Initial Coin Offerings (ICOs), or Token Generation Events (TGEs), have brought a new meaning to the term “crowdfunding.” With ~$4Bn cumulatively behind ICOs, the bulk coming in 2017, we can safely say a leveling of the playing field between accredited and non-accredited participants has taken place. To put that into context, KickStarter, the popular crowdfunding platform, has raised ~$3.3Bn since its inception in July 2012; granted that platform is primarily for smaller ventures, doesn't typically provide equity and supports mostly hardware-based companies.
Although ICOs still have a long way to go, its safe to say there is a place for ICO investing to become commonplace in a few years. U.S. Venture Capital (VC) funding is on track to break $40Bn for the second consecutive year in 2017, which dominates early stage fundraising, but ICOs may still have already passed a noticeable milestone, that of overtaking legacy seed and angel financing volume.
Many legitimate businesses face the dilemma of choosing between institutional investors, namely venture capitalists, or an ICO/TGE. “ICO” still carries a degree of stigma, and rightly so; there is no way to determine the amount of fraud in the marketplace, but it’s drowning out the legitimate businesses that are more than just pipedreams. This is not unexpected, any new innovation can be subject to abuse when the experts are limited, capital is abundant and regulation is unclear. Not unlike the dotcom bubble of the early 2000s, some ICOs are filled with great intentions to eventually build the hypothetically game changing “blockchain kitchen appliances” their $50 million token offering is touting. Trust me, I believe these teams are probably hacking away, day and night, after they’ve raised the equivalent of 1000x cash flows to create the prototype of the “blockchain toaster.”
With that as context, ICOs offer a number of benefits to the legitimate business, not the least being the opportunity to grow a product or service with non-dilutive, non-restrictive financing. Legitimate businesses meaning companies that have actual business models, actual clients, real revenues and are growing. Non-restrictive financing advantage is worth reiterating, ICOs offer a relatively new governance concept: a large financing round without a post-requisite participant, who would likely want a say in the future direction of the company or be a customer.
As an advisor to aXpire, a spend management blockchain company, I’ve seen value in a hybrid approach; raise an ICO while maintaining an incentivized board of experts, who are there to make the introductions and to provide the advice that will see a business thrive, not just have a successful ICO. The advisors not only provide industry introductions, but also are a sense check against all of the company’s marketing materials and roadmap. Importantly, these advisors must cover the gamut of technical, legal, industry and financial expertise to ensure a complete view of a business. This approach is somewhat of a middle-road between completely incorporating VC funding or completely raising through an ICO.
Venture funding and ICOs are not mutually exclusive, there are a number of blockchain companies that have included both approaches under one roof, Basecoin or Bitwala, for example. aXpire is also running a dual-track process of engaging institutional investors, who are familiar with the current blockchain environment, and who would be willing to back a company in that space raising an ICO. Having sat in on these institutional investor meetings, I have the sense that people just want to be involved in a company that is successful, regardless of its fundraising avenue(s). Established companies are able to offset some of that concern, as aXpire does, by demonstrating demand through real customers and revenues. There is still a greater element of perceived risk in ICOs, but that ultimately falls on the founders, as they structure their business around perceived future SEC, IRS and other regulations.
To conclude, ICOs/TGEs offer a number of significant financing advantages not otherwise available through institutional investors, or VCs. However, it’s not that always that cut and dry. Companies have to consider the implications of forming a company that’s likely to come under future scrutiny from the SEC, IRS and potentially others. They also have to consider the potential loss of a strong panel of executives, who could offer introductions and problem solving insights. There is a middle road through a dual-tracked fund raising process, or more immediately, an advisory network with expertise across various aspects important in the foundation of a business.