Ken Berger is the co-founder of Crypto Explorers and a former Executive Team Member at MIT/Stanford Venture Lab.
Henok ‘Hen’ Tekle is a founding partner of AlphaChain, an ICO advisory and investment firm. A notable blockchain angel investor, he is one of HybridBlock’s core advisers.
Here are parts of their joint presentation at HybridSummit 2017, where they discussed the notable differences between ICO investing and venture capital:
In venture capital (VC), the investor owns a piece of the company. This type of investor tends to be an institution, and venture capital icos venture capital typically require an accredited investor (especially in the US). There are requirements concerning how much money you make and how much you lose. That’s a common characteristic of venture investing.
Initial coin offerings (ICOs), on the other hand, are very different. When you send your Ether or Bitcoin to invest, you get tokens from that project. However, those tokens don’t translate to ownership.
Having these tokens doesn’t mean you own the Ethereum or have a share of the Ethereum network. It only means that you have access to that network so that you can take part in ICOs. This can be beneficial because lots of projects launch tokens through Ethereum.
The value of a token depends on the access it gives you as it becomes more and more prominent. Its value also depends on scarcity, as the supply available for purchase diminishes as the network rises in popularity.
With ICOs, the big difference is the community which is much more comprehensive. It’s not limited to a small group of wealthy investors. It’s the general public. Anybody, no matter where they are from or what they do for work, can go log on to exchanges and platforms like HybridBlock and participate in an ICO.
When a VC firm invests in a company, liquidity is controlled in terms of when the money can come in and when you can exit (which is usually when the company is sold). In addition, venture capitalists typically have specific returns expectations. If you are not making these returns, you are accountable for that and you could get in trouble and need to provide the investor significant compensation.
In many VC situations, the money does not come until after a long time. It could be 8-10 years or longer. Sometimes it comes within two years and very seldom sooner than that.
ICOs, on the other hand, have faster liquidity. With venture capital, it could take years. You must wait for a liquidity event or for the company to have an IPO or be acquired. In an ICO, once tokens are listed on exchanges you can trade them and see your ROIs.
With ICOs, you are free to buy and sell at any time. There is disruption of the traditional startup funding model in the sense that tokens permit people to have a liquid share of the projects much sooner compared to venture capital.
As soon as tokens get listed on exchanges, they can be traded. If the value of your tokens rises, you will see your ROI. There’s no need to wait years for a liquidity event.
3. Idea Evaluation
Generally, with VC-funded investments, you always need a disruptive idea. It must be scalable otherwise it is just not going to fit any of the VC’s standard models.
In a VC firm’s evaluation of a potential investment, the team and advisors backing the startup are very important. Who is in fact lending their reputation to this project, and why? How involved will they be in the operations and the direction of the company?
Even if you have a great product, that is not going to be enough with VCs. If you only have a project, that’s not going to work. They fund real companies. If it’s just a product or a project, then you will probably be rejected. It’s very important that it’s a real company.
When ICOs are evaluated, it’s important to look at their community numbers and engagement. This indicates how popular the project is within the cryptocurrency community. Go to Telegram or Slack, for example, and check the engagement by reading the comments and seeing how active the discussions are.
Right now, we are still in the very early stages of this market and the potential of these tokens to rise and substantially increase ROI for investors is huge. The team, its advisers, and use case are all very important criteria for determining how legitimate the project is.
The next difference is how valuation is determined. How do you valuate when you’re raising the money? What is its valuation concept, and what is the worth of the company?
There typically isn’t any foundation in place at present to do the risk assessment and allocation that VCs do when they value a startup. In ICOs, developers set the valuation by determining how many tokens to create, and how much are going to be available to the public.
In the world of venture capital, the ones who determine pricing are typically the investment bankers. However, sometimes these investment bankers don’t know much about the latest technology and may not be able to properly valuate a new concept when there is little else to use as a benchmark.
With ICOs, a startup must determine how many tokens it will create for the duration of the project. How much of that supply is most likely to be offered to the public for the ICO?
In addition, they need to decide just what to do with unsold tokens. Do you keep them or burn them to transfer more value to the investors in your project?
Lastly, the startup doing the ICO should also decide what percentage will go to the different components of their project like research, marketing, and development.
Want to learn more about the differences between ICOs and venture capital? Check out the video of Ken and Henok’s full presentation at HybridSummit 2017 here.