Throughout 2017, the newly minted, blockchain-backed initial coin offering (ICO) market boomed. Some industry insiders predicted that it signified a paradigm shift in early-stage capital financing and heralded a new golden age for startups everywhere. Others urged caution. By January of this year, over 1,700 startups had completed an ICO, raising over US$4 billion in the process. It seemed the positive predictions were right.
Then the cryptocurrency market plunged and the naysayers returned with a vengeance, proclaiming that ICOs and the bubble they’d spawned were coming to an end. Amid the fall though, a strange thing was happening. It turned out that the ICO market was continuing to expand, despite the challenging environment. For startups, this has led to a conundrum. Should they trust their future to the ICO market or seek traditional financing? Here’s what they need to know before making that decision.
Regulators close in
Despite the enormous sums of money being invested through ICOs, government regulators have been mostly silent – until recently. In February, the Securities and Exchange Commission (SEC) started issuing subpoenas to businesses throughout the crypto market. They’ve been interpreted as a warning from regulators that the days of easy money are nearing an end. The move certainly makes it appear that the SEC is in the early stages of a fact-finding mission, and that makes new restrictions and rules for ICOs look far more likely in the near future.
Traditional VC weighs in
Within the world of venture capital firms, reaction to the ICO craze has been mixed. Some have decried the market as an elaborate Ponzi scheme, and in many cases, they’ve been right. While legitimate companies may feel that they have nothing to fear, the fact is that they’re susceptible to guilt by association. With each new ICO black eye, companies risk permanent damage to their reputation in the public sphere.
Despite the associated risks though, some VC professionals see the continued rise of the crypto market as a foregone conclusion. Billionaire angel investor Chris Sacca opined that:
“I believe Crypto/Blockchain are real/here to stay. Extrajudicial assets/finance are inevitable.”
While that’s far from an endorsement, it does carry some weight when coming from a man listed at number two on the Forbes Midas List of smartest tech investors.
The ICO brain drain
While the lure of easy access to capital is a siren song that many entrepreneurs can’t ignore, there is another disadvantage to ICO funding. Put very simply, all you end up with is money. Unlike the traditional venture capital process, which grants startups access to a wealth of business knowledge and talent from the investor side of the equation, an ICO is nothing more than a DIY funding approach. For founders that believe in their products and ideas, that can be dangerous. Without experience to guide them, many startups burn through their capital with little or nothing to show for it, and that can crater the business in a hurry.
The hybrid approach
It is clear that the disadvantages and the sheer level of uncertainty surrounding the ICO market make it a risky bet for startups in the near term. For now, it’s still a smart play for startups to seek funding through more traditional means if they are able. Once they do, they can make an informed decision to raise additional capital through an ICO if they find it necessary and advantageous. By that point, they should have acquired the knowledge and talent required to make the most of the funds and turn their startup into the next big thing.
To learn more about the blockchain and how it is changing the world, read The Blockchain Solution.