VC vs ICO: Which Is Right For You?
If you’re familiar with Blockchain and cryptocurrencies, you’re probably no stranger to the concept of Initial Coin Offerings (ICOs). The last two years saw brought about a state of ‘ICO mania’, where blockchain startups across the globe were clamouring to take advantage of this lucrative new funding model.
With well over $6 billion raised this year alone, ICO funding has already surpassed that of the total raised in 2017. So should you as a business owner be looking to use ICOs as a fundraising model for your company, or should you stick with the tried and tested methods of traditional VC funding?
The answer depends on many factors, and through this article I hope to shed some light on the advantages and disadvantages of both.
So, what even is an ICO?
While it may seem like the Blockchain space evolves at light-speed, ICOs are still a relatively new concept. Essentially, it is a fundraising mechanism whereby companies who have already created their own cryptocurrency, can sell these tokens to investors in exchange for bitcoin or ether. In a way it is similar to an Initial Public Offering (IPO), but tokens are purchased instead of shares. Investors who buy the tokens at ICO price hope to see a return on their investment as the project develops.
Advantages of the ICO
ICO’s are an attractive fundraising model for startups as the steps are relatively straightforward, and the barriers to entry for investors are relatively low. This accessibility comes in the form of being able to participate from anywhere in the world (provided the legislation allows), and investors are usually able to participate with as little capital as they like.
ICOs also offer a high level of transparency and speed, thanks to the use of smart-contracts (a friction-less way of conducting digital trade). Blockchain facilitates the ICO transaction through self-executing, smart contract mechanics and therefore no middle-men are needed, saving both time and money.
Disadvantages of the ICO
No fundraising model is without its flaws, and the ICO has its fair share. In recent times, ICOs have been subject to scrutiny by governments due to the lack of regulatory frameworks. Unfortunately, many jurisdictions are still playing catch-up, and due to the infancy of this new and innovative model, ICOs still operate largely in a sort of ‘Wild Wild West’ scenario, where bad actors and dishonest practices slide under the radar. Scams are not uncommon in the ICO space, and so investors are exposed to a fair bit of risk. Ultimately, it is up to the investor to do their due diligence to avoid falling prey to these scams.
What is Venture Capital (VC) funding?
In a nutshell, Venture Capital (VC) is a traditional financing method whereby start-ups apply to well-off investors or investment banks for funding. Successful applicants are granted either monetary or managerial support (or both) to carry out their projects.
VC projects offer investors a larger safety net as they are regulated and with strict processes and guidelines. Quality evaluation is rigorous, so there is a lower risk of failure compared to the ICO route of funding. Risk is mitigated by experts who determine the strength of the product or service and the current market climate, and they can also offer professional consultation and business development services to ensure quality control.
Much like ICOs, there is also a high degree of risk involved in VCs as there is no guarantee that the project will be a success. VC funding is also subject to high input thresholds and transactional costs, and overheads such as legal fees can also add up and draw out the length of the process. Additionally, due to low liquidity, there can be exceedingly long lockup periods for funds, which may be a turn off for some investors.
Above all, whether you decide to go with an ICO or VC boils down to your personal business objectives and goals. Perhaps the ICO works in your favour for its flexibility, or maybe the VC route is the way to go due to its stricter compliance and ‘safer’ public image.
If you’d like to learn more about this very topic, Blocfest are conducting a panel discussion featuring Blockchain experts Abasa Philips (CEO, Zilla), Robin Lee (CEO, Hello Gold) and Wayne Chu (Investment Partner, Mindworks Ventures) on ‘VC vs ICO: The Good, The Bad, The Ugly’.
Learn more about Blockchain’s potential and how it can disrupt your area of business at Blocfest this September 26-27. As part of Malaysia’s inaugural KL Blockchain Week, Blocfest is a 3-day excursion into the world of distributed ledger technology. You’ll not only learn how Blockchain works, but you’ll also come out knowledgeable on its immense potential to disrupt industries far and wide.
Sean’s unequivocal passion for all things blockchain blossomed in late 2016. Starting off his journey as a daytrader, he found himself quickly immersed in the projects and their visions of a decentralised future economy. He is Content Director at Blockchain Asia Connect, and publisher of blockchain blog Channel 3.0. When he’s not busy writing about and exploring the world of blockchain, he’s running his music blog passion project: Producer Hive.