Got Coin? Startups eschew VC Funding for Tokens

08/16/2017 04:10 pm ET
Blockchain
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Blockchain

My company facilitates Initial Coin Offerings. Just putting it out there to make sure everybody understands where our agenda lies.

Having said that, I often come across entrepreneurs who think ICOs are exactly like VC funding and IPOs, and that we ICO service providers are their unregulated, Wild West-type cousins. Nothing could be further from the truth.

Let’s hit some stats to set the tone. First and foremost, if you are an entrepreneur of any stripe looking for angel or VC money and you haven’t looked into ICOs, statistically you are missing out on the biggest trend in the industry. In 2016, VCs invested $496 million into startups, whereas ICOs raised $236 million, according to CoinDesk. The volume of ICOs is expected to triple in 2017, exceeding $1 billion, projects Smith and Crown.

Who gets the money? It’s tempting to say that VCs and ICOs are pursuing different categories of customers, but the truth of the matter is – ICOs are eating into VC business, especially with early stage and Angel rounds.

In 2017, 36.2 percent of VC investment is expected to go towards software startups, 17.3 percent towards biotechnology, and 9.5 percent towards media and entertainment, according to Martin Prosperity Institute. At the same time, 40 percent of ICOs are raising funds for Core Blockchain software, 15 percent for fintech associated with cryptocurrency markets, and 11.6 percent towards media and social projects, according to Autonomous NEXT analysis.

So while the categories in the ICO bucket are narrower, and don’t overlap 100 percent with VC targets, startups are at the very least using both VC and ICO avenues to get funds in two out of three top categories.

Wait, there is more. CB Insights tracks VC year-to-year investment trends. Well, guess what. As ICOs are picking up in sheer volume and are becoming more widespread, VCs are losing the number of deals in the very categories that overlap with ICOs (2017 data) – several software categories that are blockchain-friendly (data and document management, database management, data storage) and in the media and entertainment category (advertising, sales and marketing, social).

So are ICOs mainly for blockchain projects? This is where things get interesting. Of course, projects (startups) looking to innovate within blockchain industry are a natural fit here. That said, financial services are one of the fastest growing categories on the ICO track. In other words, if your business is looking to grow, but your core business is not dependent on blockchain – you are still an ICO candidate in a sense that you are tapping ICO community for funds and issuing tokens.

And here we come to probably the most critical point of them all. ICOs are a vehicle to issue tokens – a pre-set value for you to provide a certain volume of services or product at a fixed price. By issuing these tokens you commit to provide these services or products as opposed to selling a piece of your company. This is where comparisons between VCs and Angels and ICOs end – ours is an industry that prepays startups for the results of their work, not invests in them.

This is a critical point. The motivation for token buyers is quite different from VC–style investors. They are not evaluating the company from the standpoint when they can benefit from its sale or acquisition. Our “investors” merely see a service that they need – or a product they could use – and are prepaying for its future use.

Get customers, get funds and don’t dilute? No wonder deal flow for angels and early stage VCs is drying up. We are witnessing the dawn of a new epoch in the history of the financial industry. ICOs are for every startup, because this is a great way to get funds for worthy ideas using blockchain technology.

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