ICOs vs. VCs’: 100s Shades of Grey

A provoking statement for an issue inspiring controversial sentiments: at the center of the debate is whether ICOs are competing vis-à-vis institutional & smart money (from now on VCs) to get the best investment tickets or, which I would support, ICOs are simply making VCs’ lives easier.

As a matter of fact, ICOs make it possible to betatest innovative projects by trustfully engaging brave stakeholders, instead of VCs overgoverning entrepreneurial spirits in exchange for short-lived pocket money. Whether the token is an utility (undoubtedly) rather than security (less obvious), ICOs invariably involve different types of stakeholders in the design and execution of new initiatives, whereas Founders and VCs duel to get the biggest slice of the cake (that being the economic value of the customers’ bodies)

To do so, performing ICOs unbundle the issuer’s business model into its more significant components and tend to implement a financial strategy consistent with the different expectations of various types of stakeholders (traders and users, to start with).. At some extent, one may argue that VCs overprice failure risk by being very aggressive when they enter an investment (first, be tight); secondly, VCs flatter managing founders by negotiating generous incentive schemes (indeed, VCs are no more than giving back a (often) negligible portion of their immense gains to those who made them possible). Third, what VCs are indisputably good at is Strategic Finance (i.e. raising money on public and private capital markets and/or introducing the target within the M&A arena) and that’s probably why they are still around.

The mix of the three conditions generates a sort of adverse selection trap, very similar to what has been going on for quite a few years (but blockchain solutions are rapidly paving the way for radical improvements) within the insurance business. By approaching risk management and financial planning with a rather simplistic tools’ portfolio, VCs aim at compensating the inherent risk factors by serially (i) overperforming on the good investments and (ii) unluckly overinvesting on the bad ones. In other words, VCs turn into comfortable companions for those that do not make it and a real pain in the neck (at least, until the first significant liquidity event will take place) for the good ones, consistently struggling to be the next decade’s stars.

Why, then, ICOs are partners better than competitors for VCs ? Well, no doubt ICOs help VCs run valuation matrix with a lower cost of capital: an early stage equity investment into an already tokenized project would, in most cases:

•        come after the evidence that the project’s betatest has been successful,
•        exploit the beauty of leveraging upon an established users’ community
•       have ample flexibility in the management of issue-related token reserves

Unexpectedly, ICOs seem to represent for VCs something very similar to what junior teams are for clubs competing in the national leagues: an inventory of skills; the gladiators under scrutiny in a Darwinian arena; a database for cheap replacement parts; finally, the ideal acquisition