Fundraising With Initial Coin Offerings Hot New Trend Among Blockchain Startups

One of the hottest trends among high-tech startups is using cryptocurrency to fundraise, a process called initial coin offerings. Forbes reported ICOs are “raising money at astonishing speed — amassing about $440 million over two years, mostly for developers of early-stage projects.” Billionaire venture capitalist Tim Draper told Reuters he is joining the ICO of a new blockchain platform called Tezos on Monday, which raises the question: What are the benefits of tokenized investing?

Most startups with ICOs are blockchain companies with their own in-house token systems, which are supposed to increase in value, kind of like traditional stocks. However, it would be an oversimplification to think of all ICOs as equity. Sometimes, especially in the U.S., they represent value beyond tender. “They represent value in their own system, like watts of solar power or ounces of pot,” David Siegel told International Business Times.

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Siegel, the Swiss founder of the blockchain platform company 20|30, plans to launch three ICOs in 2017. He already helped the fintech company Lykke launch its ICOs in 2016, which he claims raised tokens worth around 444,000 Swiss francs in 10 days, more than $451,543.

“Lykke was based on bitcoin, so they just started mining,” he said. “Lykke coins represent equity in the company, that’s something you couldn’t sell in the United States without regulation. ... In Asia, it’s a lot looser, so there are a lot more equity type tokens in Asia.”

American investment regulations are still measured by the Supreme Court ruling in the 1946 case of SEC v. Howey, which requires investors to register and get accredited. This makes it tricky for U.S.-focused blockchain startups to raise capital through cryptocurrency. But as long as startups play their cards right, careful never to advertise tokens that could be legally considered equity directly to U.S. investors, startups can use tokenized investing to tap into pools of capital beyond traditional firms.

“It’s used now almost as a replacement to venture capital,” California venture capitalist Alyse Killeen told IBT. “Any person can be an investor with an ICO market.”

Killeen practically wrote the book on blockchain investing. She contributed chapters to both the “ Handbook of Digital Currency ” and the “Handbook of Blockchain, Digital Finance and Inclusion.” Plus, she’s a regular visitor at the Satoshi Roundtable Private Blockchain Retreat, an exclusive meeting of cryptocurrency power players. Some critics have likened this retreat to the Bilderberg conference, which the Independent described as “the world’s most secretive gathering of global elites.” Now, Killeen is also considering a few ICOs to add to her portfolio.

“Founders are using the capital raised in ICO the same way they would use venture capital,” she explained. There are several examples of successful ICO startups, including Ethereum, the world’s second largest cryptocurrency market where ether tokens went from being evaluated at around $8 in January to $100 each in May.

Unlike bitcoin, Ethereum has a launchpad for making new cryptocurrencies and digital tokens. So noncurrency-based companies, like the music technology startup Voice.it, can use Ethereum to make their own tokens and raise capital through ICOs. The idea is that a decentralized network will help even the playing field, just a little, between young startups and the corporations that dominate the internet, such as Google and Amazon.

“There are new ones [ICOs] coming out every day,” bitcoin veteran Bruce Fenton told IBT. “It’s all going to come back down when we have a few collapses, which is bound to happen. But it’s still going to be extremely widespread. Even your local pizza shop, if it wants to expand, could have one.” Fenton is the founder of Atlantic Financial, the Bitcoin Association and the infamous Satoshi Roundtable. He said ICO is the future of venture capital and soon could replace the standard A-round of fundraising.

But not everyone in the industry is as enthusiastic about ICOs. Preston Byrne, chief operating officer at the blockchain startup Monax, described ICOs at a recent Enterprise Ethereum Alliance event as “ dumb money ” without any redeeming characteristics. “May God have mercy on the souls of those who invest in them,” Bryne said, according to CoinDesk. However, Fenton warned those who scoff at ICOs to remember the early days of bitcoin when it also was called a scam.

Killeen admitted there are several tradeoffs for both startups and investors when they take the kickstarter-style ICO approach. “Investors give up transparency and the ability to help lead the company,” she said. “Startups don’t get the [investors’] associated networks, the mentoring.”

On the other hand, since you don’t have to be an accredited investor or firm to buy digital tokens in an ICO, startups have been able to expand their reach and raise blockchain capital more quickly than they could have raised dollars or traditional equity options. Quartz reported one of the most successful ICOs, Gnosis, raised $12 million worth of ether in just 15 minutes. According to the research firm Smith + Crown, startups with ICOs raised investments evaluated at $70 million in April, and blockchain token investments continue to rise.

Yet even Siegel advises against investing too heavily in any one ICO until the market settles down. “You should not be overexposed,” he warned. Many startups essentially sell their unique tokens for ether coins, from Ethereum, hoping investments via ICOs will boost the in-house currencies and jump-start the startup's new blockchain system. Theoretically, a startup founder could now cash out on the same day his company launches. These tokenized investments raise new possibilities for blockchain startups, even though Siegel speculates only a few cryptocurrencies will survive the ICO boom.

“The actual tokens won’t be useful for a while, but they can be traded right away,” Siegel explained. “Put together a smart portfolio and just don’t look at it for a couple of years and you’ll probably do fine.”

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