Why it annoys me, that everyone thinks he should enter the “ICO-game”

This is a personal commentary piece on why I’m pretty annoyed by all those who can think they need to jump into the ICO-game and pull out a quick buck. There are many examples, I’ve just randomly picked the case of the 22xfund token-presale.

TL;DR: Any bad ICO will eventually cause cryptos in general or the blockchain technology to be viewed as flawed or even evil— when in reality it’s not the tech behind it, but the people pulling these kind of stuff that often cause bad media.
In the case of the 22xfund they want you to credit them a VC-evaluation where you’d have to apply the metrics of an accelerator program and they mask the whole thing as an ICO to lure in potential investors from the crypto-world and advertise return rates that are way above any traditional VC.

The following is a brief analysis on the 22xfund token offer and why I won’t be participating in it. This is just one of numerous cases and it simply happened to be the one that triggered me to write this comment. This is my very personal opinion of that matter and it should not be used as any sort of investment assessment/consultation.

How they advertise it

On the first look everything looks very sophisticated and it even gives the impression, that this is some official fund for the well known accelerator 500 Startups — however, this is not the case. And only after reading through some of their documents, I found a small disclaimer stating, that there is actually no affiliation with 500 Startups nor is this in any way endorsed by 500 Startups. The only connection is, that all startups of the 22xfund where part of the 22nd batch at 500 Startups. But to be honest, if I were 500 Startups, I would be severely annoyed by someone else using my brand for advertisement, even if it was an alumni. So the investment is NOT into some accelerator or VC-company, but simply in to a bunch of startups, that happened to be at the same place at some point in time. To me this is a simple case of misleading or even dishonest advertisement.

How I don’t see the math adding up

Maybe I’m viewing this completely wrong or maybe I have false expectations or I missed some very important points — in any case, I pulled some quick numbers and tried to find a scenario where any of this could work (I couldn’t):

• 500 Startups invested in over 1600 startups over the past 7 years
• there was 1 exit >$1B (which is 0.0625% of all) (Twilio)
• there have been 6 exits >$100M (which is 0.375% of all)
• there have been ~40 exits <$100M (which is 2.5% of all)

Even if you apply the highest percentage here to the 30 listed startups, this means that there is statistically “only” a 75% chance that there is actually a worthy exit-candidate. (I’ll explain the “only” further down below)

As for the actual investment, they’ve set a maximum of $1MM for 10% equity for each of the 30 startups, which would happen at the maximum funding goal of $35MM after subtracting fees and cash-reserves.
Let’s assume there’s an exit-candidate with a $100MM exit in there (no guarantee, but let’s assume that) — and let’s assume there are 3 additional exit-candidates at $50MM in there (which is pretty much impossible, but let’s assume that) — at a 10% stake, that would grant a return of $25MM (assuming 0% taxation on that), which would still be $10MM short of the initial investment. Even with an exit of $1B, it would only triple the initial investment (IF the shares are not diluted along the way).

I’m not saying, that it is impossible, but I am saying, that the statistics tell a different story.

The VC comparison

At almost every chance, in their documents, they compare themselves with a traditional VC-fund. In my opinion this is wrong:

• A VC fund usually vets each startup individually. What the 22xfund did, was to choose 30 startups that happened to be in the same accelerator-batch — sorry if I’m being blunt here, but that does not look like a proper vetting-process or due diligence to me. (Maybe there was some vetting and I just overlooked it in the documents, I doubt it though)
• They advertise, that they will outperform the returns of any VC by the factor of at least x1.5 (of course, no promises are made, but still they do advertise it). That alone lights some red lights in my head — if it’s too good, to be true, it probably is.
• VCs usually invest in only a small fraction of startups compared to an accelerator, it is therefor unlikely that a complete accelerator-batch will receive VC funding — yes, batch 22 contained 36 startups originally, but still it’s unlikely that the other 30 will get VC funding(which seems to be the goal of the 22xfund).

The startups themselves

I was not able to find proper information on the funding status of each startup within the documents. For example “Why are they participating in the 22xfund? — Has 500 Startups declined to execute their option for further investments?” There is barely any information on each startup within their documents, not even the year of founding.

Next, the investment of $1MM for 10% equity would give each startup automatically an evaluation of $10MM. I counted only 6 startups, that listed an annual revenue of >$500K. I know, it’s all about scaling and potential — but still, some of these startups don’t even show signs of scaling-potential. And even VCs look at these kind of numbers and not (at least not always) blindly throw their money at the wall and see what sticks.

I no way do I want to criticize any of the startups, but I’d still be curious what lead the founders/CEOs to the decision to participate in the 22xfund.

My resume

Accelerators typically have a pretty low exit-rate, which is okay (hence the “only” earlier in the text), because they get in at a very early stage and get the equity for much smaller amounts than a VC would at a later stage.

Yes, VC funding is risk capital, but it is certainly not the application of accelerator-metrics (having a low exit-rate) at 4x of the evaluation. And getting in at the VC-stage without vetting each startup individually is kind of playing blind darts: Sure you can win… but you’d have to play an awfully high number of games.

I haven’t seen them calling it “ICO”, but they have a Token Presale and a Token Mainsale — if it smells like an ICO and it looks like and ICO, it is an ICO. And this makes me mad, because it once again makes the whole crypto- and blockchain community look bad. All those ICOs for blockchain-technology startups have been enough in 2017, don’t blindly spread this to other investment-areas. Yes ICOs pose an opportunity for many, but that doesn’t mean that it is automatically a good opportunity.