What is the Economic Role of ICOs?

Our focus is primarily value creation in blockchain businesses. In that context ICOs are both promising and relevant. We view ICOs from an economic perspective as a crowdsourcing mechanism similar to Kickstarter and Indiegogo. You are getting a discount off the perceived value of an asset or good similar to discounted products in a crowdsourcing sale. Whether the ICO-supported business survives or their tokens increase in value is similar to the risk of getting discounted products in a crowdsale that may never ship or become abandoned by the company (I’m looking at my 3 Pebble watches).

While VC valuation is based on banker’s and VCs estimates of new industry valuations, which history shows is completely unknowable in advance. What was the valuation of a network business like Uber before the category existed? Similarly ICO token valuation is arbitrarily determined by the company founders. For VC-backed companies the market ultimately steps in at IPO time to adjust pricing based on supply and demand. Over time real valuation emerges but it can take months and years. Similarly ICO as an event determines supply and demand for the token and many startups have to adjust supply (effectively discounting) or close the ICO early (effectively underpricing). Intrinsic token pricing is determined over a longer time just it was on the VC-backed side for both Facebook (up) or Pets.com (down). Volatility for ICO tokens is high. So is for VC-backed businesses. In fact more IPOs failed than ICOs. So far, of course.

ICOs (and crowdsourcing) provide working capital without giving away equity and that alone can be a massive competitive advantage from a startup perspective. Cost of capital could me lowest in the industry. Also there is a logical limit how much money startups can raise in VC markets due to valuation. You can’t give away more than you are worth. In the ICO world you clearly can as your limit is not your valuation but share of future revenues, transaction costs or whatever it is the ICO tokens represent. The business will retain complete control of the enterprise equity, therefore its strategy, growth and pivot options. That alone is priceless. Then there is the issue of liquidity. ICOs on established exchanges are clearly the most liquid startup investments. In contrast, VC-backed or even crowdsourced investing has extremely limited liquidity in the early stages. Businesses spend a lot of time in VC roadshows that takes leadership time away from running the business. ICOs so far need limited management time and can be handed to specialists.

From an investor perspective whether ICOs are riskier than VC investments and crowdsourcing is hard to tell. I lost money in pre-IPO companies and crowdsourced companies that folded before they shipped. I believe they are in similar risk category.

ICOs are unregulated so far (so is crowdsourcing) as an investment vehicle and I’m sure some regulation will come. The best ICOs proactively address likely regulatory issues by using KYC/AML compliant offerings and exchanges, strict governance over the use of ICO funds and independent audit of the business. When regulation comes they will already be ready.

The point we are raising is that both businesses and consumer/investors can benefit from exploring alternative investment approaches that are easier to process at a much higher efficiency.

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