Noting venture investors’ rising interest in ICOs, Pavel Korolev, the founder and CEO of Pulsar Venture Capital, analyzes the opportunities and challenges of this new method of financing.
While some say that ICOs will break venture funds’ monopoly on startup funding, a growing number of these funds are experimenting with token sale. Since fundraising through ICOs can be arranged differently, traditional venture capitalists now have a window of opportunity. In the past six months, the market has seen several cases where a ‘slice’ of fund portfolios was sold in cryptocurrency.
Venture capitalists can no longer overlook the ICO phenomenon: In July 2017, for the first time, ICOs provided more funding to startups seeking capital than venture funds did, and the trend has been growing stronger ever since. Since the year start, according to the Coinschedule ICO tracker, startups of all kinds have attracted $3.2 billion of investment through ICOs.
Meanwhile, a study by Silicon Valley Bank indicates that, in the second and third quarters of 2017, ICOs accounted for 90% of investment in blockchain projects – for which this instrument was primarily intended.
In theory, ICOs organized by VC funds provide new opportunities for all participants in the process: the fund itself, investors, and projects.
Global monthly amounts raised through ICOs (Jan.-Oct. 2017)
Source: Coinschedule
For the fund, ICOs is an opportunity to raise funds and to get involved in projects which could not fall into their venture orbit before. For large investors, they are a way to use cryptocurrency assets. For projects, ICOs are not only an additional funding method: they may mobilize a community to support the project in a long-term perspective.
In practice, launching an ICO is not easier for a venture fund than for a startup. Among the questions that VC funds still need to answer are these ones: Can one and the same fund raise money from both traditional “fiat” investors and ICO investors? How will the exit mechanism look like in this case? What will investors get when one of the portfolio companies will be acquired?
The market has already witnessed the first cases of ICO failures — but this has not happened yet with ICOs conducted by VC funds.
True, this might be simply because there have been few fund ICOs so far, compared with the incredible number of startup ICOs. But this might also indicate that ICO investors tend to be more receptive to token sales carried out by VC funds than to startup ICOs. The market is still testing ICOs as a financial instrument, so the future will tell which type of ICO will establish itself more firmly.
In startup ICOs, investors are particularly disturbed by the significant regulatory risks. No one wants to get his name associated with an illegal fundraising operation. Besides, the terms of the offering are rarely favorable to investors.
For example, the company’s obligations to token investors are much less ‘binding’ than those to shareholders. Even security tokens (as opposed to utility tokens) may not make an investor a full-fledged company shareholder. And this lack of investor protection will remain until tokens are not equated to securities.
For ordinary investors, ICOs have a curious ‘side effect:’ the unprecedented democratization of tech investment. When conducting an ICO, a VC fund lets virtually anyone become a minority ‘shareholder’ – and benefit from the future success of the fund’s startups.
Recent examples of funds having conducted or preparing to launch an ICO
- Blockchain Capital — This venture fund conducted an ICO in May 2017 to launch Blockchain Capital III as an experiment of “liquid venture fund.” Some $10 million were raised within the first six hours. The fund will subsequently invest in ICOs of blockchain projects.
- Blockstack — This US-based decentralized Internet and developer platform has facilitated the launch of Blockstack Signature Fund, a $25 million fund backed by several VC groups. A token sale took place in October 2017. The fund will invest in apps built in the Blockstack ecosystem.
- Finshi Capital — This fund with Russian roots, but registered in Singapore, completed its ICO in September 2017. It claims to have raised $21.4 million at $1 per token. The fund intends to invest in blockchain projects.
- Pulsar Venture Capital — This internationally-oriented Russian fund launched its ICO in November 2017. The funds raised through the ICO will be partly invested in 29 tech startups within the fund’s portfolio, and partly go to new investment in the fields of IT, IoT, blockchain, cryptocurrencies and advanced materials.
- Starta Accelerator (which is associated with the Russian venture fund Starta Capital) claims to have collected $5 million through its ICO in July 2017. The funds collected will go to further support Eastern European startup s in the New York-based accelerator.
- SPiCE Capital — This British fund launched its token pre-sale in October 2017 without disclosing the targeted amount. Similarly to Blockchain Capital, they aim to create a “liquid venture fund” and change the traditional venture capital model.
Pulsar Venture Capital is a Russia-based fund operating internationally. Mr Korolev has been working in the field of early-stage VC financing in Russia, Western Europe and the United States for more than 10 years.
