Anyone who has been in the cryptocurrency market since 2017 would notice that there has been a drastic change occuring in the way in which new token sales are raising capital.
In a market that has evolved and shifted faster than any other in history, it is becoming increasingly apparent that private-stage financing for ICOs is becoming the preferred method for new token sales seeking to raise ‘sticky’ capital.
Before we break this down to understand why, lets take a moment to go over the brief history of token sale structures and how they have continued to transform.
Remember the simple times?
In what feels like a century ago in cryptoland, the art of a token sale was as simple as announcing the project to market and allowing anyone/everyone to participate with their BTC and ETH in exchange for new tokens.
Overall community interest was substantially lower at this time, so the public sales could go for weeks, giving all prospective investors a chance to secure some hot new tokens with no limits.
“Introducing the presale”
Somewhere along the line, a smart project figured out that offering a discount (or bonus) on a certain number of tokens for early investment would create substantial demand and an overwhelming sense of urgency amongst the community.
This worked, almost too well. Presales would effectively give an investor a substantial incentive to get in slightly earlier with no lockups or vesting period. Get an extra 30% of tokens and liquidate it on the exchange inside a month.. Makes sense right?
“Get in on the ground floor”
Market demand for bonus tokens got so high that prospective ICOs figured out they can start shifting the ‘ICO costs’ to other investors that wanted to get in even earlier. This is when ‘seed-funding’ started.
Speculative investors with a high tolerance for risk would get in on the ground floor for seeding anywhere up to $1 million that would cover the launch of the token sale and subsequent marketing activites. In exchange, the bonus equivalent of tokens would be substantial, in some cases, 500% more than any other tier.
“For strategic investors only”
To add a further layer to the complexity of a token sale, some projects began to realize that the money they were receiving during these token sales wasn’t by definition ‘smart money’. This meant that token sale participants were in for the short-term gain, intending to ‘flip’ the coins as soon as practically possible.
This gave birth to the ‘private sale’ movement.
Private sale participants such as funds, partner blockchain projects, VC’s and advisers would be given the first opportunity to participate at a heavily discounted (or bonus) round. Execution of this sale would usually be done via a SAFT Agreement (Simple Agreement for Future Tokens) and more often than not, is subject to a ‘lock-up’ period to ensure that flipping would not occur as soon as the token is listed on an exchange.
“We aren’t doing a public sale”
In January of this year when cryptomania was at its peak, more and more projects were finding that the interest in ‘private sales’ was so overwhelming that it didn’t make any sense to go through the motions of conducting a public sale.
Some of the comments we would regularly hear from project founders were “we don’t want to risk a hack” or “the legal risk of running a public sale is too high”.
In many instances, the solution to the ‘mass distribution’ and ‘engagement’ component would simply be to Airdrop a large portion of tokens to random wallets, hoping that they would then gain traction amongst the investment community.
Private sales are here to stay
Private sales now share many of the same characteristics as traditional venture capital, without the equity.
Complicated SAFT contracts paired with long distribution times and even longer lock-up periods tells us that the market has matured extremely quickly. Investor demand for these allocations even with all of the restrictions and complexities suggests that the speculative market is taking more of a long-term view.
From our analysis, the core reasons for projects putting so much emphasis on private sales are the following:
- Raising money via a SAFT mitigates regulatory risk by only raising capital from a segment of the market that is considered ‘sophisticated’ and is happy to waive the majority of rights that retail investors would usually have.
- Private sales attract ‘larger tickets’ of funding that is usually backed by ‘smart’ and ‘sticky’ money. In essence, the more sophisticated the investor, the less likely they are to dump the tokens.
- Running a public ICO is difficult. We can say this from our own experience. On several occasions, projects have told us that “raising $5m during a public sale is 10x the effort and stress of raising $25m via a private sale”.
The reasons above are compelling enough for any project to be leaning towards private money, particularly given the everchanging regulatory environment.
So is it a good thing or a bad thing?
Overall, the increase in private sale funding is a good thing. It confirms the fact that ICOs are (trying) to be responsible, seeking sticky and smart money as well as avoiding being susceptible to pump and dump (PnD) schemes through the use of lockup periods.
At the same time, we believe this equally comes at a cost..
- Initial coin offerings are supposed to be about putting the power of the token in the hands of the users. I.e, those who invest in an ICO are supposed to be the same people who will be using the token. Complete private funding contradicts this value. It means that the token is more often than not in the hands of pure speculators as opposed to the actual target market (consumers).
- A token sale is possibly one of the biggest opportunities to market the real use-case of a token to as many people as possible. Projects need to look beyond the funding and realise that they may not get this chance again. Putting a token into the hands of 50,000 people who actually went through the process of research and purchase is the best form of mass-market engagement available that will increase the likelihood of project success.
- Airdrops are likely not a substitute for a public sale as they lack the emotional engagement and commitment of a purchase. Chances are that if you have had a wallet for over six months you have a plethora of random tokens that have been given to you free. I would also predict that you probably have no idea what each of them do. Airdrops unfortunately do not have the same effect, emotional or otherwise, that a public sale does.
- It can cause liquidity issues. Having a spread of 1000 investors in a private sale vs 100,000 investors in a public sale comes at a significant cost when looking at trading liquidity and ownership. To combat this, projects are issuing tokens via airdrop (above) or alternatively employing market makers to boost intraday volume. While this is a fix, we believe that it is not a long-term stable solution.
“But Astronaut is a fund that invests in ICO’s, aren’t you contradicting yourself?”
We believe that private-stage funding is the way of the future and is already closely aligning with traditional markets such as venture capital and pre-IPO investment. It signifies a market that is maturing very quickly.
In saying this, we believe that while strategic partners such as Hedge Funds, investment groups are absolutley essential in building the foundation of a successful project, they should not be soley relied upon for the complete financing of a new ICO.
Public sales are an integral part of the ecosystem and we believe that there needs to be significantly more focus on getting tokens into the hands of the mass community through ‘organic ownership’ as opposed to airdrops.
Although the data is showing a sharp increase in private sale ownership, our hope is that more new projects will look beyond initial private financing and dedicate the time, money, and stress towards also conducting a public sale for the benefit of their own venture and the ecosystem at large.