The first real revolution in venture capital: crypto tokens

What it means and why you should pay attention

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Venture capital has largely remained unchanged since it was invented.

A few months ago I’ve compiled a list of the most innovative VC firms out there (link below). These are certainly important evolutions and innovations but the core mechanic has practically never changed.

And then, suddenly, while every one was trying incremental innovations.. the crypto revolution happened.

My single best investment was one that was unlike any other: I’m obviously talking about the Ether crowdsale that Vitalik launched in 2014, raising $18M. I think we’re now at 150x and going.

This was a totally new and innovative concept. Ethereum sold an initial supply of tokens in exchange of BTC to fund the development of the platform.

Given the fact that the tokens might prove to be extremely useful in the future in order to use the Ethereum blockchain and smart contract platform, people bought them with two intentions: in order to use them, and because they believed they would have appreciated substantially (as BTC did).

Crowdfunding was certainly not new, with already many equity-based crowdfunding platforms fully operational, but for many reasons it didn’t really succeed anywhere.

But the difference here was massive: the value had completely been removed from the equity of the development company and had instead been moved to the protocol being developed and its tokens.

For someone who has always invested in equity, that’s quite the change.

The era of crypto token crowdsales and ICOs

Since then, it has been a whirlwind of new currencies, blockchains and dApps being launched on different platforms.

Some have been exceptionally spectacular, like the DAO, others have been scams, and others have just been unsuccessful.

Why we should pay attention

I think there are three main reasons to pay attention to this new wave:

  • 1) Investing in protocols and not companies
  • 2) Problems with VC
  • 3) VC will have to move fast to capture value

1) Investing in protocols

Albert Wenger has a great post about this: Crypto tokens and the coming age of protocol innovation.

For the first time in history we have the technology to invest in the protocols themselves (via the tokens needed to use them).

This is just massive, and will open up a wave of development given the new economic incentive being available.

It’s extremely interesting to think about what it could mean, and one particularly cool interpretation is the fat protocol hypothesis from Joel Monegro.

I think this will be a big trend, but I also think there will be some very big successes being built on the application layer, and for those ones the ICO model might not be the best.

2) Problems with the VC model

Many teams have turned to the ICO route because of a frustration with the venture capital model.

VC is by definition very scarce (for good reasons) and thus not available to everyone.

Usually, the “everyone” referenced above means teams in the very earliest stages, teams that are distributed, teams that aren’t in the hot startup hubs and teams that have non-traditional backgrounds.

People got frustrated with this and are seeing ICOs as the best avenue to raise funding for their own projects.

3) VC will have to move fast to capture value

To capture the most upside, VCs always have to invest at the fringes. When the fringes go as far as to change the model, the only way is to adapt.

I think we will see VCs exploring this space and new models more and more as well as token-raisers go more towards a normal fundraising path.

Why this is awesome

More innovation

If more teams and projects can get non-traditional funding, we will see many more teams building crazy new things.

Non-US teams

ICOs and crowdsales seem to be perfectly suited to teams that are not in a hot startup hub, so these teams will probably end up benefiting the most in the short term.


Tokens are fully liquid from day-1. This changes the game massively.


Anyone can become an investor and prove that they can generate meaningful returns.

(I’m not exactly sure on how this compares to the public markets and hedge funds, but) it surely opens up the game to way more people than angel investors and people who have the right pedigree to raise a VC fund.

The problems

It’s not all roses, there might be some tulips too.

Useless tokens

With this new tool available a lot of people are inventing tokens just for the purpose of fundraising, even if their app has absolutely no need for a native token. Olaf Carlson-Wee illustrates this well in the podcast below:

Ether is valuable because there is an expectation that many more dapps will be built on the Ethereum platform and therefore many people will be in need of Ether to use such apps.

But, as an example, the Matchpool token will only become massively valuable if there will be an extremely high demand for it (or assumption of such in the future) — and this would only happen if that single specific app actually blows up. We’ve added quite a few layers of risk here and are getting much closer to a pure VC-based evaluation.

For some companies, a traditional VC route would be much more suited — but the hype is so strong that they can raise millions without ever being questioned by anyone or give out equity.

Misalignment of value captured / no equity

When people invest in a crowdsale, they are purchasing tokens that are usually not backed by any offline security or asset.

This means that if a dapp becomes successful, the token holders would only see an appreciation if the success mechanics generate a strong need for the token.

But in reality, the value could very well be stored in the equity of the company building the dApp as it actually holds the brand, the employees, the knowledge and could be the recipient of different revenue streams.

Were a company to be a acquired, the token holders would see absolutely no reward other than a potential hype-based fluctuation in the price of the token, while the founders would become millionaires.

Every time incentives start to become misaligned, problems tend to soon creep up.

One-time fundraising

Most of the crowdsales we’ve seen to date have no concept of multiple rounds of fundraising.
This to me seems completely idiotic. There is a good reason for diving the fundraising process in rounds: risk. You would be crazy to assume all of the risk of a company being successful at the very beginning of its existence, yet this is what most token investors are doing.

VCs instead buy a small piece of the risk at the beginning, and after a while have the luxury to re-evaluate and see if the company has completely failed to deliver on its promises or if they instead did well. The VC can then decide if they’d like to continue putting capital at risk.

This is one of the most blatant flaws of the token space I’m seeing, and I think and hope it will be solved soon.

Given that smart contracts are already being used, it would make sense that these contracts have built in mechanism for fund tranches based on objective metrics (pre-determined tranches are never a great idea, but they’re certainly better than a one-time full-budget investment).

Unsophisticated investors

Most startups don’t get funded for good reasons.

It seems that nowadays any random project can raise funding with a token crowdsale, and most of these projects do not meet even the most basic requirements to be an interesting risk-adjusted investment.

Contrary to popular belief, being a venture capitalist who actually makes some money for its investors, or even just being a non-money losing angel investor, is extremely hard.

Now, on the high of the immense gains made on BTC and ETH, unsophisticated investors think that many of these tokens are great investments, when in fact they are not.

Venture capital actually exists for a reason

Venture capital has been invented to fill a need, and has evolved and survived in its current model because it actually does make a lot of sense.

Getting professional managers to choose the investments and help the companies they invest in has been proven to generate amazing returns, for the ones that do it well.

Creating diversified portfolios makes sense.

Diving fundraising in tranches makes sense.

Only funding the very best teams in the very best markets makes sense.

And so on.

The help that companies get from VCs is also oftentimes non-negligible, and there’s a reason why the best teams want to pick their investors even in a very liquid situation like a hot deal.

So, doing away with the whole structure of VC seems to be too big and too irrational of a change in my view.

Anyone can end up on a “cap table”: in a typical crowdsale, the entity who’s fundraising has absolutely no say on who will end up being an investor. This holds true in the crypto world, and at the same time, the entity will have absolutely no idea who invested.

At the same time, none of the investors will be meaningfully incentivized to take an active role in helping the companies/protocols they invest in.

The argument that crowdfunding fans usually use is one of “community”, saying that by raising from a lot of people a company can create a strong community of people that are willing to help and promote a company. But in reality that’s rarely the case. People invest in many different things and usually have other jobs, plus they are most of the time unqualified to give any meaningful aide (see above).


There are quite a few scamcoins around, and with the amount of ICOs happening it’s getting harder and harder for investors to dig deep into the merits of each ICO.

It’s also easy for people to build hype for investments as every transaction is public but anonymous, so it could be easy to orchestrate sending millions of dollars in ETH/BTC and then backchannel them back to the investors in order to show that an ICO is successful.


To date, most crowdsales have been marketed as asset sales and have thus avoided regulation entirely. But the Howey test is always there and these are starting to look more and more like securities.

There is a real risk that regulators could step in and consider any type of crypto token offered in a bulk one-time sale as a security.

Additionally, any company which would like to have its token backed by some offline security (eg equity) will need to be in full-compliance of regulations, effectively removing a lot of the benefits of the model.

Where do we go from here?


Specialized crypto token funds

One certainty is the emergence of digital-only hedge funds like Polychain Capital.

These are brand new entities and players with completely new skills needed if compared to venture firms.

Naval Ravikant sums it up perfectly here:

These are the entities that will be able to make money in this new world, as I think most hobbyist crypto-investors will lose money as they won’t have the necessary information and potentially even access.

Traditional venture deals + crowdsales

We’re already seeing this with recent ICOs like Omise which has previously raised more than $25M from traditional VC firms and is now planning a crowdsale.

Startups will use token crowdsales just as the pro startups are using Kickstarter campaigns today, as a launch marketing tactic.

They will do an ICO only when the product is ready, the team is solid, some brand-name VCs are already backing the company, etc. — so that the individual crowd investors will feel much safer about investing.

I think this will be the default route for high quality teams.

Pre-ICO sales: going towards the traditional VC model

I’ve already participated in a pre-token sale with other angels and VCs before a public ICO has even been announced.

I think this will be the future. And the past, to be fair — as in the end this is actually very similar to the normal VC dynamic of today. Teams will look for smart money first from either the best people in the crypto community or from traditional angels and VCs.

I especially think that as the quality of the projects that have ICOs grows, this will become inevitable.

Equity-backed tokens

One of the most interesting things I’m seeing is the use of tokens as a representation of underlying equity interests in businesses and funds.

I’m thinking of examples like TaaS, a normal hedge fund which distributed equity-backed tokens and Blockchain Capital’s new fund, which is adding an evergreen fund offered via a token crowdsale to a traditional venture fund.

This is interesting as it makes a number of things easier in the fundraising process, but it definitely fits into a very clear regulated framework of the sale of a security, so we might end up not seeing that many of these.


The reality is that no one really knows what will stick. We will see a lot of interesting experiments of new and creative structures and technologies. Definitely a space to watch with deep interest.

This is such an exciting new space that I’m just glad to be alive at this time and able to witness and comprehend the scale of the revolution.

To keep track of all the new projects being launched in the space, I’m launching a newsletter called Token Economy very soon.

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