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Home Opinion Blockchain VC Says No to Initial Coin Offerings (ICOs)

    Blockchain VC Says No to Initial Coin Offerings (ICOs)


    Blockchain investor Travis Scher of Digital Currency Group has posted a querulous smack-down of Initial Coin Offering (ICOs) going on in the cryptocurrency world that support, for a large part, Blockchain startups. And this piece is a counterweight, a rebuttal – a retort of sorts. 

    To date, there are estimates that one quarter ($250 million) of all investment in Blockchain ($1 billion) has been conducted in this nascent sector, which has been turning heads in not only the deal flow streams of the Blockchain investment crowds but also the more traditional investment community. 

    Scher writes:

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    “I believe that ICOs and Appcoins are, broadly speaking, not an attractive investment nor are they likely to become one in the near-term.” 

    He’s adamantly stating that cryptofinancing is not attractive to Venture Capitalists (VC) and he’s right.

    It’s too disruptive for their own business model which was already taken over by crowdfunding in 2016

    “And in my diligence, I’ve repeatedly encountered four issues that make investing in new tokens— at least for now —very unappealing compared to traditional VC investing: 1) regulatory uncertainty, 2) high valuations/over-capitalization, 3) lack of controls, and 4) lack of business use cases,” he adds.

    Let’s address these points.

    1. Regulatory uncertainty is what allows anyone from anywhere who wants to make the choice to invest,  the ability to do so without being told they are unaccredited (not wealthy enough to play). Regulatory uncertainty allows for the ICOs to move at pace of innovation that is not tied to pencil pushers lobbied by big interest groups to create laws that inhibit or even snuff out the ecosystem. Governments are national – this place is global. SEC is moot for the most part as US investors are doing so with pseudonymity using Bitcoin which is not even considered money by the US government but rather a capital asset. 

    I would argue that the ICO community potentially does far better due diligence on itself and much better than any junior hire at an investment bank or VC – any shiny FINRA-licensed kid with an MBA – tasked to dig into something he knows little about.

    In the crypto-hangouts – particular at Bitcointalk where almost all ICOs are first broadcast, scores of net-savvy investors start googling the history of the founders and teams, ripping apart the code, hammering the theory, and generally kicking the living shit out of the concept – by the tens. Then they out scammers who end up shrivelling out the forum with their tails tucked and hang the ICO. You also have new companies like Smith and Crown doing great work analysing ICOs and others are now moving into that space and providing more centralised market intelligence.

    In terms of ‘breaking the law’ when it comes to spending your own money as you see fit in an investment you feel you can handle –  Obama has finally opened the doors slightly with the JOBS act and you don’t have to be an accredited investor or bike to work on Sand Hill Road to reap rewards any longer. And so it should be. The Americans are already three years behind the UK and Netherlands in crowdfinancing. ICOs are, in particular, have been a panacea to American investors (particularly those with a lot of unclaimed cryptocurrency) who want to participate. 

    2. High valuations/over-capitalization – If Scher wants to talk about high valuations and over capitalisation, let’s talk about the “growth at all costs” unicorns created by the VC community – manifested by the Sand Hill insiders that has made them and a few startup founders unbelievably wealthy while ‘unaccredited’ investors – or people on the outside – watch from the sidelines, hoping they might get some scrapings on the secondary market if they are lucky.

    In 2015, according to the Guardian:

    “…there were 82 $1bn pre-IPO startups in the US and a total of 125 worldwide and the combined valuation of all US unicorns was $486bn – more than the annual gross domestic product (GDP) of Austria, Colombia or South Africa – and not one has made any profit, as they are all concentrated on aggressively spending to expand their reach and thereby increase their valuation before floatation.” 

    And who wants to sit around for a year, piddling around with petty cash from an accelerator and listening to nicely intentioned’ but unpaid mentors blather about lean methodology – when an ICO can raise enough money to hire people to get it right. Blockchain developers are more rare than Pandas, and are some of the highest paid engineers in NYC with some demanding over a quarter million USD a year. This is not creating the next viral app using clever Javascript or Ruby on Rails, this is serious new science they have not even begun to teach in universities yet. It’s not cheap. 

    Scher writes:

    “Founders with ideas that would struggle to raise a $500k seed round from experienced venture capital funds.”

    ‘ Boohoo, they are raising too much money and it’s just NOT RIGHT because we think it’s overvalued’  is not really a substantive argument. Especially in a nascent sector such as Blockchain where everything and anything is highly speculative because few know where it’s going at this point – we are at the 1992 stage of the Internet here with Blockchain. 

    Look at it this way –  eight out of ten funded startups in your world still fail at the end of the day so it’s still hit and miss no matter where you invest. VC know this and they also play the numbers game. That’s why Fail Early Fail Fast is a mantra in the Valley. 

    “The only buyers in these token sales seem to be overly-enthusiastic early Bitcoin and Ether holders who feel like they are playing with house money, and have no basis for determining the value of these project or how much money they will need,” added Scher.

    They are playing with house money. Great! What else should they do with it? They were smart enough to invest at the right time in the right cryptocurrencies and have done well. They are largely, net savvy, young libertarians or engineers and technologists who built the systems. The idea that any VC has more ability to determine the value of a highly complex Blockchain project then the actual community who worships Satoshi Nakamoto, has deep understanding of the concepts, and crowdsources intelligence is highly laughable. 

    3. Lack of controls sounds like VC-inese for not having a boot to your neck (control) which is not considered by many entrepreneurs to be an incentive – why do you think there are so many bootstrappers these days? “Growth at all costs” is a misnomer of a VC mantra which really means, dilute them down and shut them the fuck up while we pump up the stock and get ready for the IPO.  I am not sure what lack of controls means. We already covered the regulatory side. 

    4. Lack of business use cases – this is probably the most ridiculous point. Many of the projects are open source – you know that niggly’ little issue that most VC run from because they are bent on proprietary IP and ownership models? Yes… we finally have a model for open source software and hardware projects to get funded instead of getting kicked to the curb by most traditional investors. Secondly there are plenty of great business models. has set up a foundation in Switzerland and are open sourcing all their software. They will not only have SDKs and APIs, the entire codebase will be open. They are not greedy. They are ethical guys and have earned respect in the Crypto community. They raised over $4 million in their ICO after being vetted by the community. And they plan to build solutions for the content industry – for video in particular  – and already have announced trials with content producers for next year. They plan to open it all up for third party developers to build on and create even more businesses. Their roots are in the freedom of speech movement which falls nicely with the ethos of the community. They will likely earn money by cutting deals with content producers, by offering paid for enterprise versions of their OS software (like Magento does) and maybe even build the next Steem. 

    Another project is InChain, who are doing an ICO to raise funds for insurance against hacking exchanges in the cryptocommunity, so the next time an Mt. Gox happens, people can recover and not get wiped out. This kind of Blockchain innovation in the insurance industry, funded by traditional means,  is going to take years to get past all the regulation, red tape, industry kickback, reticence from traditional investors etc. InChain plan it to not just have a PoC or prototype to show the traditional insurance industry, but a working product in 2017. 

    And seeing you dissed gambling in your article – Blockchain gambling startup vDice has a working product for their upcoming ICO, is founded by a founding core developer of Ethereum and has had their code audited by legend Peter Vessenes, former Former CEO of CoinLab, Inc and Co-Founder / Chairman Emeritus of the Bitcoin Foundation. It’s going to make a lot of money – and the Chinese cryptocurrency community is expected to invest heavily in this one. It’s a great business case.

    Yes, it is the Wild West,  and the way I see it, there’s quite a lot of Bitcoin and Ether profit floating around that is getting pumped into these projects so really VC is not needed. Sure some VC seem to think it’s monopoly money in the way people are earning it speculating… but it’s when it’s convertible to Fiat currencies, it’s very real. 
    Many of the speculators who are making a killing on the cryptocurrency exchanges are either sitting on it or playing the exchanges. And ironically, Bitcoin is not as decentralised as the Bitcoin Maximalists love to chant – half of all Bitcoins are in the hands of less than 1000 people and that’s a $10 billion market cap. They are called Bitcoin whales. And they are the ones manning the pumps for a large part of the $250 million invested via ICOs over the past year. 
    These new startups constructing on cryptocurrency are not perfect, there’s a lot of trial and error going on – a lot of experimentation, some huge fails and some big wins. But how different is it all really from the normal startup world?
    This whole space is still very young in itself and there are a lot of lessons to be learnt and people will feel or get burnt all over the place. I don’t doubt that.
    Some think it’s a bubble waiting to burst, but that’s rather unlikely – people have been saying that about Bitcoin since day one. And if any bubble bursts it’s going to be the Unicorn one – who hide ‘not profitable’ behind ‘growth strategy’. And are largely based on centralisation tactics which will likely be disrupted in the next waves of Blockchain-driven dencentralisation products. 
    Blockchain, many think,  can potentially alter the way we organise ourselves as people, communities and nations. We just don’t know exactly how yet, there are still more algorithms to be written, more math to be crunched, and a lot more people much smarter than me working on it to get there. And it’s not only about Blockchain, it’s also about the future of Open Source software, which often does not provide numbers investors like to see but is essential in the progression of innovation itself. 
    But it also takes money – and if all these profits being churned out of cryptocurrency can play a part in developing Blockchain faster and better then why not?
    It may not be VC money but who cares… don’t invest in it, if you don’t want to. But don’t completely write it off. 

    Disclaimer – the author of this article owns DECENT and InChain cryptocurrency bartered for marketing and PR works – and he sits on their advisory teams. He uses them as examples in this editorial only because he knows them from the inside and not in offering investment advice. 


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