“Flood Capital” — Why ICOs May Be Taking on Too Much Too Soon
How the average ICO campaign in 2017 raises nearly as much capital as the first three funding stages of a VC-backed startup
In the world we’ve all known before crypto euphoria (aka where gravity exists), new businesses took an appropriate amount of time to validate their business models, understand the market landscape, and know their customers. Add in a lot of hard work and a bit of luck and their outlooks might be prosperous. For the successful companies at least, this is complemented by a steady access to the capital they need, or sometimes referred as drip capital. In the same way that you don’t flood a garden and expect it to grow, flooding a business with capital can yield the same subpar results. One must take into account a multitude of conditions and parameters in both scenarios over an extended period of time to ensure proper growth.
Now enter the ICO thunderdome…
The average ICO in 2017 raised $15.98 million according to CoinDesk’s ICO Tracker. These are typically raised on campaigns lasting between 30–90 days. Comparing this to traditional equity funding, that is a very concentrated capital raise. I don’t know about you, but if I’m betting on the next Seabiscuit, I’d like to have some good indicators that it’s going to catch its stride before putting more money down. The chart above shows how the average ICO raise nearly fills in the first three complete rounds of traditional equity fundraising (2017 global averages) according to data from CBInsights. On the equity side, when adding up the average time lapse across ~14K traditional financing events and assuming the expansion stage includes Series C, we arrive at an average time of just under 60 months, or 5 years of funding raised as drawn from this report by Sebastian Quintero of Radicle Labs. Comparing this back to a singular ICO campaign of 90 days you could say that the average ICO project raises the same amount of capital as an equity funded startup in just 0.4% of the time.
“Flood Capital” and some possible solutions
So how can newly formed ICOs handle this “flood capital” to gain investor confidence and help the team realize their vision. The short answer could be self-regulation in which founding teams are transparent and cautious on the capital flows to their respective projects. There’s always going to be outright scams, especially since we are still in the early days, but some capital filters can go a long way in distinguishing stronger projects. One possible solution are tiered raises over time subject to the performance of the project and wisdom of the crowds. There could also be a vested release of capital programmed into the ICO smart contract such that specific performance milestones will automatically trigger a specified cash flow to the project. We’ll save looking at these potential solutions for a different byt3 but as with any investment, it’s caveat emptor and some due diligence goes a long way. Depending on how you look at it, it’s still an exciting time for the public to conduct collective diligence and invest in the future of a decentralized ecosystem.
Disclaimer: I am not a financial advisor, this is not financial advice. These are merely my observations and insights about a market trend.