The hype around ICOs and how they could disrupt Venture Capital
By Boris Golden, Principal at Partech Ventures
Those days, I’m getting a bit tired of all the hype around ICOs and how they could disrupt VC. I’m not a specialist of ICOs, nor an arrogant VC unwilling to accept to be challenged :), but here are a few reasons why I don’t believe that ICOs will be that impactful, although VC will (and needs to) be disrupted!
ICOs are without doubt very interesting, and understandably very trendy because of those compelling stories of companies having raised millions in hours (or even seconds) with what seems to be a magical trick, with no string attached and without the hassle of more traditional fundraising means. From there, it’s quite easy to assume that this will soon become the best means for startups to raise funds, and thus that VC will finally get disrupted, as many people seem to hope! But it’s probably not so simple yet…
- Don’t forget that ICOs are relevant only for startups that have tokens at the heart of their business model. That is, a very small proportion of startups those days ; and for the others, it doesn’t make sense to do an ICO (as of today at least).
- Beyond money, the big benefit of an ICO for token-centric projects is that it can act as a Kickstarter for their tokens & help kick-start the network effect often needed to give value to those tokens. But many startups having raised on Kickstarter end up also raising money with VCs, as they usually need more money, and more than just money, to deliver on their promise (because they sold something that was no ready and thus face the innovation challenges, risks & costs of startups). So even for those startups using tokens, it might not just be as simple as “ICOs vs VCs”.
- Also, reducing the friction to raise money for early stage companies can be very harmful. Indeed, it is very difficult to make an informed investment decision (even when it’s your full-time job!), especially for a very early-stage company which lacks tangible achievements. You need to: see a large number of opportunities to always calibrate & benchmark, gain experience in assessing companies, carry out due diligence, evaluate the risk/reward of a deal… That’s also why VC is a job :)
- And anyway, be sure that ICOs will increasingly get regulated to protect potential investors, fight money laundering and so on. So what’s happening right now is probably not sustainable, and taking advantage of a temporary lack of regulations (which could happen quickly as China has already banned ICOs).
- Now, the recurring question “Will ICOs disrupt VC?” looks a bit awkward to me right now, as AngelList is probably a bigger disruptor to VC today. And I tend to believe that more credible candidates to VC disruption will likely emerge. But that’s clearly very early to tell and ICOs might evolve to address those limitations.
- The real underlying point being probably that people actually expect VC to be disrupted since it clearly needs an upgrade. Why? For instance because: average VCs’ financial returns are low / typical VCs’ value add to companies is deceptive / behavior of VCs with entrepreneurs is often not satisfactory / etc. And with all the media hype, ICOs might seem like the perfect & compelling candidate for this role.
- So a more fair question might be: what’s the future of the VC industry? With capital becoming more abundant those days, new mechanisms or platforms to raise money emerging, the rise of data/AI-based automation of sourcing/screening/assessment, etc, VC as it exists today will for sure change significantly in the next decade. That would make sense as middlemen don’t seem to have a bright future anymore!
- But VC is mostly a people business so this will most likely not be enough to kill us as easily ;) And more importantly, don’t forget that a key part of a VC’s job is to actually support & bring value to his portfolio companies (that’s a key topic, for another post). Adding real value to companies (beyond the smooth talk) is already increasingly a key element for VCs to differentiate, but I’m quite sure that it will soon become mandatory to strive & even survive in the mid term as a VC…
- Ultimately, if you assume that sourcing/assessing could be mostly automated with AI, and that finding money to invest could become a near commodity (none of the 2 being an obvious future at this stage, just to be clear), then one could wonder whether [investing in] & [supporting] companies will still be intertwined jobs in the future. The big advantage of the 2 being done by the same people is that it creates a quite natural & healthy alignment of interest between the two functions. However, there might be less reasons in the future for it to be this way… maybe?
That’s only my early thoughts on a complex topic, so please feel free to challenge, contradict or add your own perspective in the comments. And thanks for reading!