INSUBCONTINENT EXCLUSIVE:
The rollercoaster-get-rich ICOs of 2017 are over — crypto companies are waking up to the idea that VC investors aren''t so bad after
all.
Companies used initial coin offerings (ICOs) to raise some $5.5 billion in cryptocurrency-based funding last year
As an emerging investment system with no regulation, nearly anyone was allowed in.The knock-on effect was that many who rode the wave made
huge profits, often into the millions of United States dollars, as a 10X return seemed to become the minimum standard among those getting
crypto-rich.
The trend went into overdrive in 2018, when the price of Bitcoin hit a peak of nearly $20,000 and Ethereum notched $1,200
ICO funding hit $6.3 billion in only the first three months of the year, as noted by Coindesk, but, fast forward six months and a new trend
Public ICOs, which allow anyone to invest, are increasingly replaced by a new approach of limited, private sales that consist only of
accredited investors and close connections
Many ICOs today include no public sale component, with retail investors forced to wait until a token is listed on an exchange.
Private
sale only
Telegram huge $1.7 billion ICO best exemplifies the change.
ICOs in 2017 began to include a private pre-sale before the ‘open&
public sale stage, the idea being to attract big bucks and in some cases give incentives like discounts
But Telegram opted to keep its entire sale public
It also stuck to accepting money from accredited investors in the United States — those who are legally certified to make investments —
rather than opening its doors to anyone wanting to own a piece of its token sale.
That a trend that has been repeated in other ICOs,
including the recent $32 million &seed& round for Terra and its stable coin project
Terra co-founderDaniel Shin explained to TechCrunch that it will hold a second round of private sale investment, but that&ll be reserved for
investment professionals and others in the network.
Legally, of course, this makes absolute sense.
The SEC is steadily increasing its
crackdown on ICOs, and it has long been standard for companies planning ICOs to overlook citizens of the U.S, China and often other
countries where the legalities are unclear from taking part in the sales
But, actually, the rationale of private sales goes beyond legalities.
Professional investor benefits
The crypto industry has woken up to the
reality that getting your capital from a handful of professional investors can be more advantageousthan a bunch of regular people.
For one
thing, dealing with a dozen investors is far easier than a Telegram group that numbers tens of thousands
Professional investors are more accustomed to giving a company money and letting it use it independently, but retail investors in the crypto
space tend to be more demanding and unrealistic as they seek a quick return on their money
While liquidity is amajor appeal for all in an ICO, VCs tend to hold a longer-term approach than retail investors who look to flip and move
to the next money-making opportunity
Or, in times of downturn such as right now, investors have deeper pockets to ride out recessions.
There a popular refrain that ICOs mean not
having to deal with&Evil Venture Capitalists&, but a community of retail investors is demanding in its own way
Plenty of ICOprojects waste time and precious resources putting out mundane press releases that are devoid of news just to produce something
that they hope will placate their thirsty community of retail investors, and miraculously give their token a price jump
For example, inking a &strategic partnership& with the American Chamber of Commerce Korea isn''t news — getting actual sales is.
This kind
of distraction and allocation of resources makes no sense when you are setting out building a company or aproduct, which ultimately the
founders of these projects are doing
As any experienced founder or investor will say, retaining focus is key in those early times.
Added to that, professional investors can
actually help with the building by leveraging their network
Whether that is assisting on hiring in the competitive blockchain industry, introducing potential customers —American Chamber of Commerce
Korea eat your heart outmdash; bringing on other investors, etc.
That why in the aforementioned case, Terra opted to bring four crypto
exchanges into its private sale — no doubt their influence will be key in building what remains a hugely ambitious project
Other companies that raised large ICOs, including TenX and MCO, have publicly expressed interest in holding new investment rounds to bring
That because money alone won''t open doors, but often connections can.
To recap: professional VCs can be more trusting, less of a
distraction and more useful, but there are some instances in which a more open public approach should be a part of an ICO
That when it comes to building a community.
2018 is the year ICO companies become investors, too
The exception: Community
The term
&community& has been thoroughly bastardized by ICOs, but there are some projects that — at least on paper — can benefit by allowing
specific types of people, people that will use the product, to get involved early.
Huobi, the exchange, developed a token for its users
earlier this year, while chat app Line is also minting a token that it hopes will be used as part of its messaging platform
In both cases, neither company held an ICO, but they did use a crypto token to build a community.
Civil, the startup hoping to ‘fix& media
using the blockchain, is holding an ICO that open to members of the public
That also a community play, as the CVL token will be required to create newsrooms on its platform, and also to interact with them, such as
challenging stories written by reporters.
Other technical projects out there are doing the same — focusing squarely on the community they
are building for and adopting lower target figures for their ICO fundraising.
The technology space is so vast that there are exceptions, but
it is certainly notable that there are relatively few credible projects planning ICOs that include retail investor participation.A report
co-authored by PwC shows that the general pace of ICO investing settled in Q2 2018
If you ignore outliers such as Huobi, Telegram and EOS — the $6 billion project that fundraised for a year — then activity has certainly
settled down after an explosive 12-months of growth.
Increased stability is likely to mean that the trend of private sales continues
Traditional VCsarelaunching dedicated crypto fundsand those in the crypto space are formalizing investment vehicles of their own, all while
the SEC and other regulators across the world intensify their gaze on ICOs
VC capital is likely to play a more pronounced role in funding ICOs than ever before.
That not to say that the retail investment phase is
Speaking at TechCrunch Disrupt last week, Coinbase CEO Brian Armstrong sketched out his vision of the future in which all company cap tables
are ''tokenized.
He foresees retail investors across the world being free to invest in security tokens that operate as a more accessible
offshoot to traditional investment systems like the New York Stock Exchange, the NASDAQ etc
Whether that extends to participation in ICOs themselves remains to be seen.
Coinbase CEO Brian Armstrong believes retail investors have a
big future in the crypto market
Disclosure: The author owns a small amount of cryptocurrency
Enough to gain an understanding, not enough to change a life.
