with VCs, there is less risk because investors perform due diligence on the companies they invest in.
“ICO is a global efficient accelerator; it will speed up the ways we are changing the world and will bring more innovation to the world.”
But Wang also said that caution should be exercised because unnecessary regulation could come upon the ecosystem — and that wouldn’t be healthy. VCs need to educate themselves on the ICO landscape.
But what happens if what happens if more startups are funded by ICOs than VCs, asked Chang. How many of these ICO companies will build actual products? Will they be able to deliver if they have not built products before? She suggested investors of ICOs need to be actively engaging with the company beyond the fundraising phase; they need to critique the product, provide feedback, etc.
Moskowitz was optimistic that such incidents will be kept at a very small number.
“The community will see through it. If they see that you don’t have any product or have not built a product before, they would not participate,” he said.
On whether ICOs are a legitimate investment opportunity
Moskowitz said that ICOs are democratising investment opportunities. And by taking part, they are helping grow the platform and speed up decentralisation of the internet. There are no limits to how much an investor needs to put in, so that opens up investment prospects.
There is froth in the ICO markets, said Wang, but ICOs it helps young companies grow, and opens up a range of buys, then it’s good for the market. Joo likened the rise of ICO to the beginnings of e-commerce.
“Just a few years ago, to build a bookshop to compete with Borders [bookstore chains], you need to raise big capital…but Amazon did it in a warehouse in Connecticut and they needed less capital,” he said.
As long as these ICO companies have good concepts, sound go-to-market models, and good founders, they would be excellent opportunities for anyone looking for a gem in the rough. ICOs could also help VC raise funds as well.
Chang urged investors to buy into ICOs to see how it works and understand the process. Many of these ICO companies are growing at exponential rates, too, so investors could be tapping into lucrative deals.
ICOs could be the future of investment and help many millennials achieve financial freedom, she said.