If you want to understand why cryptos are getting the spotlight, you have to understand the ‘behind-the-scenes catalyst’ which is driving the market. It is called Token sale or Initial Coin Offering (ICO).
Money raised by start-ups via so-called ICOs has surpassed early stage Venture Capital funding for technology companies in 2017. Today, ICOs are the way for start-ups to raise money by selling tokens to backers sort of as an equity and similar to an Initial Public Offering (IPO). ICOs present both benefits and disadvantages, as well as threats and opportunities, to the traditional venture capital business model.
An ICO typically starts with the creation of a new crypto-token on a protocol such as Ethereum, Counterparty, Neo, Ubiq or Openledger etc. and a value is arbitrarily determined by the start-up team behind the ICO. Then the price dynamics determined by market supply and demand and the value is settled on by the network of participants, rather than by a central authority.
Venture Capitalists who are generally still cautious regarding the ICO business model are now becoming more interested in it for a number of reasons.
“ICO as a new business model leveraging blockchain technology will sustain as the digital way, combining crowdfunding and (a) new hybrid asset class of equity ownership and currency,” Oliver Bussmann, Bussmann Advisory, Crypto Valley Association, Innovate Finance
The first reason is because of profits. VCs are hungry for massive returns for their investors and 2016 & 2017 brought huge profits from blockchain start-ups, for example Stratis made an ROI since ICO(20.06.2016) +90,976% while Metal ROI since ICO(01.03.2017)made +5300% only in 5 months.With this in mind looks like there is some serious money to be made in this market by investors in a relatively short period of time but of course they must keep in mind that volatility is a two-way street and prices can drop sharply as well.
The second reason why VCs are becoming more interested in blockchain ICOs is because of their liquidity. Instead of waiting for the long play like in a traditional IPO or an acquisition they can realize gains more quickly and can pull profits out more easily. They just simply need to convert their cryptocurrencies into any major FIAT currency by a trustworthy crypto-exchange.
What traditional investors don’t like about the blockchain space?
· regulatory uncertainty
· over-capitalization
· lack of control over financials & strategy
· scams & pump and dumps
“Strict regulation comparable to the IPO business to protect investors is required,” Oliver Bussmann, a former CIO at UBS and now Bussmann Advisory, Crypto Valley Association, Innovate Finance
However scams and criminal activities being reduced by due diligence of the community as well as by external parties using independent analytical research.
So who are those VCs backing blockchain startups?
Billionaire bitcoin enthusiast and Venture Capitalist, Tim Draper backed Tezos and Bancor as well this year which were the two biggest ICOs yet and Marc Cuban, NBA’s Dallas Mavericks owner and serial entrepreneur is planning to invest in an ICO campaign run by eSports gambling startup UniKrn.
“I want to learn more about them. I haven’t signed the paperwork yet. But it’s likely it will happen,” said Cuban.
Some other VCs have stepped into the space as well like Blockchain Capital (BCAP, ICO), Andreessen Horowitz and Union Square Ventures who are leading the crypto movements by investing $10 million into a crypto hedge fund run by Olaf Carlson-Wee called Polychain Capital and investing in Coinbase the early days.
I believe VCs rather than replaced by ICOs, could actually find a productive relationship and benefit from each other. Companies who choose the ICO way could use it as a seed round and then they would be in a better position to negotiate their next round. Which means that ICOs could be more like a crowdfunding part of a company and the venture capital round would come later.
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