How Cryptocurrency Is Changing The Game For Startup Investors
By: Sam Ameen
6 Dec. 2017
With Bitcoin and cryptocurrency going mainstream, startup founders and investors are starting to adjust their fundraising and investment strategies. This year was that of the Initial Coin Offering (ICO), where startups raised funding by creating and selling their own coins/tokens, instead of the traditional method of selling equity.
ICOs started as a way for technology that doesn't have an underlying business model to raise funding. A perfect example of a technology like this is a protocol (like the Internet).
The ICO trend started to skyrocket in June, as early adopters took advantage of being the first movers. Ninety-three percent of their projects were funded, and for some of them, they managed to raise tens of millions based only on a basic business plan (known in the industry as a whitepaper).
However, over the past few months, we’ve seen the rate of successfully funded ICOs start to decline, with investors getting smarter and less likely to fund speculative projects. The adoption rate of cryptocurrencies is increasing, however, as more companies are starting to add Bitcoin as a method of payment. Expedia, Virgin and Microsoft all currently accept it, while McDonalds and Wal-mart are odds-on favorites to adopt Bitcoin in 2018.
How are founders changing their fundraising strategies?
Jane Lippencott is the cofounder of the cryptocurrency ZenCash, which is based on a private and distributed blockchain platform for communications, transactions and publishing. She feels that founders should have the foresight and discipline to refrain from ICOing at an early stage because, "doing so exposes careless or uneducated investors to high risk, and burdens teams with unnecessary pressure to demonstrate price returns on an abbreviated and unrealistic timeline."
The general consensus is to first raise traditional angel and seed rounds to achieve product-market fit. Afterwards, however, Lippencott advises founders to explore "opting to ICO, instead of raising a Series A or Series B round, as it could make perfect sense. Especially, because entrepreneurs can simultaneously raise substantial non-dilutive capital, acquire customers, and build a community."
Maxine Ryan is the cofounder of Bitspark, a blockchain remittance platform for money transfer businesses, which recently launched the token, Zephyr. She encourages founders to conduct thorough research before launching an ICO to understand the regulations. Ryan said, “as more startups are considering this route to raise funding, founders should closely study the difference between an ICO and a Token Sale, as there are specific regulatory requirements which affect both.”
Token Sales generally refer to the creation of a Utility Token, which provides a specific use case within the startup's ecosystem. ICOs, on the other hand, can be recognized as issuing a security based on the underlying company, which has significantly stricter regulations.
More professional investors jumping onboard
Even though the number of ICOs is slowing down, interest from investors is increasing. Established investment firms are now adopting cryptocurrency as a legitimate asset class, which is fueling additional growth, and more importantly, credibility, for the industry.
More on Forbes: Planning To Do An ICO? Don't Forget About Taxes
CME Group is launching a Bitcoin Futures investment product this month, while JP Morgan looks likely to offer their clients exposure to Bitcoin via this method. For hedge funds, according to CNBC research, there are now over 124 funds which solely focus on cryptocurrency, with this number rapidly rising each day.
While in the venture capital scene, leading firms like Sequoia Capital and Andreessen Horowitz are starting to invest into ICOs. Innovative investment methods are being developed, too, like using SAFTs (Simple Agreement for Future Tokens).
How do investors see the trends evolving?
Jehan Chu is the managing partner at Kenetic Capital, a blockchain investment platform. Chu predicts that “the 2017 vintage of ICOs with $100-$200 million hard caps will soon give way to the newer, sleeker, more efficient and sustainable 2018 model. Ten million dollars will be the new $100 million, and we’ll see ICOs not only broken up into stages with milestone deliverables in between, but also equity raises working their way back into the equation for later-stage funding options.”
Simon Dixon is the CEO of BnkToTheFuture.com and is an active investor in the industry. He's bullish on the future of ICOs as they "produce an excellent way for protocol technology to reward its users and benefit from its adoption."
Dixon predicts that more large businesses, that already have traction and customers, will start to tokenize their ecosystems and communities. We've started to see this trend rising already, as publicly listed companies, like iCandy Interactive Limited, are starting to create their own coins.
Dixon's advice to founders is, “prove what you can do with traditional investment first. And then if you get traction, explore if a token fits into your model as a way to build a great network, rather than raise capital."
Want to optimize & scale your startup? Founded by VCs, Betatron invests in promising startups, refines their business models and fast-tracks them to grow and scale over 4 months.