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 seems like an even weirder version of Wolf Of Wall Street.  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

Our thesis is that the next phase of the market will move to Equity or what might be termed IEOs (Initial Equity Offerings). 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.

IEOs 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, it 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.

Image Source.

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

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Crypto equity via ICO and the other innovation chasm

 

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Are you a bull or a bear on this question?

– Crypto equity via ICO is the secret to unlocking innovation capital and is the bridge across the chasm between crowdfunding and public market liquidity. This is the bull case.

Or:

– Crypto equity via ICO is a haven for scamsters and needs to be heavily regulated. This is the bear case.

Today we shine a light on that question. First we outline the bull and the bear case. Then we ask some experts to give their views. Bias disclosure: I am a bull, but having seen a few waves of disruptive change I know that change takes a LOT longer than people think and that the early unregulated wave of any disruptive change has a lot of what are politely referred to as “sketchy characters” and less politely as scamsters.

The other innovation chasm

The old saw is “if it ain’t broke, don’t fix it”.

The corollary, for entrepreneurs, is “if it is broke, find a way to fix it”.

The innovation capital business is broken.

Most entrepreneurs understand the chasm between MVP (Minimum Viable Product) and PMF (Product Market Fit). The low cost to build MVP increases supply, but real demand does not change that fast, so lots of MVP ventures fall into the chasm (i.e. they fail).

The next chasm is less well understood. This is the chasm between PMF and Liquidity (via an IPO on the Public Markets and failing that via trade sale).

Today, we don’t see this chasm so clearly because there is a very expensive bridge across it – in a few locations. The very expensive bridge is provided by the big PE/VC Funds. Uber has raised over $8 billion and is still supposedly not ready for an IPO. That is an expensive bridge a) for the Limited Partners (aka the LPs aka the real investors who pay the PE/VC Fund Manager their 2 and 20 cut) and b) for the entrepreneurs (faced with all those preferential equity terms that toss founder and management equity to the bottom of the stack).

Not only is the bridge very expensive, but it is only available in a few choice locations. If you are in Silicon Valley, no problem, there are lots of expensive bridges. If you are in New York, London, Singapore, you have a few bridges. Outside those centres you are scrambling and doing so in the knowledge that some entrepreneur in Silicon Valley just raised 10x what you raised and is planning on using that to crush you.

It gets worse. Unless you do your IPO on NASDAQ or NYSE, you will face a discount. Look at the valuation discount of great companies trading on reputable stock exchanges all around the world. So now you have a second very expensive bridge operated by the “bulge bracket” investment bankers (such as Goldman Sachs and Morgan Stanley) who you use to “take you out to IPO”.

So, yes it is broken. The innovation capital business does need fixing. Whether some variant of the ICO is the fix is what we now turn our attention to.

Crypto equity via ICO 101

ICO = Initial Currency Offering.

It makes you think of IPO. That means it also makes regulators think of IPO.

Yet it is C for Currency, not company shares. You buy a Crypto Currency Token that you can use on the network.

Some examples of ventures that have been funded in this way include:

  • Storj
  • Lykke
  • Ethereum
  • ZCash

In all cases, traditional VC were not in control. Sure they could invest alongside everybody else. But they had no information advantage.

The Howey test (from an SEC legal case from 1946) is basically – if it looks and acts like an equity it probably is. Many ICOs fail this test, putting them in the regulatory cross hairs.

Crypto Equity Bear Case

It is very simple to raise money via an ICO. This will bring out honest entrepreneurs who are fed up with the current way of raising capital. It will also bring out crooks. It already has. So far the losers have been people playing with found money. For example if you invested in Bitcoin in 2009, putting some of those profits into Ether in 2014 seems pretty easy, even if you follow it up by losing on the DAO in 2016. It is quite different when Joe Q Public is invested from earnings that took 40 years to accumulate and which he is banking on for a comfortable retirement. If ICO scales, more crooks and more Joe Q Public actors get involved.

Crypto Equity Bull Case

Crypto Equity – done right helps ventures get across both chasms:

  • Chasm 1 between MVP and PMF. The investors are often also the users. They use the tokens on the network. So they help get the venture to PMF.
  • Chasm 2 between PMF and Liquidity. The Crypto Currency Token is traded. Speculators provide liquidity.

The fat protocol thin app thesis

This thesis was articulated by Fred Wilson of Union Square Ventures in August 2016. I urge you to read the whole post and the very informed comments from the community. If you don’t have time, these two pictures paint a thousand words:

IMG_1153

IMG_1154

 

 

The original thinking, from 18 months earlier and, amazingly prescient being  a few months even before the Ethereum ICO, was from Naval Ravikant (founder of Angel List who we have written about here, here and here).

What do the experts say?

The experts we reached out to are in what I call the “Other BBC” space (Bitcoin Blockchain Crypto), so they will be inclined to a bullish case. If you have an alternative view, please let us know in comments.

My questions to them are:

  • Use Case Suitability. Is ICO only suitable to businesses at what USV call the fat protocol layer? This will be very few companies. Or could the ICO, with some modifications and regulations, be used for any company? If yes to the latter, what do you see as the essential modifications and regulations?
  • ICO Lessons. What key lessons should entrepreneurs, bankers and regulators draw from the ICOs that have happened so far?

Use Case Suitability

From Fabio Federici

“I think we need to distinguish between two types of tokens. On one hand, we have the tokenization of equity, where the token does not serve any specific purpose in the product/protocol but rather represents a digital form equity as we know it today. While this will improve liquidity and efficiency, I don’t believe this to be a paradigm shift.

On the other hand, we have decentralized blockchain-assets, ranging from currencies (BTC), over commodities (ETH) to application-specific tokens like Golem (a decentralized AWS) or Storj (a decentralized Dropbox) (see @ARKblockchain). These are just some examples blockchain-based assets, where the value of the network is captured by its users, rather than a centralized entity – and that is what will power the next phase of the Internet. I believe that the most exciting use-cases are yet to come. Just like it was hard to imagine Google, Snapchat or Uber in the early days of the Internet, it is impossible to predict the applications that decentralized blockchain protocols will enable.”

From Oscar Jofre  (see our review of his Korecox venture here).

“I am a bull/bear crossover on this subject because of the lack of oversight even by the industry to make sure proceeds are used in a manner that will not cause a domino affect of disgruntled coin holders in an empty network.

Not everything needs regulations but given that the retail market is just learning of the crypto currency, the industry needs to mature so this can be a very viable method for companies to utilize.  Unfortunately at the moment we are not seeing that and my bear comes out because I am seeing first hand, how companies are using ICO as a form of equity raise and not having a care if the person purchasing their coins makes any return on that investment.”

Richard Olsen of Lykke:

“In future, any company will be able to take advantage of the ICO route. No regulatory changes will be necessary, because Lykke will acquire the necessary legal licenses and future ICOs can happen under the Lykke umbrella, www.lykke.com

ICO Lessons

From Fabio Federici:

“I think it is important to distinguish between the tokens representing pure equity, and blockchain-based assets that serve a purpose in a protocol. While the first is just a digital version of what we know today, the latter represents a new type of asset class.

Also, one should always take a close look at each asset before making a decision, whether it’s building on it, investing in it or regulating it. Many factors play into the evaluation of these assets, from the aforementioned purpose to the fundamentals, the code, the team and many more. We are still in the early days – ontologies and (e)valuation methods have yet to be developed.

The main lesson for me is to keep an open mind and evaluate each token or asset individually. We are in the midst of the rise of a new asset class that will change the world.”

From Oscar Joffre

“ICO’s are here and need guidance. They are not used to harm but to really bridge the large funding gap we have globally for companies.  The industry can choose to be proactive and self-regulate, which in the end will be better than regulators injecting in.”

Richard Olsen of Lykke:

“The new future has started – entrepreneurs, bankers and regulators have understood that ICOs are a new reality and are essential funding tools. They combine cost efficient funding with building a motivated network of supporters.”

 Conclusion

Crypto Equity is a gamechanger – if done right.

Those three little words –  if done right – cover a lot of complex detail.

We can leave that to regulators in each jurisdiction to create their rule books. That can take a lot of time and will devalue the frictionless cross border nature of ICOs today. Or the community can create a self-regulatory code of conduct as Oscar Jofre suggests. We have opened a thread on Fintech Genome where this initiative can be crowdsourced.

http://genome.dailyfintech.com/t/crypto-equity-via-ico-self-regulation/965

 

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Bernard is a Fintech thought-leader & deal-maker.

Get fresh daily insights from our amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email.

2017 Tech, Strategic, and Investment trends in WealthTech

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Watson helped me write this post. I fed him all Daily Fintech posts from last year and all the conversations on the Fintech Genome and gave him access to all my Tweets, Quote Tweets and Replies (he said he couldn’t access my Linkedin interactions; are they gated?).

Paolo Sironi and Susan Visser, would welcome such a use-case of Watson’s capabilities; but for now it is only in my dreams that this happened which I dare to share with you today since it is “Charles Dickens season”. I don’t qualify as poor in the conventional social understanding but I am poor in cognitive tech resources for my Fintech thought leadership.

Last year in December we issued a Warning (just before the traditional year-end predictions)

The truncated message from the myth of Icarus, is that it is dangerous to fly high; but the forgotten message is more important for Wealth management: “It is equally dangerous to fly low”.

It is Not Safe anymore to continue “business as usual”. This is a Warning.

The warning is still very valid and the only clarification I’d like to add is that when we talk about “Wealth Management” don’t just think we are referring to services offered to mid to higher end clientele. This category extends to any level of “wealth creation” that can be derived from small amounts of conventional currency savings, or a low digital credit score. It also encompasses the Capital Markets infrastructure and the regulatory environment which sets the rules of the game of wealth creation at a wholesale level.

End-users continue to push the transformation boundaries. Fintech startups, incumbent institutions in financial services, Financial software vendors, Telcos, and Cloud service providers, are responding to this unstoppable trend. The old adage “If it aint broke, don’t fix it” isn’t anymore valid. The Icarus warning “It is equally dangerous to fly low” encapsulates the reality of our era that is breathing down our neck “Danger to become obsolete”.

For our smartphone readers, I am confining myself to an outline of themes in Wealth Management and Capital Markets for 2017:

The 2017 technology-led trends

  • AI and ML will be the technology that will be “a must have” shifting from “nice to have” and “transactional only”. AL and ML will be leading the movement towards Invisible and Contextual wealth management services. For those that have been investing in AI for many years and have yet to be compensated for being early; 2017 will provide them with great signs of relief. This era will be the AI& ML Walk and Talk starting 2017.
  • The macro environment will continue to be challenging and will result in a genuine shift in wealth creation. For years, it has been Buffet vs. Soros (fundamental vs. macro) and passive vs. active. 2017 will be the year that we will increasingly entrust wealth creation to AI & ML guided processes (mostly actively managing passive financial products (like ETFs) and customization towards goal-base investing).
  • 2017 will be the year that it becomes clear that an API offering will leapfrog a White Label offering. For those that have both and are agile, it will be work out very well.
  • 2017 will be the year that the ISDA agreements in the Swap market give way to Smart contracts.
  • There will be more digital wallets opened in 2017, than any other adaptation of a Fintech service (payment service, digital bank account, robo-advisor etc). Looking at new financial assets for 2017, there are two possibilities to consider. The P2P loans as part of our fixed income allocation and cryptocurrencies as part of either our FX exposure or to include in the commodities allocation or the inflation protection risk buckets. Both have significant regulatory hurdles to face, however, the rate of adaptation of these new assets (not yet recognized as such) will favor significantly cryptocurrencies. P2P loans as an new asset class will not gain significant traction in 2017.

The 2017 strategic trends

  • We will be seeing more of the “Sell-side empowers the Buy-side” shifts mainly out of the US.
  • We will be seeing more cross-selling innovations in wealth creation launched by the incumbents and partnerships of Fitnechs; the US and China will lead.
  • The Transparency movement in wealth management will pick up speed. 2017 will be about Transparency rather than Disintermediation, which became “out of vogue” already in 2016 with more collaboration between startups and incumbents than genuine disruptive moves.
  • 2017 will be the year that IBM, Microsoft, Amazon etc, the Big cloud computing providers will no longer be the Gorillas on the Fintech stage that go unnoticed.
  • 2017 will be the year that Asset managers wake-up and shift from asset-gathering mode and the traditional way of managing the entire investment cycle process. From all parts of the ecosystem they have been by far the laggards. Brokers have been the leaders on the transformation highway.
  • 2017 will also be the year that private bankers and independent Financial advisors are brought further up to speed. The incumbents for which private bankers work for and the affiliated incumbents that the IFAs collaborate with (for custody or execution etc) will empower them.
  • European regulators will continue to lead. PSD2 will influence all other continent regulatory thinking. The FCA will focus more on international collaborations. The Global Innovate Finance summit will become more of a genuine global summit.

The 2017 investment trends

In this part, I share my predictions and also pose a few questions (I don’t have the answers on their timing) because they are important considerations to keep in mind.

  • Alternative wealth creation in 2017 will only refer to what Secco bank is aiming at (i.e. create wealth from digital assets like reputation and monetizing our own data) and cryptocurrency investing.
  • In 2017 I will be writing more about emerging cryptocurrencies investment managers rather than Vanguard, Betterment, and Fidelity and their investment performance. In 2016, we only watched cryptocurrency exchanges and brokers.
  • The cash piles that are sitting around the world wont be reduced significantly in 2017, simply because those chasing them (from Fintechs to incumbents) are in their second phase of innovation and users (like myself) still have to consider three dozen apps to cover all financial needs from Fintechs.
  • The ICO unstoppable trend will continue but will remain predominantly for blockchain related ventures. In 2016, the first steps in shedding light in the very opaque private markets were taken (Title III in the US, ICOs, Stock exchange innovations for private companies to prepare their IPO). This trend will be slow in penetration but will continue with the East joining.
  • Will 2017 be the year for the huge market opportunity of Chinese robo-advisors to create and offer an investment portfolio that can truly match the risk profile and goals of the Asian end-users; rather than being constrained from the very limited local investment pallet?
  • Will 2017 be the year that we all start considering investments in the Goldmans’ or the Alibabas’ because of their strides in Fintech innovation? This I foresee, is two years down the road.

Have a great holiday, for all our readers taking a digital break starting this week.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge Network. Efi Pylarinou is a Digital Wealth Management thought leader.

Golem and the ICO ecosystem

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The Golem anthropomorphic figure

The Golem deal beckons us to revisit the ICO market. Our recent coverage can be found in IPO or ICO or IEO (briefing on Colored Coins) and Transparency missing from the suppliers of Capital to Fintechs.

Golem’s ICO is over. It raised 820,000 ETH (roughly $8.6 million) in a couple hours.

As reported by Smith + Crown

Golem is backed by the Ethereum blockchain and is a platform that aims to become a decentralized hub to create global marketplace for computation.

The Golem Network Token (GNT) was created through this ICO and is the medium of exchange between “buyers” and “sellers” on the Golem hub. So, those engaging on the platform (developers creating software, providers supplying infrastructure and “requesters” ordering computing resources) will trade GNTs.

Golem is the third largest ICO deal. In the ICO market, any deal above $1mil is considered large. Not many people are aware that the ICO market has facilitated around $220mil in capital raised over the past three years. The really large deals are, Ethereum who raised $18.5mil during its ICO and the DAO with a wopping $180mil (a tragic example).

Access to capital has and will be a business essential. The IPO market was traditionally gated by the investment banks and is being disrupted by Fintechs like Angel List, Syndicate Room, OurCrowd etc.

Crowdfunding, transparency in the syndication process, cross border deal facilitation, are ingredients of the underway disruption that are leading to access to capital without being listed on an exchange (i.e. public markets) and to improved liquidity in these private shares.

So where does the ICO (Initial Coin Offering) disruption fit in to this? The basic facts and distinctions are:

  • ICOs are one way of crowdfunding.
  • ICOs offer a cheap, transparent share ownership process.
  • ICOs can be thought of as a derivative of a bitcoin or other digital currencies, because in the process the company issuing shares is creating an Altcoin typically with its name but not necessarily that is a colored, smaller part of the bitcoin (which has 100,000,000 satoshis and therefore, could be divided in that many pieces). The small denomination will also help liquidity.
  • ICOs are a way to access global capital simultaneously; whereas traditional capital raising starts in one regulatory jurisdiction and thereafter, may choose to also list in another exchange. ICOs seem more like the FX market that trades internationally, rather than the equity markets.
  • ICOs can and are launched from very early stages of business development. They are a cheap, effective way to participate in early stage ventures.
  • ICOs can and will benefit from the liquidity traction of the underlying digital currency from which it is created.

Open issues relate to whether (actually not discussed that much):

  • ICOs are legitimate and how they could be regulated?
  • Are they an investment or a speculative trading asset?
  • Will they remain confined to facilitating funding of techie types of companies?

The ICO ecosystem

The Fintech ecosystem is building up to track, analyze and service the ICO market.

Smith + Crown, is the place for news, research, and analysis of cryptocurrencies, blockchains, cryptofinance, distributed autonomous corporations..

It offers a dedicated page to monitor past ICO deals and those upcoming.

ICOstart is a new marketplace (i.e. exchange in old parlance) to issue and trade the Altcoins from these ICOs.

ICOO is another new place to go, to track pre-launch crowdfunding ICO deals and to be able to trade them immediately thereafter, on the Open Ledger platform. This is a company created by CCEDK in collaboration with Openledger. CCEDK is the Danish bitcoin exchange that closed in May and relaunched in July, more as a hub for crowdfunding, issuance of assets, escrow accounts.

Daily Fintech will continue monitoring the space and reporting.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge Network.  Efi Pylarinou is a Digital Wealth Management thought leader.

Briefing on Colored Coins – IPO, ICO, IEO

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Image source

The new kid on the block is IEO (Initial Equity Offering). I coined that phrase because neither IPO or ICO fits.

– IPO (Initial Public Offering) implies listing shares on a regulated Stock Market such as NYSE, Nasdaq, LSE, SIX etc. 

– ICO (Initial Currency Offering) implies issuing a new Alt Coin. The problem is that Alt Coin are not getting any serious market capitalization. For students of exotica, here is the market cap of the top Alt Coins. The last thing the world needs right now is another AltCoin.

If it is broke, do fix it

A regulated Stock Market is how the market works today. The old saw is if it ain’t broke, don’t fix it. The corollary is if it is broke, do fix it.  Here are the 4 big flaws with these legacy Stock Markets: 

  • legacy listing processes: post Enron, the SEC (followed by other Exchanges) layered on lots of expensive process to protect investors from scams, all of which were based on manual processes (which later got automated but they were still not native digital ie they were expensive and inefficient).
  • national boundaries: it is too hard to discover stocks on exchanges in local markets, so they either suffer a valuation discount or seek a listing on one of the global exchanges (where only mega-sized companies can do an IPO). (See here for our other coverage of this issue).  
  • declining revenue line from listing fees: Stock Exchanges increasingly make their money from selling data, co-located servers for HFT and payment for order flow. This leads to misalignment of interest with the two customers who matter – issuers and long term investors.    

This post, earlier this week by Efi, describes how things went wrong at traditional regulated stock exchanges.

Why Microsoft did an IPO

They did not need to raise money – they were already profitable. They wanted liquidity and price discovery so that they could motivate employees with stock. That is the function of a public market. Any public market 2.0 initiative has to bear that in mind. Investors want to buy shares of profitable business. Uber’s $66 billion valuation in private markets is being questioned because investors cannot figure out how they still lose money after having got to such scale. Then consider a bootstrapped business such as Microsoft at their IPO 25 years ago or a Mittlestand company in Germany. As an investor, which do you prefer to own? That is what the Innovation Capital business should be serving and is not.

Colored Coins 101 for business people

Part of our mission at Daily Fintech is to demystify jargon that obfuscates. We translate Fin for Tech and Tech for Fin. In this case we are translating Tech for Fin. There is so much innovation around Blockchain that it is hard for business executives to keep up to date. Our job is to find the stuff that matters and bring it to your attention.

We think Colored Coins is an important development in the Blockchain world. We will parse the tag line on their front page to explain why: 

The Open Source Protocol for Creating Digital Assets On The Bitcoin Blockchain

  • Open Source Protocol. This is like TCP/IP or HTML. No company controls it or makes money directly from Colored Coins. You make money by adding value on top.
  • Creating Digital Assets. You don’t buy an Alt Coin. Let me repeat that. You don’t buy an Alt Coin. You “color” an existing Bitcoin ( % of a Bitcoin or number of Satoshi, which is the smallest divisible unit of a Bitcoin) to represent an asset (stock in a company, a house or car or painting or whatever). Then you can buy and sell those assets frictionlessly across borders. 
  • Bitcoin Blockchain. This is about the public Blockchain. You can also use Colored Coins on Ethereum (another popular public Blockchain). If you believe that all Blockchains will be private, this is not for you. Using the analogy with the development of the Internet, this is about the Internet not a collection of Intranets. Open Coin transactions are validated by a consensus network (either Proof Of Work by Bitcoin Miners or Proof Of Stake or whatever Ethereum uses). 

Of course, an open source protocol is only as good as the use cases created by entrepreneurs. That is the subject of a future research note.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge platform.