24 July 2018
Tug of war: What is more promising – ICO or VC?
Alexander Tkachenko, founder of Venture Exchange, compares two sources of funding – the classic and the innovative.
In the IT sector there’s currently a confrontation between two forces – classic venture capital investments and ICO, a newcomer to this area. Let’s compare the pros and cons of these two investment tools and talk about how startups funding is likely to be done in future.
ICO is a kick for newcomers
ICO is a good chance for teams who don’t have a product yet, just an idea or a brand. This May, the blockchain startup Block.one managed to carry out a record-breaking ICO without a developed product. Many investors knew about the startup founders from their previous projects, so, in fact, they invested in a possibility of another success.
As for venture capital investments, they are now received by more mature companies. So ICO is more attractive for startups from the point of view of an easy access to capital.
Another advantage of ICO is the opportunity to form a community of future users, developers, and partners for the project. Based on the traded tokens, an ecosystem is built: besides keeping the tokens as assets, investors can also use them within the platform. For example, developers of bots and stickers for Kik, a messaging app popular in America, will receive payment for their products in the form of Kin tokens.
For projects with social mechanics, an ecosystem is as important as money. In these cases ICO solves several problems at the same time: gives both the funds and the opportunity to build a basis for developing the project.
Venture capital is a wise mentor
Unlike ICOs, where investors aren’t related to each other and are just token holders without taking an active part in the life of the company, VC funds de facto become co-owners of the business.
Together with their investments they bring their competencies and their business connections to the project. Often, they can influence the activities of the company to its interests – block transactions, appoint directors, etc. Sometimes this can save the company from crash, as it happened with Breathable Foods. It was pulled out of a crisis by a successful pivot done with the assistance of the investors.
VC funds, just like token holders, are interested in maximizing the profits of portfolio projects. But unlike the disparate pool of investors in ICO, they can influence this indicator directly.
VC investment has its own disadvantages. Sometimes, the investors’ insistence on taking part in the activities of the company results in a conflict with the team. Also, you should remember that, compared to ICO, venture investments are harder to get – you must prove that your project is viable.
Profitability and risks
ICO can show extremely high results at a given point. Sometimes, it’s a thousandfold return in a very short period. In VC the figures are much lower than those in token investments.
Both in VC and in ICO, the risks for investors are high. However, VC has its own filter to protect it from fraud and blind-alley projects – the funds’ expertise. Meanwhile, in ICO where anyone who feels like it can take part in the funding (with the exception of closed pre-sales like ICO Telegram) it’s hard to tell whether the investors are professionals or not. As a result, we often hear about unscrupulous entrepreneurs who raise funds for ICO and then just disappear with the money, like it happened with a startup named Confido.
Some countries are already trying to regulate the ICO market. However, I think that at the moment ICO still carries a much greater number of risks than VC investments.
The future lies in synergy
I think that ICO is not likely to become an alternative to venture capital investment. However, these two financing tools can unite. ICO will bring to the market its easy access to capital, while VC will share the expertise of experienced professionals.
Even now we see emerging funds that attract capital through blockchain platforms and offer security tokens – an equivalent of bonds – to investors. Tokenization solves one of the greatest problems of VC investment – liquidity. Funds can only receive a return after 5 to 10 years, while tokens are liquid from the very first day.
I think that as a result of the two markets merging, both the pattern of ICO and the pattern of venture capital investment are going to transform. Possibly, as soon as in 10 years from now people won’t ask themselves any more whether they invest in tokens or in share capital – there will be a single financial tool based on blockchain that will become an effective and secure solution for funding businesses.
Original article in Russian is available via the link.
24 August 2018
24 August 2018
12 July 2018
9 July 2018