ICOs, Treasuries, and Game of Thrones

Why the industry is not ready for another bull market

Published in

FalconX

6 min readOct 30, 2018

A recent BitMEX-Token Analyst report on token treasuries exuberantly declares that initial coin offering (ICO) teams “essentially made out like bandits…ICOs have clearly been a phenomenal success, to such an extent that even a further significant fall in the value of Ethereum (ETH) will barely make a dent into the success.”

When we talk to founders who recently raised in retail markets, though, we hear a very different story. Many tell us that their runway has been cut in half, they can’t hire the developers they’d planned on, and that they felt like they shouldn’t have done an ICO in the first place.

We listened, and we decided to investigate ICO treasuries a bit deeper to deconstruct this profound disconnect.

We took a detailed look at the treasuries of 100 ICOs that raised a total $1.6B¹. At a glance, the BitMEX insights checked out. The ICO market is, in aggregate, sitting on gains:

Amount Liquidated ($1.3B) + Remaining Balance ($458M)- Amount Raised ($1.6B) = $167M Net Treasury Gains

By looking closer at the data, though, a different picture emerged.

ICO Treasuries: Lucky Lannisters and Unlucky Starks

We can identify the biggest ICO winners and losers by examining treasury balances between the time of raise and today. We’ll call the top 10% of treasury gainers the Lannisters and the bottom 10% of treasury losers the Starks.

For the Game of Thrones uninitiated: the Lannisters are a family that’s very wealthy, that — at least at the beginning of the series — you’d be very lucky to be born into. The Starks, on the other hand, are a family that is somewhere between quite unlucky and cursed.

The Lannisters have 206% returns on their raised assets and command 52% of the market’s treasury gains.

Not a bad outcome.

So what does it take to become a Lannister?

The answer is surprisingly straightforward: these teams raised when the price of ETH was low and withdrew a substantial share during the early 2017 bull market.

On average, they raised when the price of ETH was just $38 and withdrew at an average price of $112. They’ve been in the money for a while, and aggressively withdrew 61% of their ETH. After conversations with some Lannisters, it’s become clear that their dominant financial strategy was, “Convert 12–18 months of runway to fiat, wait for the price of ETH to double or triple, then sell”.

The Starks, on the other hand, have not been so fortunate.

The Starks have lost 66% of their treasury — an average $8.7M and literally years of runway is gone. They absorbed 31% of the market’s treasury losses.

The Starks raised at an average price of $690 and it hasn’t been moving in their favor. They’ve only liquidated 19% of their treasuries. Now that they’ve lost so much, it will be wildly difficult for these teams to execute on their vision for the world, and for us to benefit.

Here’s the sad truth: Starks and Lannisters aren’t all that different. Both groups have employed the same tactic: withdraw once the price of ETH is multiples higher than it was when I raised. This has led to two drastically different outcomes: The Lannisters accrued outsized positive returns and the Starks timed the market poorly and accrued outsized losses.

Why should you care?

It’s not just Lannisters and Starks that are accruing outsized gains and losses. 93% of ICO treasuries have outsized gains or losses (greater than 5%)⁴. 50% of ICOs have losses. However, most startups are not in the business of taking on financial risk. Shouldn’t they primarily be preserving this capital to deliver on their investor promises?

This is crazy.

The Lannister and Stark story — in which treasury management is a reaction to the fluctuations in the price of ETH — is common across ICOs. If everyone’s post-ICO strategy is to simply react to the price of ETH, we’re destined to see teams get lucky or unlucky. ICOs will never become the great, meritocratic equalizer we had all hoped for. We need to get smarter.

Is your treasury bleeding out?

Some teams hold on to significant sums of ETH for ideological coherence, and we see their point. Many are directly working to displace fiat money with cryptocurrencies. For these teams, it’s important to keep in mind that treasury management isn’t about generating profits. It’s about underwriting a roadmap. Balance.io Richard Burton put it best: “Your $100 million ICO is not a success. It is a debt to the community. You owe us a $100 billion protocol. Good luck delivering.”

For teams that have lost significant portions of their treasuries, it’s not too late. Several professional fund managers have embraced crypto and can craft portfolio strategies that balance operating needs and a deeply-held hope for the future of decentralized networks. We recommend embracing these fund managers back.

In order to make ICOs more resilient, they need cohesive treasury management strategies; without this, it’s just a spin of the wheel.

Special thanks to Jeff Bussgang of Flybridge Capital, Kevin Zhou of Galois Capital, Robin Lobo, and to the many others that offered their insights into this posting.

Summary Stats:

FalconX is an Accel Partners, Flybridge Capital and Lightspeed Venture Partners backed team that’s makings crypto markets smarter. We’re fortunate to work with and connect crypto’s smartest founders and investors.