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.

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

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Silicon Valley finally goes global – good for some but not others



By Bernard Lunn

The VC Fund model has a strange paradox. It breeds scalable global giants while remaining defiantly small and local. There are two reasons for this:

  1. You need to be local at the early stage. When a company reaches the growth stage it is easier to manage your investment in a portfolio company via an occasional Board Meeting and lots of metrics. In the early days you need to be physically close to the team to a) read body language to see how stressed or energized the team is and b) spot problems where a founder is going off the rails in some way (such as being dishonest, drug problems or depression) and c) be able to give advice informally just in time during learning moments outside the formal constraints of a Board Meeting.
  1. The Weekly Partners meeting does not scale. The weekly meeting, with all Partners discussing and approving a deal works well. You get lots of experienced eyes on a deal. However that does not scale beyond say 10 partners (when it starts to get political) and it is too hard to manage a Partnership with global conference calls where the global offices feel left out and may have to dial in at strange hours to accommodate the “head office” (and then people start to resent the Head Office and factions emerge).

This is starting to change. This post describes how the Silicon Valley financing model is finally starting to globalize properly.

This is a Good News and Bad News story. It is Good News is for entrepreneurs based outside Silicon Valley who get greater financing choice. It is Bad News for local funds and accelerators who get more competition.

There have been two experiments in VC globalization:

A. Some Accelerators have gone global. For example:

  • 500 Startups. You cannot extrapolate much from this example as it depends on the energy and personality of Dave McClure. I get tired just watching his travel schedule from the comfort of my office. They did ramp this up a notch with their recent Nordics Fund. This is the carve out model (see below) applied to an accelerator (which makes sense as accelerators morph into becoming full scale VC Funds).
  • Sponsored Accelerators. This is being used within Fintech. For example the Barclays Accelerator powered by Techstars is now in both London and New York. This global viewpoint is not surprising because Techstars originated from Boulder Colorado rather than Silicon Valley and so they had to obey the Steve Jobs instruction to “think different” from the start. Another Sponsored Accelerator (with multiple sponsors) is StartupBootCamp (SBC) which is now in London, Berlin, Amsterdam, Hong Kong, Istanbul. SBC is scaling this model. They are in multiple verticals (Fintech, Insurance, IOT, Health and many more) and I can envisage them in all major and minor innovation hubs.

B. The Carve Out model. This is how the Tier 1 VC Funds have traditionally gone global. They carve out a % of Fund for a country. For example, they raise a $1 billion Fund and carve out 10% ($100m) for Country X. This model has not always worked well because the Weekly Partners Meeting does not scale (for reasons outlined above). When this does not work out there is either a buyout and rebranding (e.g. Benchmark UK becomes Balderton Capital) or the Fund sells a whole country portfolio to another institution (e.g. Canaan Partners selling their India portfolio to JP Morgan).

Sequoia Capital is innovating on the path to globalization. I saw this on a video interview with Sir Michael Moritz (which I did not bookmark and cannot find, so may have got it a bit wrong and happy to correct if necessary) where he said that they have allowed the team in China to make investment decisions without referring those decisions back to Silicon Valley. That decision took courage because it is relinquishing control. I do not know if Sequoia Capital is doing this in any other country. Perhaps China is a special case. Perhaps it is an experiment and if it works well they will apply it to other markets. Sir Michael Moritz has certainly been vocal on how important China is in the global economy. His point is really to point out the obvious and to point out that too many people are in denial about the obvious. China is driving change in so many areas and within Fintech this was the subject of a session I was part of at SIBOS this year.

I think that China is the lead example, but it is broader than that. I refer now to the “countries formerly known as emerging” because there are so many that are innovating and the old labels (third world, developing, emerging, growth, BRIC etc) no longer fit that well. The one market that I know from personal experience is India and I have written about how the movement to mobile wallets in India epitomizes a more general trend that I call “first the Rest then the West” (that innovation now starts in the countries formerly known as emerging and then moves to the old world of America and Europe, which is a reversal of the historical flow of innovation). That means that Silicon Valley has to globalize in order to stay relevant – and it looks like Silicon Valley is finally starting to globalize properly.

Silicon Valley open sourced its core IP. Countless blogs, books and online course now teach how to create and scale a startup. Obviously Silicon Valley has a far greater % of people who understand how to do this, but the manual is available to anybody from anywhere. That means that Silicon Valley has to globalize in order to stay relevant – and it looks like Silicon Valley is finally starting to globalize properly.

Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech.