Cryptofunds: Will tokens disrupt venture financing? (Event)

Alexander Lange
May 11, 2017 · 6 min read

Together with Nick Tomaino, Adam Stradling and Max Kordek I hosted a small token summit preview event at Earlybird Venture Capital’s Berlin office, discussing the future of Cryptofunds and the the rising decentralized economy. It was the kick off event of the meetup group Cryptotrading & Investing.

The panel (from left to right): Max Kordek, Nick Tomaino, Alexander Ruppert, Adam Stradling.

Our panel discussions are still keeping my mind busy. This is an attempt to summarize some of the key points and hypothesis brought forward by the panelists. Some slides I presented at the meetup can be found at the bottom of this article as well as some more lovely pics ;-)

Crypto financing is of high ethical value. ICOs are democratizing venture financing, what is a good thing and lets non accredited investors and the average Joe participate in wealth creation rather than keeping this hot asset class accessible for a tiny elite only. It’s questionable whether crypto investing will just shift wealth from an elite to another — the tech community.

Regulators step in when people get hurt. The more mainstream crypto trading and investing becomes the higher the probability that some inexperienced, non technical investors might get hurt. Whenever this happens at significant scale we expect regulators to step in, what would materialize one of the core potential risks the prospering but still small and fragile crypto economy is facing. These days it’s pretty open how different regulators or law enforcement agencies might handle crypto asset trading given the sectors infancy. We are still at the very dawn of crypto economy.

Source: https://pixabay.com/de/dawn-wolken-panorma-mombarone-190053/

Vermont, Switzerland, Estonia and Shanghai seem to be among the most progressive jurisdictions in this regard.

Token engineering & ICO structuring will emerge. To a certain degree the market is likely to regulate itself. Token engineering and ICO structuring are new playgrounds and highly experimental. Over time the markets and token mechanics will mature and new token models will emerge leading to a better alignment of interests between founders, early investors, users and developers. The crypto community is very open to experiments and we expect the evolvement of best practices within the next year, coming at a cost though.

Token sales are not for everybody and not for every project — in some cases they make sense, in some they don’t. Generally, ICOs are a valid tool for funding companies offering a usage token, such as bitcoin or a work token, such as Augur, Golem Project or Sia Tech whereas pure equity tokens were discussed very controversially. Only the future, further experiments and adequate amounts of data will reveal the truth.

A burst of the crypto bubble won’t dry out the market. Company valuations and growth rates in market cap are not sustainable. Many projects have been funded on the basis of a white paper and shiny websites without a product, a proven business model or even the team’s ability to deliver software. Corrections of those high valuations are likely to occur in the next year but probably won’t have a very long term impact. Different from sectors having been financed by conventional VC investors, venture financing in crypto happened in a distributed manner: instead of a few VC firms burning their fingers and drying out a whole segment (see .com) hundreds of thousands of micro investors might lose some insignificant money each — distributed risk is the is the other side of the distributed ownership coin. The panel left no doubt that the crypto asset class will be the next big thing to invest into over the next decade.

Founders should mitigate liquidity risks by either exchanging some of the crypto assets they raised through ICOs into different fiat currencies or raising conventional funds in parallel to an ICO . In parallel to equity financing founders should consider to raise only as much capital as they will need for the next 18–24th month before issuing further tokens — what results in higher scarcity, price uplifts, lower dilution as an overall higher efficiency.

We might witness a paradigm shift from a data economy towards a distributed economy over the next decades. Most of the value will be created on the infrastructure level “fat protocols”, whereas the value of applications can only be defined by utility and value added services. Data are either owned by users hopefully — self sovereign identity is the buzzword) or will be accessible for everybody, that’s what public blockchains are all about.

VCs will adapt, new players will be born. A lot of conventional venture capital firms are considering to invest significant amounts of their funds into tokens directly like Polychain Capital does. Potentially it could make sense to back the company running the core development and employing key people as well, similar to how OB1 / open bazaar did it. Legally, the field is untouched and it’s hard to find lawyers being familiar with this relatively new asset class. Another game changing business model is to raise a VC / hedge fund by issuing tokens like Blockchain Capital. Cryptofunds are a completely new animal given the much higher liquidity compared to conventional VC funds with very long lock up periods of about 10 years for LPs.

Nobody knows what blockchain’s killer applications might look like. Some say it’s bitcoin, some argue that it’s simply too early to tell — like it was in the internet’s early 90s. Nobody could expect Facebook, AirBnB or google to happen back then. As of now it seems that significant value is mainly created on protocol and token level, rather than on application level.

The crypto revolution will be bloody. As always in human history massive power shifts don’t just happen as we have witnessed in the days of Martin Luther or the French Revolution for example. The path to the separation of church and state was bloody and so will be the separation of money and state and blockchain enabled power shifts beyond that. The elites in charge (central banks, governments, financial systems and multinational corporates) will fight with all they have to uphold the status quo. Their preferred tools will be cyber weapons as we have seen many times — think of Ross Ulbricht and the Silkroad scandal, Snowden or Julien Assange.

From cold war to code war. The battles of the future will be fought on our devices and the software running our economies and societies. Governments, companies and individuals need protection from the powerful elites abusing their knowledge and access to cutting edge technologies. Cryptography will become the bomb shelters of our time. The interplay between political systems and individuals will be redefined.

Source: coinmarketcap.io
Source: coinmarketcap.io
Source: own research, not finalized. An in depth post on this map will follow soon — it lacks context here.
Source: Coinmarketcap.io
Sources: CBinsights, Smith & Crown Analysis.
Source: https://thecontrol.co/
https://www.pinterest.de/elviraferrando/de-todo-un-poco/
Source: http://www.usv.com/blog/fat-protocols
Our lovely guests.
The dinner crew: Ravi Kurani, Christoph Ortlepp, Christian Schröder,Herbert Mangesius, Adam Stradling, Nick Tomaino, Alexander Ruppert, Max Kordek, Michael Hirn among others.

<< In case you missed our exciting discussions, don’t worry. I am going to host further events to related topics soon. If you don’t want to miss them join the crypto trading & investing tribe.

Special thanks to our intern Edvard Boguslavskij who helped me to pull this piece together.>>

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