If crypto-currencies are the future of the digital economy, then we can surely say initial coin offerings, or ICOs, could be the future of fundraising.
More than half dozen of Indian startups are skipping venture capital funds & raising funds through ICOs despite the regulatory ambiguity, as investors take longer to scrutinize balance sheets and conduct due diligence before parting with their money.
Bengaluru-based blockchain startup WandX launched its ICO on October 27 and had already raised $430,000 as on December 4. Its target: $4 million. “This is an easier way to raise money. We raised about $400,000 in a month, which would’ve taken at least six months through a VC,” said Abhinav Ramesh, CEO of WandX.
WandX allows users to create and trade in financial products on crypto-assets through its platform.
"The best part is we we don’t have to give away any equity and people who participate are primarily cryptocurrency enthusiasts.”
Infact, In October, another Indian startup "Drivezy, peer-to-peer bike- and car-sharing platform, raised a targeted $5 million via an ICO launched in Japan with support from its investor AnyPay, a Japanese financial-technology company.
“We got pre-subscribed in 50 seconds after the launch,” said Ashwarya Singh, cofounder of Drivezy, also Bengaluru-headquartered. The Y Combinator-backed startup has plans to raise $15 million via a second ICO in January, and another $100 million through a third in April.
Founders Issue Digital Tokens
An ICO, simply put, is a new way of crowd-funding a startup. The founders raise money by issuing digital tokens in exchange for crypto-currency without the transfer of any equity. Investors can use the tokens to avail the company’s future services.
For instance, the token offered by Drivezy, Rental Coins 1.0, offers shared ownership of the fleet of cars that the startup will buy in the event of a successful ICO. Investors who buy the Rental Coins can either use the digital tokens for renting a car or receive payouts each time a car is rented out by others. The tokens can also be traded. Essentially, Rental Coin is proof of ownership of a shared asset — cars —making investors in the ICO eligible for a portion of the money the company earns by renting vehicles. Currently, Drivezy has around 1,600 vehicles — 1,100 cars and 500 two-wheelers —on its platform. “We intend to grow by three times through the two ICOs that we have planned in addition to the VC funding that we have raised,” Singh said.
Globally, there have been 234 ICOs this year raising more than $3.6 billion, according to ICO listing website Coinschedule. Though the first ICO, by MasterCoin (now Omni), was in 2013, this investment vehicle has seen an uptick this year.
Traditional offshore tax havens of Switzerland, the Cayman Islands and the Mauritius have been more welcoming of ICOs. In India, crypto-currency investment is not regulated by the markets regulator or any other agency.
Still, investors are cautiously bullish and believe that ICOs will persist as a form of fundraising despite the grey zones. “Blockchain (the underlying technology behind crypto-currencies) is here to stay and ICO as a form of fundraising is here to stay,” said Accel’s Reddy. “However, it would take 3-5 years for some of the blockchain ideas to take fruition because the ecosystem is not ready.”