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Will ICOs Render VCs Obsolete?

A Silicon Valley pro dissects and debates the capital-raising question she’s asked most often

Siri Srinivas
Apr 30, 2018 · 6 min read
Artist’s impression of me destroying ICOs. Photo by VCG Wilson/Corbis via Getty Images

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VC math doesn’t translate to retail investors

We don’t talk about venture fund economics enough. Technology/startup investing is hard. A majority of investments go to zero because the odds of picking a winner are low. But these odds are baked into the way VC funds are raised and deployed. Venture capitalists can make a good number of solid bets and still make very good returns even if many of those bets fail — remember, the average VC investment takes 7–10 years to generate returns. VCs are generally good at patiently holding on (HODLing, if you’re in the know).

  • Can only make a relatively smaller number of bets.
  • May not want to take the risk that comes with the possibility of tokens going to zero.
  • May be more interested in short or medium-term returns.

$$ + Smart People Does Not Equal Success

What VCs know and the lay person may not is this: Piles of Cash + Smart People != Success. It takes more than smart people, an idea and funding to build a company. The current model of mega-fundraises for companies that are two people and a whitepaper is not always sustainable and will not translate to every startup fundraise — though, yes, there are plenty of exceptions. Whether or not you think the VC process is ideal, it’s often a Darwinian process of self-selection (discounting cognitive biases and herd mentalities, which exist and are factors).

Investors need managing

Companies that launch public token sales are bringing on thousands of token holders who now have to patiently wait and hold while the teams build their platforms or products. This leaves companies with the resources and institutional knowledge of a startup dealing with the demands of very mature public companies — reporting, audits, investor relations/babysitting. Companies have to then do the dance of keeping tens of thousands of investors happy — the exact reason why many startups have decided to stay private longer in the last decade.

ICOs did not invent equity crowdfunding

If crowdfunding capital could have disrupted traditional venture funding processes, the ball would have already been set in motion by companies such as Crowdfunder. Companies that are doing Regulation A+ offerings (which allow the public to invest in private companies) of security tokens are using laws that were made so as to sell equity in startups to unaccredited investors.

ICOs are for networks, while VCs invest in many boring industries

ICOs are meant for the very specific case of launching networks that need to dispatch tokens to sustain incentives and value transfer within those networks. Not all businesses create networks and therefore have little reason to launch an ICO or create an indigenous token.

The Carrot-and-Stick of VC fundraising actually works

For better or worse, VC fundraising sets up a long-term cycle of rewards and incentives. In other words, setting goals in the short to medium term, achieving them and using the result as the basis for your next fundraising sets companies on a planned, but flexible, growth trajectory. Sure, once and done sounds great for fundraising, but isn’t practical or easy to do when actually building an organization (unless you are Zapier).

The VC value-add

(Good) venture capitalists don’t just write you checks. (Good) VCs are, at best, students of industries and markets who spend years and decades on the sidelines watching companies fail, veer off course, recover, and succeed. A (good) VC can’t tell you how to engineer your product, but they can tell you how other companies dealt with the same issues. (Good) VCs bring in the 30K-foot view when founders are experts on their own companies. (Good) VCs are patient.

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