The New Alternative to Traditional VC Funding
Despite the number of ICOs decreasing, the dollars raised is still growing. It seems like ICOs have become mainstream. In 2018 Q1 over 7 billion USD was collected across nearly 300 ICOs. So more funds were raised in the first quarter of 2018 than in 2017. At the same period, almost 50 billion USD was raised across 2,661 venture capital deals. By looking at these numbers, ICOs does not seem like a tremendous player (at least yet) at the venture capital field, but the situation may easily change soon. So what are ICO benefits? The reasons are manifold. Let’s take a closer look at them.
ICOs are easy to organize when compared to traditional funding mechanisms. There is less regulation regarding ICOs than there is in capital-raising process of venture capital. The regulation of ICOs is still unclear and at developing stage, but many countries (e.g., Japan, Switzerland, Malta, Belarus, Gibraltar, Switzerland, Lichtenstein, Cayman, British Virgin Islands, Isle of Man, Singapore, Dubai) have taken a proactive role regarding ICOs. In November 2017, European Security and Market Authority (ESMA) stated the new rules to companies collecting capital in ICOs. ESMA advises companies to carefully consider if their activities are in fact regarded as regulated investment activities, such as placing, dealing in or advising on financial instruments, managing or marketing collective investment schemes or offering transferable securities.
ICOs as an Alternative Funding Form
While ICOs are usually thought as a fundraising mechanism for cryptocurrency projects, the investments raised in ICOs do not flow only to cryptocurrency projects, but to other blockchain projects as well. In venture financing, the most of the funds go to software projects. While both ICOs and traditional mechanisms have raised more dollars, the number of deals in both is decreasing, especially regarding VC funding. The decrease is most significant in first-time VC funding provided to companies. The number of deals has dramatically fallen from 7,331 in 2014 to 635 in 2018 Q1. The number of companies established has not decreased, so this means it is far more challenging to get funding for your start-up business in 2018 than it was in 2014. This setting makes alternative funding forms like ICOs more interesting.
The average of dollars collected per ICO is about 26 million USD in (Q1, 2018). The same number regarding traditional funding mechanisms is 18,8 million USD per a funding round. So apparently it looks like it is easier to raise money in an ICO than it is with conventional tools. However, this is not the whole truth. More than half of ICO funds collected goes to only ten projects, so just 3,5 billion USD is left for the rest 280 ICOs. So, the median is probably around 12,3M USD compared to venture capital funding’s 1,3–15M depending on the funding stage (1,3M USD being angel and seed investments). Summa summarum, ICOs do not compare poorly with VC. Actually, they compare pretty well as ICOs are usually organized in the early stage of the business.
Why are ICOs so popular?
ICOs are appealing to investors as they provide high volatility and good liquidity of funds as the cryptocurrency or token is listed in crypto exchange shortly after the ICO is closed. Besides, unlike stock exchanges, crypto exchanges are open 24/7, so the prices change in real-time. Venture capital investors must usually wait for years before the company is listed in exchange and stocks can be publicly traded. ICOs attract speculative investors because they provide the ability for quick profits and also enable small investments.
So ICOs can be considered as an excellent alternative to traditional IPOs because they are easier and quicker to organize and have generally good results compared to conventional venture capital funding. ICO is especially suitable for start-up companies as it is more difficult for them to get funding via traditional mechanisms.