The next order of magnitude for ICOs

Prior to mid-2017, new and innovative companies raised virtually no money from the Crypto World. Now, Initial Coin Offerings (ICOs) are becoming mainstream. What could cause the ICO phenomenon to grow by another order of magnitude?

In its ‘Venture Pulse’ review of the global Venture Capital (VC) landscape for 1Q18, global consultant KPMG noted that ICOs have ‘become more mainstream’ as a source of funding for start-up companies. This has been partly because the regulators in some countries — such as Japan and Switzerland — have supported ICOs. It is also because ICOs are widely regarded as being far easier to undertake than Initial Public Offerings (IPOs) through conventional stock markets.

There has indeed been an explosion in funding through ICOs. Coindesk’s ICO Tracker data indicates that there were usually only one or two ICOs per month globally, and never more than eight, through the three years to the end of 2016. There have been at least 50 per month since October 2017, and 78 in December last year alone. Prior to mid-2017, the norm was for less than US$15mn to be raised through ICOs each month. Some US$1,442mn was raised in December last year, followed by US$1,790mn in January, US$2,382mn in February and US$2,158mn in March.

Although some of these most recent numbers may have been inflated by private placements of crypto-coins to buyers, the Crypto World has acquired a scale where it really could have an impact on VC markets — especially in relation to the funding of start-up companies. By way of comparison, KPMG noted in its report that ‘first time’ (i.e. mostly start-up) companies raised around US$3,000mn through 1Q18 in 635 deals.

The surge in activity in the Crypto World is even more extraordinary when you consider the eco-system on which it is based — or the lack of it. Most of the 200 or so crypto-exchanges are new, offer only a limited number of crypto-coins, and are not well equipped to handle ICOs. Worse, they generally serve buyers in only one country and often operate in a regulatory grey zone.

For all these reasons, there have not really been properly organised communities of crypto buyers. The activity that has taken place has overwhelmingly been due to first-time buyers (or speculators) going to the crypto-exchanges, rather than being attracted to them. There are undoubtedly plenty of Crypto-VC entrepreneurs. However, they do not constitute an established community, linking scientists, innovators and financiers, like the cluster in the United States’ Silicon Valley.

Now, imagine what could happen if someone could address these problems simultaneously — producing a Crypto World with efficient and regulated exchanges, an informed general public and proper clusters of Crypto-VC entrepreneurs.

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