It’s been quite a journey for the crypto world. Promises of swings that mirror Bitcoin’s meteoric rise to success seem to have fizzled out as markets become cautious and regulators of many developed countries take a stand.
We look at Initial Coin Offerings (ICO) and how they have emerged as an alternative to traditional methods of fundraising.
Market takes a considerable hit
The cryptocurrency market has been a roller coaster ride for investors and industry enthusiasts in 2018, experiencing major swings not commonly seen in traditional markets, from the euphoric highs of December 2017, when the price of Bitcoin almost broke US$20,000, to falling to a low of less than US$6,000 in February 2018.
This is seen in this graph from Cryptocurrencychart which highlights the year-to-date performance of the biggest three cryptocurrencies (by market capitalisation) i.e., Bitcoin, Ethereum, and Ripple.
The changing ICO landscape
The ICO market, cryptocurrency’s equivalent of a mainstream IPO, has also undergone its fair share of changes and stabilisation, partly thanks to pundits and bad-behaving investors engaging in “pump and dump” strategies. In essence, “pumpers” artificially inflate the price of a less popular token with false positive news to hype it, and then “dump” it when the prices have increased, often causing the tokens to plummet.
Pump and dump scams are strictly illegal in traditional securities markets, but the largely unregulated nature of the cryptocurrency market has made it an attractive environment to unscrupulous individuals seeking to exploit the hype around everything blockchain.
But the ICO industry has now taken more structure with blockchain companies introducing lock-up periods, reserving more shareholding, and seeking funding from more credible – often institutional – investors, that will hopefully provide more stability to the current ICO landscape.
A changing investor profile
According to PwC, close to US$14 billion was raised in the first five months of this year in ICOs, while according to Bitcoin.com in February 2018, 84% of fund flows into ICOs have come from private and pre-sales i.e., before the tokens were made available to the general public.
Among this list of private investors are a growing number of Venture Capital firms (VCs), looking to get in on the action in an industry that holds considerable promise.
A landmark ICO that mirrors this new shift in investor profiles was seen in Telegram’s fundraising efforts, targeting VCs and top figures in the investment community in the private sale, which left no tokens available for public investors in the primary market, and private sale investors selling their tokens at considerable profits in the secondary market.
The private sale originally targeted a raise of US$1.2 billion, but was oversubscribed and eventually closed at US$1.7 billion.
The VC advantage
Despite making the whole ICO process less “decentralised” (which refers to tokens being dispersedly owned by a large number of retail investors), VCs do bring several advantages to the overall ICO process.
VCs have better access to networks, capital (and hence helping to shorten the pre-sales fundraising), and often get involved in strategic processes to ensure that the company reaches its goals post-funding. VCs’ considerable experience in assessing founding teams in the entrepreneurial sphere gives added confidence to the external community that companies funded by them have gone through strict due diligence and have higher likelihood of succeeding.
From the VC perspectives, they see promise in ICOs for a number of reasons including the potential for exponential growth in an unprecedentedly short amount of time. Another key advantage is the fact that this secondary market is highly liquid. This means that they can realise gains more quickly in this rapidly growing market given the clear exit strategies i.e., ,as compared to tying up vast amounts of funds in a unicorn startup and waiting for either an IPO or an acquisition in the typical venture investment’s model. For ICOs, this is also after taking into consideration the lock-up period i.e., the predetermined amount of time that large investors are not allowed to sell their tokens/shares.
The future should see the industry finding a happy medium in terms of stability with the pre-sale and private sale stages taking as much, if not more, importance than the public one. In the end, it’s all about profitability and sustainability of a business model that benefits the startup sphere in the long run. The attention gained from VCs during this process will also act as strong validation that segregates viable businesses from those that are joining the ICO process merely to gain traction or a quick profit.