Are ICOs really to replace VCs?
By Olga Grinina
Many, including me, have cited parallels between VCs and ICOs as major drives to fuel startups and foster innovation. However, in the post-industrial era, the distinctions and borders between these two seem to be a little bit blurred. Is ICO merely a new form of finance — accelerated and boosted by a wild crypto market — or an entirely new paradigm of fundraising with a unique mechanism that is going to replace traditional rounds of venture financing?
So what’s a good old way to raise millions?
In tech world, the capital has long been raised from venture capital firms in multiple rounds with each of them being a logical subsequent step from one to another depending on the specific stage in startup’s development and value increase. It’s well known that investors constantly evaluate the project depending on how the team performs, proof of concept, increased customer base. These are all the notions used every day in the VC world and they work perfectly well when applied to the estimation of probability of success — and therefore prospective investment.
Silicon Valley venture capitalists with years of experience note that what ICOs do now — massive money influx scale and a wide span of investors drawn in — is basically raising money at Series B /Series C stage, which is essentially wrong. These are traditionally the two stages when the lion’s share of capital is being drawn in and a larger investor community is involved. The startup already tested the waters, has a working product and might have started growing a customer base, which in itself presents a solid reasoning for seeking to raise a greater amount of money to put into R&D, marketing and everything else needed to maintain the product. The investment is essential to scale up and face competitors while winning a certain market share. The team — and investors — are now setting the goal of not merely breaking even, but making a net profit, and investment risk here is lower because the startup has already some revenue forecast based on performance. Normally by this time, there is a detailed business plan and therefore a good understanding of how to use the funds.
Are ICOs catching up?
Looking back at the majority of past ICOs it’s pretty obvious that the majority didn’t have an MVP at the crowdsale, in the best-case scenario there was a detailed GitHub page with lines of codes and a Team page with profiles. Surely, WPs would optimistically cite a detailed allocation of funds upon raising the soft cap. Sadly, there is hardly a startup that actually has any public responsibility when it comes to actual delivering on their promise after the ICO. Have you ever heard of a term sheet being signed? Well, in the VC world this is a must and no VC would invest without being sure that he has some power to hold the team accountable. Wouldn’t it be cool if those WPs at some point took the form of business plans with stages and detailed money spending spreadsheet? That would probably be the only of the ways to make ICOs legit.
Why not have an ICO at an Angel stage? Well, probably because at those early or seed stages there’s actually not that much to finance in. Angel investment is a typical stage for helping out the project to get started that provides basic financing for the concept research and start of tech development. Traditionally investment in tech has been raised in several stages. So why not stick to that approach and have a VC invest at the seed stage and after that — when there is a solid operating product that needs larger investment — run an ICO at Series B and C? After all, structuring the investor money flows in a conventional way known for years could be one of the ways to make the investment in blockchain mainstream.
