Blockchain Start-Ups to Venture Out from Venture Capital! Are ICOs Here to Stay?
Initial Coin Offerings (ICOs) were all over the news in 2017 and 2018, with their often eye-popping sums raised and stories of fraud and failure. This year, the ICO climate has been comparatively quiet, paralleling the general lull in cryptocurrency and blockchain spaces. Only $291 million were raised by ICO in January 2019, compared to over $1.5 billion in January 2018.
Why that initial ICO excitement and subsequent decline? In Susan Akbarpour’s recently published article “Blockchain Start-Ups to Venture Out from Venture Capital! Are ICOs Here to Stay?,” she examines the role of ICOs in the modern startup ecosystem.
Akbarpour analyzes the use of ICOs as an alternative fundraising vehicle to the traditional venture capital system, including the reasons for startups to use ICOs and regulatory challenges impeding more widespread ICO adoption. The article was published in the Journal of Investing’s April 2019 Cryptocurrencies in the Global Economy special edition, a joint project by IPR Journals, the Consumer Finance Institute (CFI) of the Federal Reserve Bank of Philadelphia and Drexel University.
When Venture Capital Doesn’t Venture
The article argues that venture capital (VC) firms are no longer “venturing” as they once were, sticking to safer investments instead of truly disruptive ideas. This has created a market need for alternative investment vehicles for innovative products that do not fit traditional VC models.
ICOs, Akbarpour posits, provide a mechanism for certain startups to bypass the VC fundraising process to independently raise the necessary capital to make it through the “missing middle,” a term coined by Skyler Fernandes referring to the lack of capital raising opportunities available to entrepreneurs looking to raise between approximately $100,000 and $3 million. Only with that “middle funding,” like ICOs, can companies grow to reach a palatable level for VCs and institutional investors to consider them.
The mCart Example: A Case Study in the Power of Blockchain and ICOs
The article examines the case study of Akbarpour’s own company, Mavatar Technologies, Inc. and its product the mCart influence marketing and asset monetization platform. Because mCart’s vision to unify shopping, sales, and advertising under one platform defied traditional VC models, it had trouble raising sufficient capital and risked running out of money. Therefore, Mavatar decided to employ blockchain to resolve an existent issue mCart had delivering micropayments to its on-platform influencers while also raising its additional capital for the company via an ICO of the mCart platform’s mCart Token.
mCart Platform Economics
The mCart Token is a proprietary blockchain-backed token that is used to pay the influencers who are becoming an ever more important part of the marketing landscape, expected to be worth $10 billion by 2020. And this isn’t even taking into account the micro and macro influencers who are barely being monetized!
Despite the size and growth of influencer marketing, the current “last click” model of paying influencers is highly ineffective. The middleman software that goes between the influencers’ content, the content that is actually driving the sale, pushes sales to bots or tools publishers (coupon and rebate sites mainly), which then get the coveted last click and its associated commission. This system drastically distorts the value system, unfairly redirecting rewards that should belong to the content publishers to tools publishers.
The mCart platform solves distorted affiliate sales models using the mCart Token. Marketplace operators can instantaneously pay influencers for the sales they drive in mCart tokens via blockchain-backed smart contracts. There are no hefty administrative fees or back-office costs, which have previously impeded such direct micropayment-based affiliate sales models.
The mCart platform runs seamlessly and is highly scalable. It solves a clear market need, letting anyone get paid for their influence and providing a valuable new revenue stream for asset holding organizations. The platform was well poised for an ICO to sell mCart Tokens to investors in order to scale on its mission to make the whole world shop-able!
Regulatory Uncertainty & a Stalled ICO
To realize the mCart vision and make it through the missing middle of the investment landscape, the Mavatar team planned an ICO for mCart Tokens. However, the mCart Token ICO faced regulatory challenges indicative of those faced by all highly innovative startups wishing to hold an ICO, Akbarpour writes. While the mCart Token ICO raised a couple million in a private sale to accredited investors during spring 2018, the company’s legal team encouraged Mavatar to push back the investors’ offers due to an uncertain regulatory environment surrounding ICOs and cryptocurrencies.
United States government regulatory agencies such as the Security and Exchange Commission (SEC) had yet to take concrete steps to define different types of tokens. This inaction is impeding startups from using ICOs to raise funds for their work on disruptive products not fitting the historical models of the institutional investors or not getting institutional funding for any number of reasons.
We Need Government Regulation — Now!
Akbarpour concludes the paper by warning that unless the SEC takes concrete action to define kosher tokens, it will continue to impede a wave of ICO-funded innovation, suppressing American blockchain-backed innovation and driving these startups to build their businesses overseas. Billions of dollars worth of investment and potential revenues will be pushed to other countries where the regulations are better defined and friendlier.
Akbarpour clearly lays out the ICO funding landscape and the reasons why regulators should define a framework for removing challenges facing authentic ICOs sooner rather than later. This paper is a must-read for anyone who wants to better understand the potential that ICOs hold for startup financing.
“Blockchain Start-Ups to Venture Out from Venture Capital! Are ICOs Here to Stay?” can be found on the Journal of Investing’s website.
