The Summer of ICOs

The Summer of #ICOs 

 #fintech @bussgang #VC #ETHEREUM #blockchain

  • Instead I will make a few observations about how an investor might think about the impact of ICOs / token launches on the venture capital industry, in particular, and some of the downstream ramifications that need to wrestled with.
  • The ICO generates excitement and valuable incentives to contribute to the ecosystem which accelerates its growth and, as the ecosystem grows, the company has a cash flow formula that allows value to accrue to the equity holders of the corporation not just the tokens.
  • If a portfolio company can raise money in an ICO and retain tokens that then rise in value, it dramatically reduces the company’s incentive to seek an exit.
  • If the management team and employees receive tokens as part of their compensation plan and those tokens are highly liquid — as they should be after an ICO thanks to the meteoric rise of exchanges and crypto hedge funds — then the value of their compensation may be more through token value than equity value.
  • Are investors and management as aligned as they are in a company that does not raise money in an ICO or do token sales create more opportunities for misalignment—which gets back to the issue of governance.

Goldman Sachs and CB Insights recently reported that startups have raised over $1 billion in Initial Coin Offerings (ICOs) this summer — more than the to…

@SpirosMargaris: The Summer of #ICOs

#fintech @bussgang #VC #ETHEREUM #blockchain

Many investors in the ecosystem that we respect have shared their thoughts on the power of the blockchain and cryptocurrencies to disrupt many industries (and we share those views) but few have discussed the downstream ramifications to our business. Hence, the purpose of this post.

Others do a good job of that. Instead I will make a few observations about how an investor might think about the impact of ICOs / token launches on the venture capital industry, in particular, and some of the downstream ramifications that need to wrestled with.

Early stage entrepreneurs will also still likely value experienced advice on company-building from seasoned venture capitalists. But once entrepreneurs have their initial team and product in place, a few smart advisors around the table and the social proof required to attract great talent, why would they raise additional dilutive equity capital if they can raise non-dilutive capital through the sale of tokens?

I wonder, for example, if our portfolio company, Codecademy, would have avoided its latest financing round and instead created “CodeCoin” in order to incent contributors to software development lesson plans and a marketplace for coding content? In these early times, some startups may be hesitant to pursue this path because of the uncertainty and perceived risk.

But once the regulatory and systems infrastructure for ICOs is in place and the friction is reduced, it will become a more common means of raising growth financing, representing a disruptive force for later stage investors. In short, token sales allow early stage companies to skip the series B round and beyond.

In fact, that is somewhat the point — a community is created and value begins to accrue to the participants in that community. The hope is that the early stage investors select companies that have a business model that takes advantage of the growth in the community and the ecosystem around it.

The ICO generates excitement and valuable incentives to contribute to the ecosystem which accelerates its growth and, as the ecosystem grows, the company has a cash flow formula that allows value to accrue to the equity holders of the corporation not just the tokens. But that balancing act is a tricky one and not guaranteed, particularly because business models and cash flow formulas are often hazy in the earliest stages.

Who sets the policy for token sales—management or the board of directors? What happens if the company has raised money in the form of a convertible note and has not yet formed a board of directors? What are the ramifications and conflicts of interest that may exist, particularly if executives and employees have tokens as incentives or have bought tokens (or have friends and family who have bought tokens) in private transactions?

The Summer of ICOs