Blockchain technology is here to stay. There has been a major influx of capital into Initial Coin Offerings (ICOs), but I don’t see VCs disappearing anytime soon.
At Fast Track VC, we speak with thousands of qualified startups that are all hungry for capital. The overall number of startups has increased, but according to Fortune, the number of deals that VC firms are doing has not, which means that there is simply not enough capital flowing to feed them all. Only a small percentage of these startups receive the funding that they are seeking, which leaves a considerable number to fail or seek other options.
Keep in mind that these are qualified startups—which for us means having a complete minimum viable product (MVP) already in the hands of early adopters. The startup should also have already started generating revenue. There is only a small chunk of entrepreneurs seeking capital who meet those requirements. If you were to remove these filters and consider any entrepreneur raising capital, it results in a massive number of startups with wide-ranging likelihoods of success.
ICOs allow anyone with the ability to make a website and fancy whitepaper to raise capital from investors around the globe. While this might be seen to some as “efficiency,” this also means that true due diligence often goes out the window and the quality of investment decisions plummets.
Inexperienced investors can be sold the dream by startups but often simply do not have the knowledge and resources to investigate the true risk of an investment before proceeding. These startups that investors access via these ICOs may not even be capable of success. There can be many reasons for this: an inexperienced team, lack of skills to develop the technology, poor financial planning, insufficient market research and a host of other key success indicators. The general populace is simply not equipped to quality these startups effectively.
Scammers have taken advantage of easing of capital flow by creating phony ICOs to rob unsuspecting investors like the “JPM Coin or Rothschild Family LCF Project” that were coins claiming to represent these organizations. China has recently implemented aggressive policies to crack down on these thieves by banning ICOs and shutting down exchanges. Many believe that this is short term so that the country can implement regulations. The U.S. and Canadian securities regulators have also begun investigations to determine what ICOs could qualify as securities—which means that they would be subject to all the same restrictions and requirements as other public securities —and the truth is, most of these ICOs are not adhering to these laws.
Another key difference between VC investment and ICO investment is that there is typically a big difference between owning equity in a startup and owning its token. VC is straightforward and offers equity an agreement to a per cent ownership of the company. ICOs, on the other hand, can be far more ambiguous and even anonymous, offering a token or digital currency, which are meant to be equivalent to shares in the firm but are still largely unregulated, leaving investor protection at the door. These ICOs can be hacked and have been several times, or others have turned out to be completely fraudulent. A large price to pay for what is perceived liquidity.
With increased liquidity comes volatility, equalling risk to the investors. In Fast Track VCs case, when an investor offers a $10k investment, they are going to get a return when that startup exits. In a traditional VCs model, when an investor offers $10k they will get a return when the fund matures and the investments liquify. It is particularly important to our team to identify opportunities with clear exit paths. In an ICO example, when an investor offers a $10k investment they could get a return as soon as they can convert the cryptocurrency to another. This ease of liquidity results in very volatile prices that increase the risk of the investment. This is a far cry from a partnership mentality where VC and the entrepreneur grow the business and benefit together. A VC truly has skin in the game and is motivated to help the business succeed.
Even Ethereum’s co-founder Vitalik Buterin said it himself during an interview with Korean outlet JoongAng Daily and JoongAng Ilbo, saying “There are also not very good incentives for people to produce information to help people determine which projects are worth participating in.” There is a clear need for intermediaries to shine a light into the foggy world of investing. It is in a venture capitalist’s best interests that their investees get a return. To do so, we have layers of filters that ensure only the very best opportunities are selected. Throughout the selection process the startup’s strategy is evaluated, along with the quality of the technology and stringent due diligence of their financials. A great VC will act as a partner—not merely a source of cash.
Investors want to minimize risk and are willing to pay a premium for intermediaries and due diligence. Because of these major differences, ICOs will not completely replace VCs. In fact, our team at Fast Track VC is ready and willing to take investments in cryptocurrencies, once it is regulated.
Rob Boardman currently leads the Investor Relations operations for Fast Track VC, a global platform that enables accredited investors to co-invest in technology startups with high growth potential.