Crypto-Tokens and ICOs: A Brave New World for VC through fractionalization and liquidity.
It’s a brave new world for venture capital as the rise of cryptocurrency has flooded the market with an entirely new stream of investor cash. The market capitalization of blockchain-based tokens such as bitcoin, Ethereum, litecoin and more than 700 others is exploding, increasing more than eight-fold since 2016, from $7 billion to more than $50 billion today.
Of course, any major economic shift, as in this case the creation of a whole new monetary system, will inevitably rattle the world of venture capital as investors and raisers alike try to make sense of these new investment vehicles. Bitcoin, the best known of these cryptocurrencies, has seen its value jump from around US$500 in mid-2016 to today, where 1 bitcoin is worth more than US$4,700 as of August 31. The price has spiked and dipped dramatically in that time, but the overall direction has been up considerably.
The advent of these crypto-tokens has blown open the doors of investment in a democratic way, giving startups access to a whole new base of investors and capital. Investors can now buy tiny pieces of companies, helping the startups quickly and easily raise capital, no longer dependent solely on multi-million dollar venture capital funds and instead turning to the crowd (ala crowdsourcing/crowdfunding). A startup can sell these tokens and let the market decide what they’re worth, raising millions (or tens of millions or more) in the process and bringing the potential for huge returns on relatively small initial investments. Asian payments startup Omise Go had an ICO (initial coin offering) in July, creating tokens called OMG, which sold for US$.50 initially. Today those tokens are valued at US$11, a 20x return for those who bought in at the time of the ICO. Omise Go has gone on to pass the US$1 billion valuation mark, making it one of the first ICO unicorns to-date.
But it’s not necessarily the right path for every company looking to raise funds. John Biggs, a longtime TechCrunch editor, author and follower of cryptocurrency said in an interview “any company can use an ICO. If they’re out of the country they can tokenize equity, if they’re in the US they can tokenize a process. SHOULD they is another matter entirely.”
Venture capital firms have, of course, taken sharp notice of the emergence of crypto-token investing. Some are diving in headfirst and others are viewing them with suspicion. The investor marketplace has a thirst for these big returns, but the technology is still so new it’s difficult to say with certainty whether this is a bubble waiting to pop. CNBC already reported last month that ICOs have already surpassed the amount raised by startups through early stage venture capital firms for 2017, more than $1.2 billion so far and counting. This is something bound to be keeping some fund managers up at night.
Biggs says this worry is not unfounded.
“Tokens will replace seed rounds for most companies. Because tokens are so fluid they can be used for multiple projects and can give solid gains if done correctly. If I were a VC I’d be worried I’ll be out of the market soon.”
The regulatory environment for tokens is still taking shape, and whether the SEC and other agencies will come to view tokens in the same light as securities remains to be seen, and will surely affect the future viability of such investment vehicles. However, if the noose of strict regulations tightens, a big reason for using token sales to raise capital in the first place, the de-centralization of the market and ease of transferability, may evaporate.
With the token gold rush appearing to be in full swing, even established venture capitalists are dipping their toes in the cryptocurrency waters. Widely recognized names like Bain Capital Ventures, FirstMark Capital, Union Square Ventures and Andreessen Horowitz have all recently invested in crypto-funds. Some smaller VCs are even considering establishing their own crypto-funds, according to Digital Currency Group’s Travis Scher. The FOMO (fear of missing out) fever of cryptocurrencies seems strong in the VC world for sure. Further still down the rabbit hole, some blockchain-based funds are issuing tokens of their own to invest in other tokens, if you can follow that logic.
In short, the crypto-tokenization of capital has given rise to a whole new venture landscape. While it has the potential to offer huge returns, democratize fundraises and ease the transfer of proceeds, as the past has shown, bubbles break. It may be too early to tell if we’re already in the midst of a crypto-bubble, and clearly as more big-name VC firms take the plunge the market’s stability will shore up, but one thing is for sure, at least for now, the world of venture capital is rapidly changing course. Whether it completely turns upside-down remains to be seen, but it’s clear that VCs are taking notice of crypto-tokens with varying degrees of cautious optimism.
VCs aren’t the only ones following this boom with trepidation. The central bank of China, one of the world’s largest economies, has just this week taken the step to outright ban ICO funding, pending further investigation by the nation’s regulatory bodies. No word yet on whether the U.S. Securities and Exchange Commission will follow suit, but the price of cryptocurrencies plummeted as much as 20 percent on the news, which shows the fragility of this emerging marketplace. We will soon understand if this volatility is part of a typical path/ Transition to a new monetary and value storage system.
Keywords: SGH Capital, ICO, Tokens, Venture Capital