Through my own experience, and watching hundreds of other projects at a close distance, I would say raising money through ICOs is about 100 times easier than through traditional VCs, if not more. With the ease of raising money increased, logic says there may be 100 times more startups, well-funded startups, where ICOs are allowed.
Now, imagine two otherwise identical locations, but one has 100 times more well-funded startups; what would their relative speed of technological advancement and economic development be? Which country will become wealthier over time? Which country will be able to collect 100 times more taxes over time? Which government will have more influence (more power) over time? For me, it is crystal clear but draw your own conclusions.
Let’s look at a few different aspects of ICOs. Why are ICOs good? Well, for strong entrepreneurs, if given a choice between:
1. Courting VC investors, doing powerpoints, business plans, pitch decks, executive summaries, due diligence, term sheets, investment agreements, offshore company structure setup, board of directors, make reports for them, getting a bridge loan because the VC lawyers insist on some totalitarian terms that essentially gives them absolute power and ownership of your company and hence delays the whole investment process… And at the end of a six months cycle, maybe getting $150K USD worth of angel investment, while the CEO (and other founders) spends a majority of his time and brain cycles on this, and not the core business. And repeat the cycle immediately again.
Or 2. Writing an awesome white paper about your passionate dream project and raise $20M USD in 10 days, from thousands of people around the world who speak your language, understand your vision, use your product as soon as it is launched, spend all day beta testing your product, or discuss with you about new neat (and sometimes useless) features that you haven’t thought about.
If you are an entrepreneur, which path would you choose? If your local jurisdiction doesn’t allow ICOs, would you be tempted to move to a different country to pursue your dream?
For investors, ICOs are also attractive. Again, consider the alternatives:
1. Say you wanted to invest $1000 in the $50MM round for Uber. Guess what; they won’t take your money. Even if you had $1MM, they may or may not take it. They are likely being courted by more famous VC investors. Of course, you can TRY to give your money to a famous VC investor, if you meet their minimum threshold for investing, which is often a few million dollars. And you are ok with them taking a 2% management fee annually. And, you are ok with not having a say in what projects they invest in. Oh, and you are ok with waiting for eight years to see how the fund does. How many eight years do you have in your life? How many VC do you know or trust? Do you really want to pay for their business class tickets and 5-star hotels?
Or 2, you could invest in any number of the awesome ICO projects where you have been following the founders for some time, know their history, share their vision, know you will use their products (if it works). You can invest $500, or $5000, or $50,000 in each of the dozen projects you like (depending on how deep your pocket is), and see which one works. You have the choice to exit your investment at any time afterward, on an exchange where the project coin is traded. Fully liquid. And, you can invest in awesome projects around the world, and not limited to projects in your country. How does that sound? Would you still beg a VC to take your money?
That’s all good and rosy, but ICOs are not without its problems. We are still in early days of the industry. You can’t make advancements without encountering problems. Properly dealing with issues is how progress is made. If we had given up e-commerce/internet because there was identity theft or credit card fraud, where would the world be today? Whoever deals with the issues best will be the winners, that’s where the competition is.
Let’s take a deeper dive in some of the common problems, and misconceptions.
Professionals VS Crowd.
There is a notion that “professional” investors are better than “regular” retail investors at evaluating projects. I believe this notion ignores how the real world of ICOs works — that the “regular” investors work in crowds or hive mind. Is the crowd stronger than VCs when it comes to evaluating projects and due diligence?
While some professional VCs investors are truly experts in their field, and genuinely trying to help entrepreneurs, I find the vast majority of “professional VCs” have no clue about the projects or field they invest in. Many of them have zero startup experience and don’t even have a basic understanding of the technologies involved their fields. Many VCs don’t use the products of the companies they invest in. They look at hundreds of projects, across a variety of industries, spends most of their time negotiating with entrepreneurs, while staying at five-star hotels and fly business all day long. Today, there are probably more of these “professional VC funds” than there are startups.
Compare this with a couple of thousand retail investors in an ICO: they range from novice to advanced potential users of the product, are genuinely interested in the industry, have been following the team, and are not shy about sharing any negative findings on social media or question the founders in Telegram groups directly. Which group do you think will be more likely to be thorough in their findings?
As an ICO investor, this, of course, requires you to do your homework too. Don’t just follow the herd. Invest in projects you understand. Read the whitepaper. Follow the founders for a while before you invest in them. If you find anything good or bad, share it. You need to contribute to the crowd that you are part of.
Scams exist everywhere, in every industry. I still receive phone calls and SMS telling me I won a grand prize, but I need to make a bank transfer to someone first. Does that mean we should stop using phones, SMS, and banks? The same law enforcement dealing with scams in traditional industries still apply in new industries. We don’t need to re-invent the wheel here.
Most ICOs are new startup projects, and have a high rate of failure, just like in traditional startups. This is nothing new. Most ICO investors already know this. ICO investors are early adopters (and learners).
I do believe compared to “traditional VC invested projects,” a larger ratio of ICO projects will succeed. There are at least three reasons for this. One, the founders spend less time raising money and have more time to focus on product development. Two, with increased funding, some shortcomings of the project will be easier to overcome. For example, if the founding team is weak in marketing, it is now far easier to hire related specialists given the available funds. Three, ICOs help jumpstart the project with an initial user base. Now users are investors. They make returns at the same time as they use/pay for the product and make it popular.
Guess what most VCs do today? They invest in ICOs now! VC groups, unlike other large slow-to-react organizations, have their nose on the money. That pretty much says it all! Unfortunately, many other large organizations who are responsible for economic development and public wealth are not as nimble. The faster movers will reap exponential benefits. Don’t get left behind.