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The Summer of ICOs: VC Implications

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Medium Startup Grind | Jeff Bussgang | Aug 28, 2017

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Goldman Sachs and CB Insights recently reported that startups have raised over $1 billion in Initial Coin Offerings (ICOs) this summer — more than the total amount of venture capital raised during the same period.

At Flybridge, we are wading into this uncharted territory as a result of one of our portfolio companies, Enigma, staging an ICO in the coming weeks.

Many investors in the ecosystem that we respect have shared their thoughts on the power of the blockchain and cryptocurrencies to disrupt many industries (and we share those views) but few have discussed the downstream ramifications to our business. Hence, the purpose of this post.

I won’t attempt to provide all the contextual background regarding the blockchain, cryptocurrencies and why they represent such a profound innovation in our world.

Others do a good job of that. Instead I will make a few observations about how an investor might think about the impact of ICOs / token launches on the venture capital industry, in particular, and some of the downstream ramifications that need to wrestled with.

Need for growth capital.

A company that can successfully raise money in an ICO may never need venture capital again. Most of those companies will still require seed capital to assemble their team and fund a year or two of initial development and experiments.

Perhaps, when things settle down a bit more, those companies will even raise series A capital from traditional institutional sources to expand the product features, beef up the operations team more fully and make progress in finding initial product-market fit.

Early stage entrepreneurs will also still likely value experienced advice on company-building from seasoned venture capitalists. But once entrepreneurs have their initial team and product in place, a few smart advisors around the table and the social proof required to attract great talent, why would they raise additional dilutive equity capital if they can raise non-dilutive capital through the sale of tokens?

See:  The ICO Governance Deficit

Put aside the frauds and hucksters — time and transparency will cause them to shake out — and obviously not every business model is a fit for an ICO. But many are. Good teams creating something of real value around which they can build a community now can tap another source of scale capital available to them.

I wonder, for example, if our portfolio company, Codecademy, would have avoided its latest financing round and instead created “CodeCoin” in order to incent contributors to software development lesson plans and a marketplace for coding content? In these early times, some startups may be hesitant to pursue this path because of the uncertainty and perceived risk.

But once the regulatory and systems infrastructure for ICOs is in place and the friction is reduced, it will become a more common means of raising growth financing, representing a disruptive force for later stage investors. In short, token sales allow early stage companies to skip the series B round and beyond.

Shift of value from equity holders to token holders.

When a company that has raised venture capital creates a token and raises capital in an ICO, there is a real risk that value is being shifted from the equity holders to the token holders.

In fact, that is somewhat the point — a community is created and value begins to accrue to the participants in that community. The hope is that the early stage investors select companies that have a business model that takes advantage of the growth in the community and the ecosystem around it.

The ICO generates excitement and valuable incentives to contribute to the ecosystem which accelerates its growth and, as the ecosystem grows, the company has a cash flow formula that allows value to accrue to the equity holders of the corporation not just the tokens. But that balancing act is a tricky one and not guaranteed, particularly because business models and cash flow formulas are often hazy in the earliest stages.

Save the Date:  [Nov 16, Toronto Event]: New Frontiers in Capital Innovation – ICOs

Further, not only does substantial value accrue to the community but control and governance over the underlying technology and protocol accrues to the community and token holders as well.

As Sarah Tavel pointed out in a recent tweetstorm, for a company trying to stay nimble and have the flexibility to run a lot of rapid experiments, the very existence and power of the community may reduce degrees of freedom during the search for product-market fit.

We typically advise our portfolio companies to avoid taking on strategic investors at an early stage for this very reason. Entrepreneurs who embark on ICOs may similarly want to be careful before empowering their community of supporters too early.

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The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with both social and investment crowdfunding, alternative finance, fintech, P2P and online investing stakeholders across the country. NCFA Canada provides education, research, industry stewardship, and networking opportunities to over 1600+ members and works closely with industry, government, academia, community and eco-system partners and affiliates to create a strong and vibrant crowdfunding industry in Canada. Learn more at


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