Can ICOs Disrupt Venture Capital in Asia? Or is it just another bubble waiting to burst?
It was only inevitable that the finance and banking industries would be disrupted by fintech companies. We have seen this happen with “unbanks” that addressed the needs of the underbanked population in Asia. However, with the rise of blockchain-powered companies, there is a new trend that fintech aims to disrupt, and that is venture capital.
Initial coin offerings, or ICOs, are somewhat like their regulated counterparts, the initial public offering (IPO), in that shares are sold to the public at a predetermined (usually discounted) price, and which are then allowed to float based on supply and demand. Only with coins or cryptocurrencies, the “shares” sold are not shares of equity, per se, but rather tokens that can represent ownership of cryptocurrency or other asset backing the token.
The region has no shortage of startups dealing in fintech and other areas where high-technology has introduced a lot of innovations. However, with companies launching their businesses backed by ICO funding, there is concern whether this new crowdfunding type is edging out traditional venture capital.
Being a fundraising activity, an ICO lets companies fund the development of their blockchain-powered services, and the ownership of tokens will guarantee the ICO buyers the right to participate in the company’s activities and benefit from the blockchain once the product is launched.
A venture capitalist would bank on the success of a company, in the hopes that the VC firm’s stake in the startup would significantly increase. Meanwhile, a token owner would also be hopeful of the company’s success, since the value of coins or tokens would also be dependent on the demand thereof (which is, in turn, dependent on how successful the product is).
Coins vs Shares
However, the main difference is that venture funding is dilutive, meaning that startup founders and other holders of equity (employees with ESOPs, for instance), will find their stakes in the company diluted after every funding round with traditional venture capital. With an ICO, meanwhile, it’s simply fund-raising, without having to give up equity in return.
This means that startups can simply start raising millions of dollars all without losing a single share of their companies. The question and the challenge for the region is whether this will edge out venture capitalists as the preferred means of fundraising for startups.
Mentorship and Network
While equity dilution is, of course, one of the downsides of venture capital, there are also intangible benefits that can prove to be very advantageous to startups. For one, there is mentorship. Most venture capital firms are composed of seasoned entrepreneurs and investors who have had successful exits and multiple ventures. This means years of experience and knowledge in their respective industries. With these VCs on a startup’s board, inexperienced founders can gain important insights and wisdom, which can help one’s company in its goals and milestones.
In addition, VCs would usually have their own network of portfolio companies, as well as other companies that can potentially work with a startup for better synergies. For example, a company wanting to break into the payments industry might benefit from partnering with an established e-commerce company. Simply raising money through a coinsale might not come with these side benefits.
Validation and Investor Benefits
Aside from the equity vis-à-vis token ownership debate, there is also the argument about continuity and longevity. 90 percent of startups fail, there is no question about that. For venture capital firms that have invested in failed startups, most would simply write these off as losses, as the failed investments