For years, entrepreneurs have been forced into following a well-trodden track towards raising serious financial backing for their ventures.
Armed with nothing more than an idea and a slideshow, individuals wishing to get together the money to realize technically complex and resource-intensive projects have shuffled from VC office to VC office in search of funding, incessantly knocking on doors in hopes of finding a suitable partner.
This ‘Sand Hill Shuffle’ has become so ingrained in popular culture as part and parcel of the startup process that entrepreneurs have become resigned to giving away parts of their ventures at what is often a steep discount to get access to the resources they need.
But with the rise of cryptocurrencies and ICOs, this dynamic has been turned on its head.
In 2015, Ethereum set a benchmark for the industry as it raised $8 million from one of the first substantive ICOs, demonstrating that exclusively crypto-based projects could raise serious funding from a broad investor base.
But over the last year, adoption of the funding mechanism has moved from the fringes to the core of the crypto and broader financial worlds, with over $6 billion raised in the first three months of 2018 alone, according to CoinDesk.
That figure includes the bumper $1.7 billion of backing secured by messaging app Telegram, signaling that this form of fundraising is now attracting the attention of serious capital.
So what are the benefits for founders seeking to capitalize on the potential to grow their ventures without sacrificing their companies to the whims of their investors, or indeed for the communities which have eagerly got onboard with the idea?
The Founder Perspective
Clearly with global ICO funding on track to more than double this year, there is substantial interest from venture founders in taking advantage of this funding mechanism. And there are solid reasons for entrepreneurs to turn to the token market for financial support rather than dragging their Powerpoint to Northern California.
TLDR’s Alex Yamashita has followed the ICO market from its inception and watched as more and more entrepreneurs have embraced the token sale as a genuine route for expanding their business. He says that ICOs have now become the default route for financing innovation, highlighting that token sales last year began to eat into large chunks of the VC share of the market.
And he argues that there is one big reason for this sea change: the often onerous reality of working with VC firms.
“For founders, ICOs are now the new way for how innovation is being financed. A major benefit for entrepreneurs is that of control. VCs usually want to take a big chunk of control in the company and often don’t provide that much value.”
In Alex’s eyes, this creates a flawed incentive mechanism for founders and investors. More importantly, it creates difficulties in accessing finance for those who are unable to transport themselves to specific streets in the Bay Area to endlessly pitch to VCs who hold a disproportionate level of control over the relationship.
“The VC industry is really an old boys’ club which is all on Sand Hill Road, and that is basically an oligopoly.”
In contrast, using ICOs, which have developed to be more distributed and global, allows investors to tap into the same wealth of capital offered by established VC investors without sacrificing substantial portions of equity or control to an outside party.
Another key benefit for founders, as well as token users, is liquidity.
Under a traditional venture capital-style equity investment structure, founders are locked into the firm for years, unable to monetize their stakes until given the say-so by investors, or until they are forced to float the company by market pressure.
With a token-based structure, founders are able to more easily monetize their stake in the network without giving up their control, and they can move without difficulty in and out of the venture as they please.
This is a far cry from the story that many founders still using traditional financing will find familiar — where those who built the venture from the beginning find themselves with large stakes worth vast sums that they are unable to realize.
The Community Perspective
On the other side of the ICO phenomenon lies perhaps an even more intriguing aspect — the community which actually purchases and hopes to use the tokens offered up by ventures in exchange for their cash.
At the heart of this lies the distinction between traditional investments, such as those in equity, and the more complex prospect of tokenized cash-raises.
In mainstream finance, investors receive a tradeable security in exchange for cash investments. This definition encapsulates most of the traditional capital markets, on both the debt and equity side of the equation.
With ICOs, the value on offer is more than just an investable asset from which a return is expected. Investors in such projects are also buying into the ecosystem under construction, with the expectation that the token they now own will become a usable commodity within a given system.
This helps to solve a key issue of tension between users and creators of the economy, allowing users to both participate and invest in the system. But TLDR’s Andrew Durgee reckons that for both investors and token issuers, the future of the ICO market lies in security tokens, as opposed to the utility tokens that most founders have opted to use in the current marketplace.
“The [ICO] market is still trying to find its way, but the future lies in using security tokens. At the moment, utility versus security tokens is the hot topic for both regulators and the market. The difference between an ICO and a security token is over whether the instrument produces revenue like a stock because then it comes under securities laws. But I believe security tokens will be at the forefront of developments in the future.”
Durgee says this is due to the need for the market to be accepted in the US, where it is most likely to find the core of its growth. The security token is the more likely acceptable method for regulators in that jurisdiction.
Overall, ICOs target the financial rentiers which have come to dominate the global system. Organizations such as banks and other middlemen have lobbed sustained criticism at the token market, citing the well-known degree of fraud as an insurmountable obstacle which will be the ultimate bulwark against the erosion of their position as fundamental intermediaries.
However, with the volume of capital currently pouring into the market, investors seem to disagree, and entrepreneurs are keen to take advantage of this major shift in dynamics to retain control over their own vision.
While the market may be still in its infancy, with the attendant growing pains, the phenomenon is here to stay.
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This article is based on views and information held by TLDR on publication date and may be subject to change, although TLDR does not undertake to update them. Nothing contained herein constitutes investment, legal, tax or other advice, nor a recommendation or solicitation of an offer to buy or sell any securities or to adopt any investment strategy. No representation or warranty, express or implied, is made or given by or on behalf of TLDR as to the accuracy and completeness or fairness of the information contained in this article.