Why ICOs are a slippery slope
Much has been said and written and said about the recent ICOs (initial coin offering). a quick summery can be found here.
The ICO barrier of entry is supposedly much lower. This is a double edge sword, as it has pros and cons. at the near-term, until some regulation will make the ICO a balanced tool: we might see mostly the cons.
The main document that is disclosed is a white-paper which always follows a similar structure: executive summary, team, advisors, the product, technology, timeline & milestones, funds (in ETH and not fixed $), token structure and timeline for the initial offering. TenX’s white-paper can be found here.
What caught my eye is that the token proceeds is always set as a percentage and not as a fixed amount, whether in ETH/BTC or in fiat(actual $). as the exchange rate of ETH, which in this case is being used to buy tokens at the ICO, might change and no fixed amount is set as a target, e.g. “we require $1m for R&D costs for the next 2 years”. In stead there is a % of unknown amount (target is 200K ETH, but may exceed. at Bancor ICO there was no set target) based ratio of something that can change in value very quickly
Why the ICOs at their current structure are dangerous
There are no requirements for getting funding from accredited invetors , as anyone can participate in the initial offering.
- There is no clear and official vesting period for team members that is disclosed at the whitepaper, no cliff period as well (minimum commitment for core team members; e.g. 12 months cliff to get any equity).
- The funding cap is raised arbitrarily (bancor had no funding cap, and tenx are reporting to have a 200k cap and might increase it).
- If there is a cap, it’s just a crazy one , as it’s more money than any startup would ever need (compare that with $60mm or $150mm as a seed round)
- There are additional legal aspects to be reviewed.
- Most startups that raise in ICO don’t really need a token. for example: an ICO with a token for shared workspaces.
Some cryptocurrency advocates are already lamenting the potential demise of ethereum due to the ICOs plague .
When the founder of the next biggest ICO answers to a request to add details about team’s equity and team vesting schedule in the following manner, then that should set off your alarm bells.
“ the 10% for the employees & founders is used similar to a stock option pool in a normal company. Which means employees get part of their compensation in PAY tokens. This does not mean that the entire pool is allocated from the very first day for that purpose. We don’t have a cliff, but rather a monthly payout to employees/founders. We expect this option pool to last the company many many years as tokens are allocated to each employees compensation package based on the market value when he joins.”
Also, when the barrier of entry for ICOs is so low, no wonder how many fraudulent copycats are out them.
Is there a bubble ?
a significant portion of the ICOs fail and then the token doesn’t generate any value to it’s investors. The problem with the over inflation of ICOs is that it might strike back platforms like ethereum that are seeing a short term benefit form the ICOs using it’s token; demand for ETH is raising as investors buy Ethereum not as a long term investment, but because their price is going up and they need it to invest in tokens that come up on ICOs. This all may get to a boiling point that would trigger a sell pressure from miners and ICO projects, and that can cause a major bust.
How do we know it’s a bubble? quite simple: all the signs points into that direction. If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.
Thus, the only question is: when rather than if, it would bust.
Are ICOs are the future of fundraising?
After all said and done, once the first wave of ICOs will pass and we’ll experience one crash, we might enter a more regulated and responsible ICOs. That leads to examine whether in the long term that may be a viable solution for startups to raise funding.
Are ICOs like the ones that Bancor had and TenX will be taking place later this month (June 24th) could pose a new way to raise funding ?
That remains unseen; the size and frequency of ICOs are increasing and thus far more than $500m were raising via ICOs ($270mm raise till the end of 2016).
VC as an asset class performs on average worse than private equity or the S&P500. only top-tier VC outperform the market. The vast majority of VC funds are playing a losing game. Thus, passive investing in low-fee vehicles beats active investing almost across any chosen timeline.
ICOs might replace the current VC as money managers, since the wisdom of the crowd is likely to be greater than a single focal point of a few people at a VC firm.