To ICO or to Venture? That is the question!

Following our recent event “Distributed Futures; Blockchain, tokens and ICOs”, Partner Carlos Espinal shares thinking around the recent increase in successful ICOs and what that means for the future of venture.

With the number of successful ICOs (initial coin offerings) that have been completing in the last 12 months ($1.5Bn raised in 2017 alone), some have declared venture capital on its dying legs.


“I think the Sequoias of the world will go out of business. I think all the big VCs are done. The role isn’t there anymore.” Brock Pierce, Founder of Blockchain Capital.

Is venture dead? While worth posing, I think the question is inherently incomplete, as it conflates many ideas into a simple debate for impact. In this post, I’m not hoping to declare one type of investment as the winner (or loser), but rather, to showcase where each has their place — and where the models might even be reconciled or combined.

Firstly, there is a difference between the mechanism/structure investors use to invest in a company, and the value-add (if any) which the investors bring to the founder, alongside their financial investment. Another way of thinking about it is to think of Venture Capital as a bundled product, combining capital, advice and assistance (e.g. with hiring and recruitment). From this perspective, ICO’s represent one further evolution in the commoditization of capital and the beginning of the de-bundling of venture capital — and perhaps even progress for LPs, measured through liquidity (see Spice VC). From the capital point of view, an institutional investor, typically a VC, in theory, can invest via any mechanism/structure (eg. crowdfunding, ICO, etc), but there is a reason why they prefer (for now) some structures and this partly has to do with governance & institutional restrictions (which is usually imposed on them by their LPs and from prior experience of where things can go wrong) and partly due to economic return alignment (more on that below). A non-institutional investor (eg. someone participating in crowdfunding), by contrast, has fewer limitations and thus can invest in whichever structure she or he wishes to.

From the relationship point of view, a founder circumventing traditional pools of institutional capital of high quality (let’s put aside those less value-add investors which generate some of the pain founders feel when raising), might be passing up more than just a source of capital. They may also be inadvertently relinquishing key industry/financing relationships, as well as investor experience that cuts across industries and founders they’ve worked with in the past.

Thus, the original question of whether to ICO or to pursue traditional Venture could be broken up into these parts that are included in the conflated question:

1) What does the investor(s) bring to the table above and beyond their capital? Do you need that value-add for the specific project being worked on?

2) How many investors will be allowed to invest in Token sales / ICOs by their LPs and get comfortable with the idea of questionable liquidity to fiat in the short to medium term (thus forcing founders more towards crowd-funding via ICOs and at the exclusion of traditional VC)

3) Will the ICO/Token-Issuance deal-structure be the preferred investment structure over traditional equity/convertible rounds in the next 5 years for professional/institutional investors due to reduced complexity?

4) How will governance evolve in the ICO world to capture some of the best practices which have been honed over years in the VC world, within the ICO world?

In the words of my colleague Kyran Schmidt —

The question of governance is an interesting one and I think we may well see evolution in structures so that token builder incentives more closely replicate the traditional incentives provided by venture capital — e.g. milestone-based financing. You could even see blockchain-based smart contracts as an enabler for that e.g. capital is only sequentially released to a foundation or developers if certain milestones are hit (network usage, transactions processed, etc).

My colleague Tom Wilson has this to say on this point —

I don’t think the primary driver behind higher governance in ICOs will necessarily be VCs’ LPs, but it will likely be a driver as the market matures and LPs understand the space more. I think that many of the key governance matters (information rights for example) actually help companies rather than hinder and hence why they’ve become standard in all financings and will find their way into ICO docs etc. Good governance can actually align interests and ICO companies should look to incorporate rather than fight against such rights.

I also think another driver of higher governance in ICOs will, unfortunately, likely be a large high profile failure (i.e. a team, ‘company’ or protocol developer, that has raised a large amount on an ICO making off with investors’ money) — this will not only drive the market to get hotter on governance matters but will inevitably drag the regulators and legal system to look into regulations around ICO offerings (this will probably happen quicker in jurisdictions where it’s possible to offer to non-sophisticated investors).

So, what do I expect to be the outcome over the next few years? Firstly, I think that there will be some mapping of traditional investment best practices into ICO structures, secondly, I think more and more institutional investors will get comfortable with investing in the new structures and assets being created by ICOs, and lastly, as an industry, we will develop better ways to leverage relationships with token developers, token holders and sources of capital.


Have you turned away from raising through venture and opted for an ICO? We’d love to hear your thoughts. Get in touch via Twitter @Seedcamp

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