Why Aren’t VCs Turning Toward ICOs?
The Reasons Why VCs Ignore ICOs
Are the good old standards in business still solid and reliable for a new, modern-day startup? We could have a long conversation on this subject, but today, we’d like to discuss ways to attract investments. Should company owners choose venture capital (VC) or an initial coin offering (ICO)?
This question concerns more and more entrepreneurs as time progresses, so we’ve decided to tell you how ICOs have changed the world of business as we know it. In the article, you will learn the biggest differences between the two concepts in order to easily decide which one to choose.
ICO and VC: Introduction and the Latest Market Trends
Let’s start with venture capital, as it appeared long before ICOs. Venture capital is, basically, an investment in a promising business in order to profit from its success in the future. Even the greatest market analysts can’t provide you with guaranteed business success, so any such investment is a risky matter, be it a modern or traditional concept. To reduce these risks, VC supporters spend lots of time and effort analyzing all sides of a product and the market in general. You can’t be sure of success, but you can at least try to predict it.
In the opposite corner of the boxing ring, there is the ICO. The initial coin offering is a crowdfunding approach held via the blockchain. Owners of a new business publish tokens, and investors buy these tokens in exchange for cryptocurrencies. These tokens accumulate value over time — this is what stimulates investors to pick a certain ICO. Tokens were first sold to investors in 2013, and it took only 5 years for the new wave to overtake the market.
We were literally hit by an ICO storm in the period from 2016 to 2017. According to Statista, ICO funding value was $85 million in 2016, and in 2017, it was already $4,044. In other words, the index rose 47 times. This number looks overwhelming even for experienced marketers.
The question ‘why?’ is the first thing that comes to mind. What’s so special about ICOs, and what’s their secret power? You can’t answer these questions with one sentence though. Let’s dig deeper to find the buried treasure (or higher return on investment).
VC vs. ICO: 7 Factors That Make Them Different
Any business concept has its advantages and disadvantages, so there is no perfect solution for everybody. The appearance of ICOs opened new horizons for people around the world, but they differs hugely from traditional investments. That’s why they require careful examination.
1. Audience
VC: Working with VC looks more like a B2B model (business-to-business). Usually, investors spend some time on market research, and they have a lot to offer. To get investors to pay attention to a project, you have to convince them: use a product demo, project roadmap, white paper, and, most importantly, proven financials with preexisting traction. Orientation toward B2B is dictated by the nature of the investment: VCs invest in equities, and earn a lot during acquisition or IPO. In both cases, speed is a key criterion for ROI, as it is always discounted by the rate of other types of investment. B2C markets are growing fast, but it always takes time to acquire customers, while on the B2B market, you could increase company equity valuation with only one large deal, that much faster.
ICO: On the other hand, ICO investments are a B2C market (business to consumer). Basically, anyone can take part in an ICO, so startup owners use any means to create buzz: videos on YouTube, podcasts, or Internet ads. In this case, the preparation stage is less expensive and less time-consuming.
2. Legal Requirements
VC: When dealing with venture capital, it’s a common practice to sell a share of your company (usually, it’s 20%-30%). Investors use this practice to secure their funding, so startups should be ready for negotiations and the signing of a legal contract. This process may take a year or so to get to the finish line. Sounds exhausting, doesn’t it?
ICO: In the ICO environment, companies decide how they distribute tokens and when they should be delivered to the investor. This area has simplified legal regulations so far, so startups set their own conditions, and investors decide whether they want to play by these rules or not.
3. Product Status
VC: The two investment types usually imply different stages of product development. In the case of VC, expectations of the audience require far more effort as opposed to a startup. A product usually has at least a minimum viable version (an MVP) — it should be tangible, so to speak. This is one of the most important conditions for persuading investors.
ICO: What about ICOs? They give more freedom to startup creators. The product may be at the concept stage when you launch your initial coin offering. In such conditions, ICO deals should have more maturity in the future with better forecasting and defined requirements. The market has definitely become more mature, and it is harder to collect investments with just a concept, but in case of product development funded with an ICO, you could immediately receive contributions with MVP and start to improve it. With VC, you also must have traction for MVP sourced with your own money, which could vanish prior to obtaining traction KPIs for the VC investor.
4. Risks
VC: As there is a limited group of investors in VC, the risks are often high. We’re talking about significant sums of money here; that’s why the preparation stage takes much time. Investors want to be sure they will get their profit.
ICO: ICOs are different. People invest no more than they’re ready to lose. This condition allows socially important startups to flourish. For example, if you want to create a medical product to save lives, there’s a bigger chance of getting funds on the blockchain. Unfortunately, ICO freedom has resulted in a higher number of teams that collect and disappear with the money. This is impossible with VC investments. Surprisingly, despite the fact that the success rates of projects sourced by VCs and ICOs are nearly equal, the risks are nearly the same. As mentioned earlier, the amounts of ICO projects are generally much higher. This allows them to diversify investment enough to gain ROI with minimal investment at the beginning, and in a shorter time, with risk at the level of conventional VCs.
5. Access
VC: Not everyone can make VC investments at will. An allowance to make a VC investment requires you to be accredited, and to have a huge investment budget at your disposal. So, going for VC calls for a corresponding status.
ICO: ICOs are much simpler and ‘close to the people’ in this regard. The concept of the ICO is centered around promotion for project creators and potentially profitable risks for investors. And anyone is allowed to risk. You can start to invest in an ICO with $10 in your wallet, and no registration is needed whatsoever.
6. Geographic Location
VC: Often, VC investors stick to conservative approaches. For our situation, this means investors prefer discussing business affairs in a face-to-face conversation. This becomes complicated if a startup is across the ocean, right?
ICO: At the same time, we have ICOs, which ignore all borders and distances. All you need is an Internet connection. Internet ads for ICOs work because potential investors may be in another time zone, hundreds of miles away.
7. Public Relations
VC: Venture capital is a known concept; it has many years of history, and lots of trust from entrepreneurs. VC investments are a private case, so don’t expect lots of noise around a possible failure. Investors share tears of joy and grief with a startup, so you get lots of support and privacy when focusing on venture capital.
ICO: It’s hard for people to get used to changes, especially when it comes to finance. The blockchain and ICOs are innovations that don’t have a predecessor on the market — this is why they seem suspicious to some business owners. No wonder this hits hard on the reputation of ICOs. But the blockchain community has your back, and it tells all fishy deals online. ICOs don’t have a choice — they have to play fair. Otherwise, the community won’t allow you to continue working on the market.
Final Thoughts
For experienced VC investors, initial coin offerings may seem like immature teenagers. Every teenager becomes a grown-up at some point, however, so we’re absolutely sure ICOs will have more legal support in the future — and, subsequently, more interest from investors. Luckily, events similar to Crypto Investor Day are already allowing businesspeople to share their thoughts and knowledge. You get an awesome opportunity to receive answers to the trickiest questions, and have a chat with real blockchain experts.
Will blockchain change the future? In fact, the future has already come, and blockchain is a huge part of it.
