ICOs After The Gold Rush

After the gold rush

I love Neil Young’s After The Gold Rush. It encapsulated an era in a similar way to John Wesley Harding by Dylan. Yes, I know, I carbon dated myself there. That was time of getting real after wild excesses – which is what the ICO market is now going through.

In this post I try to peer through the fog to see what we might transition to after the ICO gold rush.

First, lets look past all the scams and market manipulation that I call Wolf Of Wall Street on LSD.  Lets look at the good part of the ICO phase, at the good ventures that would never have got funded the old way.

Bless those Bubbles

Whatever you call this phase – bubble, craze, hot market, irrational exuberance, gold rush – these frenzied deals enable innovation while burning through truck loads of investor cash. They are bad for (most) investors, but good for innovation and progress in society. This has been true for every wave of innovation from rail to Internet.

I categorise ICOs into:

  1. Total Scam.
  2. Hopeless but honest venture.
  3. Could be a great venture, but the value is in the equity more than the coin. When I see VC buying equity but selling coins to Jo Q Public, it is not hard to figure out who is the sucker at the table.
  4. Could be a real currency like BTC or ETH. This is about 1 in 1,000 – 999 failures but 1000x return on one or two winners. One candidate is Trutheum (see thread on Fintech Genome on Trutheum). Also possibly Civic and Filecoin (but I need to dig more into them).

The intent between 1 & 2 is different, but the net result is the same (burning through truck loads of investor cash). You can use simple filters for these.

Category 4 is an interesting game. You could invest in all Altcoins at ICO in the hope that you catch the one that makes it. This is not easy in practice. Murphy’s law says that the one in 1,000 venture that makes it all work does it’s initial raise in some different form and your basket won’t catch it and you are left with 999 duds and no 1,000x winner. Or you could do fundamental analysis to find that one in 1,000 winner; but this is really, really hard. The reality is that there are very few protocols. People often reference TCP/IP but there is only one TCP/IP and it is not used for speculation. I called this a mirage as long ago as December 2014. After 8 years, Bitcoin is maybe a really valuable protocol (I think it is, but risk is still there). I love IPFS and Filecoin, but it is unclear what problem it is solving. It is hard to see AWS storage price as one of the big problems of our time. Nor  do I buy that current Internet protocols are fundamentally flawed. For example, content addressing is better than location addressing but content addressing is possible today. Compare that to the scale of problem that Bitcoin and Ethereum set out to solve.

In short, Category 4 is “good luck, you will need it”.

Category 3 is where there is lots of opportunity and “only” 100x risk/return profile. That is what we explore next.

Regulated IEOs aka Security Tokens

Our thesis is that the next phase of the market will move to Equity or what might be termed IEOs (Initial Equity Offerings).  which have become known as Security Tokens. Once they become legal, entrepreneurs will be able to offer equity in ventures that have liquidity without waiting 10+ years to get on NYSE or NASDAQ. That is fixing a big, big problem. The Innovation Capital business today is fundamentally broken.

Regulation may or may not catch scams; I would bet on the ingenuity of scammers more than the diligence of regulators. Do your own diligence even on a regulated platform.

Security Tokens will enable honest entrepreneurs to raise capital more easily. This will be a big breakthrough. Today the fundraising process is totally broken for entrepreneurs. As the VC business grew big and professional, entrepreneurs kept on being told the bar had been raised:

“Come back when you have an MVP.

Ok, here it is.

Come back when you have PMF.

Ok, here is evidence from our early adopters

Come back when you have Revenue.

Ok, here are our metrics showing our Revenue

Come back when you have Profits

Ok, here are our metrics showing our Profits

Come back when your Profits are growing at faster rate.

Ok, here are our metrics showing our Q-Q profit growth rate

Ok, we are ready to invest.

No thanks. we don’t need you now.”

The sort of ventures getting funded through ICOs would never have got through that gauntlet. So we would not have Ethereum for example. Sure 90% will fail, but so what because the 10% that make it will change the world and make you rich. It is the old fashioned VC mantra but in the last decade so much money went into VC that it was no longer VC. VC had become Wall Street West.

In the traditional funding model, these are ventures that would have either not got funding the traditional Angel/VC route or would have got $100k Seed and then fallen into the Series A Chasm due to lack of capital to execute properly. In ye olde Dot Com bubble they would have raised $25m to $200m in a regulated IPO. Now they are raising $25m to $200m in an unregulated ICO. “Plus ça change, plus c’est la même chose”. Just under 20 years, one letter is different.

Which ones to invest in in category 3 is the big question. Personally I am happy to wait and not get hustled by FOMO. I don’t usually buy at IPO. I prefer to wait until there is blood in the streets (for example when Lending Club crashed). Just a market crash is not enough. The fact that the price was once $1,000 does not make it a bargain at $100. The best time to buy the good ventures from the Dot Com era was around summer 2002 and into early 2003 (when Apple and some other great companies were trading at cash value). I missed Bitcoin totally in 2009 because I was not hanging out on crypto forums. I was deep into Ethereum in 2014 but did not pull the trigger to buy a life changing amount. Maybe there is something like that offering a 1000x return today, but I don’t see it yet.

Raising money from Angels and VCs, unless you live in Silicon Valley and are wired to the big money guys, has been a lousy process. It is worse still if you are a woman or a minority. So the ICO is the entrepreneur’s revenge. But the ICO has overshot the runway and entrepreneurs are now giving investors a lousy deal and they can use SEC as cover to offer this lousy deal. Good ventures should be able to offer equity as well as coins and not just to “accredited investors”. The ability to give early adopters a financial stake in the future is a game-changer. Today only cash capital is rewarded. What if cash capital and social capital and intellectual capital were all aligned? Imagine Mark Zuckerberg’s next door neighbour at Harvard with the same simple brilliant idea offering the first 1,000 users a big % of the equity. He or she would be vastly wealthy and 1,000 people who made it happen would have had their lives changed. And Mark Zuckerberg and Peter Thiel would just be ordinarily wealthy folks not celebrity billionaires.

The regulatory rollout to enable IEOs will grind along slowly and be painful for the platforms going through the process, but the platforms that make it through the process will be very valuable. It will take time but we will get there. That will unleash a whole new wave of innovation. Ventures that are too risky for traditional VC because they have technology risk may get funded through IEOs. Imagine a high risk Biotech venture. If scientists could invest they can evaluate risk better than a bunch of finance guys on Sand Hill Road. Ditto for clean energy and other things that really matter to us. The earliest investors in Bitcoin and Ethereum were totally naive on finance but could evaluate technology risk.

After the Neil Young’s Gold Rush, popular pressure did finally end the war in Vietnam. After the ICO Gold Rush, we may get more funding for life-changing innovation.

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Bernard Lunn is a Fintech deal-maker, investor and thought-leader. 

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  1. Interesting thesis on IEOs! If that happens, eventually regulation may be implemented and IEOs would perform very similarly to IPOs. The only difference would be that IEOs would have a more global investor market (possibly). ICOs are popular amongst many new companies now due to the lack of regulation and changes to ICO could deter small companies from using this form of fundraising. I really wonder where ICO would lead to in the future! Would it be catered more to investors or to companies that need funds?

    • Would it be catered more to investors or to companies that need funds? It has to be balanced IMO. Was unbalanced for investors in VC age, then ICOs went too far in opposite direction.

      • So lets get this straight. Using an example from the good old days of manufacturing, company A says it has designed a widgit that will transform people’s lives and sell like hot cakes. Only Company A can’t get funding to set up a manufacturing line. So they sell IOUs that offer, not shares in the company’s equity, but a share of the widgits that will be produced. The investor believes the widgit will become a big hit so he buys the IOUs believing he can make a fat profit trading the widgit once they become popular. The company’s equity then shoots up, but only the company owners benefit from this?

  2. yes that does describe some ICOs, but not all should be “tarred with the same brush”. Some coins have genuine utility value. But some are certainly equity dressed up to look like coins.

  3. I do think this is a bad decision for filecoin to only accept accredited investors..

    There appears to be no reason for Protocal Labs doing this other than cozzying up to their rich friends.

    If they only want accredited investors, then why use an ICO to raise funds? Because they want to list it on the exchanges so the whales can cash out. Otherwise why not just use the venture capital method and the investors just wait until the company makes profit to receive their return on investment.

    Protocol Labs does still have 1 week to change there position on only accepting accredited investors.

    Agrello decided to relax their KYC checks just before there ICO start a few days ago.

    Here is a snippet from a short article that states the SEC has no authority over cryoto currencies or tokens as they are not considered t be a security.

    “· The SEC does not have the regulatory authority to impose regulations on cryptocurrencies. This responsibility falls to the CFTC, which is responsible for forex transactions.

    · The CFTC only cares about the regulation of currency exchanges such as Coinbase and the derivatives market that is arising from the currencies.”

    U.S. ICOs shouldn’t be scared of the SEC

    Full article (short read): https://medium.com/@coinjob/why-are-u-s-icos-scared-of-the-sec-272e2b60c1fa

    “Conclusions: As it relates to CoinJob, I am not worried in the least about SEC regulations, as there are none and the SEC does not have the authority to regulate this market.
    We are based in the U.S. and if U.S. citizens want to finance our ICO, bring it on. I invite other ICOs to take the same approach and for everyone involved to do their diligence to separate truth from fiction.”

    Hopefullly Protocol labs will not jepaordise the success of filecoin.

  4. Thanks Amerikiwians. You article makes a good rational case (I recommend it, the comments are also good). I think entrepreneurs raising ICO money today are being cautious by just excluding US “investors”. Methinks that is a passing phase and we will get to some more regulatory clarity soon – but we are not there yet.

  5. I notice that the Pillar Project started off banning Americans from its ICO but then had a change of heart half way through. They only raised about half of their ceiling in the ICO – maybe that’s why.

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