Why am I negative to Blockchain & Crypto?

It seems that the hype around Blockchain & Crypto is going a little bit down. Therefore this is a good time to make a summary of the achieved results.

General overview

I would like to consider ICO-backed startups as if they were regular. A startup has 3 important “components” that are valuable for early-stage investors:

1. Market. The market of the next unicorn should be huge. If it is not established yet (like VR) or it is a small one, the startup would not be interesting for VCs because they won’t be able to exit with a good amount of cash.
2. Team. A good team can handle a not so good product. A bad team would fail even with a brilliant idea. The team usually consists of CEO as the general manager and CTO who is dealing with the technology part (in case of tech-based startups).
3. Problem/Product. It should be clear that the problem exists and it affects a lot of users. The best case scenario is if it affects them directly. The proposed solution (product) should solve the identified problem.

All these three things should be evaluated for early-stage startups. The order is not so important, each VC has their own point of view here.

Let’s try to evaluate an average crypto-startup using the criteria above and highlight potential issues.

Product

The usual workflow for a regular startup is to build an MVP version of the product and present it to the VCs. It might have limited functionality, it might not be looking “sexy” but it should present at least a general user experience. Without a prototype, it’s usually very difficult to get any investment (except maybe if you are talking to angels).

When we look for ICO-backed startups they usually have a whitepaper that specifies the product that is going to be built. It is almost impossible to find an ICO that has already the product. Sometimes the team say they have a prototype, but usually, it looks like a fake or does not have even the core workflow.

It means that the risk of “non-delivery” is increased significantly. From the investment perspective, it looks like a dot-com bubble because there is nothing behind the whitepaper. The latest research that analyses 43 ICO-backed startups shows that 0% have delivered the product they’ve committed to.

You might try to evaluate it yourself: try to remember at least one successful crypto-product that is successful as a business, not as a crypto-platform. It would be pretty hard to do.

Team & Product

I spoke a lot throughout the last years with different ICO-backed startups. I can’t remember any one of them that has a strong tech team that could build the product these teams were presenting.

Usually, the scenario is the following:

• The team runs an ICO without any tech behind.
• When they get the cash they are trying to bootstrap the team & hire the developers.
• They fail because of the risks that appear due to the software development process and because the team has no strong CTO who could mitigate such risks.
• They invest more and more in tech believing that additional money can help. It won’t.

I saw a number of startups that hired a CTO within 6 to 12 months after successful ICO. Generally, it means that for all this time the product was not being developed at all.

The reason why VCs investing in regular startups are asking for the MVP is not the MVP itself. MVP shows that the team can deliver as a team, MVP shows the speed & quality of this team. Some VCs are even investing in people, not in projects.

Market & Regulations

The idea of Blockchain is brilliant and it solves an old “man-in-the-middle” problem: we have so many entities that are not producing anything except being the intermediary. Why should I pay to the bank if I want to send money to my friend? Why should I wait for days in order to get a certificate instead of getting it automatically? Why should I pay to someone who would confirm that I am me or that my document is indeed mine?

However, there are so many great ideas that can’t be implemented right away because of the legal, market & social aspects. Blockchain technology (or any other similar technology) can definitely form a market in the future but for now, the market is limited. Yes, a few big players are coming but it would take years for them to evolve.

It means that there is no ready market, and each blockchain-based project has a significant risk to be “removed”. It is not because of the team though; market is the problem. Brilliant products die if there is no market for them. Only a few can form the market but it requires a lot of luck.

Another important problem is that there is no infrastructure that could support the projects. Feel free to try to find a bank with a license that would allow you to work with crypto-currency or get money from ICO. I know of no such banks operating in EU or the US. There is a number of Neobanks that are heading for the area (see Arival Bank story) but at the moment it is still a painful process. This applies not only to the banking but to a lot of other sectors as well.

Compliance is another struggle. Most of the ICO-backed startups do not care at all about the money they get. Taking into account that the whole concept of crypto-currency has a high risk from the regulator’s perspective it does not make sense at all: if you can’t provide the source of funds (and due to high rist you have to do a much better job than for non-crypto projects) you won’t be a part of the system. A.ID team has written an amazing article on how to approach compliance (AML/DD/KYC/KYB/CDD) for risky projects. How many ICO-backed startups have followed at least 30% of the rules? Right, not one. Without a service like A.ID the compliance can be the stopper for the startup.

Summary

Blockchain is a really amazing technology that has the capacity to change the world. The amount of investments definitely confirms this statement (see CBInsight Report below).

It has significant potential that almost everyone can evaluate in multiple industries — from FinTech and RegTech to even AgroTech. However, I see that the focus of the market right now is not on delivery of real products but on raising money without a strategy, team, infrastructure, or regulatory background. It does not mean that every ICO-backed startup will fail. But it means that the risks are really high. “Pumping” this industry with extra capital might cause an opposite effect and lead to investors disappointment. And when the time comes it will be hard to once again convince them to invest in the same “bubble”.