When J R Willet launched the Mastercoin project back in 2013, he held a month long fundraising period where investors could purchase Mastercoin tokens in exchange for Bitcoin. In total the project received 5000 Bitcoin worth 500,000 USD at the time.
This was the first Initial Coin Offering or ICO.
Fast forward to 2017 and there have been a total of 228 ICO's raising $3.6 billion in funding. The largest of which being the decentralized storage network FileCoin, that brought in $257 million in Bitcoin and Ethereum.
Additionally the 5000 Bitcoin that Mastercoin raised back in 2013...that's now worth $41 million.
ICO's vs Traditional Venture Funding
Raising funds for traditional start ups usually involve a an exchange of FIAT currency for a % stake in the company. This % stays the same and so does the value of the $.
Raising funds using an Initial Coin Offering however has a couple of advantages over venture funding. The business gives up no % in return for investment and also the Bitcoin or Ethereum received in as funding have the chance of increasing in value over time.
Using an unnamed ICO as an emample, the $200 million dollars raised in July 2017 is now worth over $400 million. The advantages are clear. That said it is worth mentioning that cryptocurrency markets are extremely volatile and can decrease in value as an equal rate.
Entrepreneurs also gain the benefit of a lot shorter route to funding, no shareholder agreements and zero liquidation preferences.
This model introduces a problem for traditional venture capital houses for a number of reasons -
- Fund policies currently are mostly not equipped to take part in ICO's.
- An unclear legal framework makes compliance impossible.
- The speed of which ICO's launch and get funded is outside of comfort zones.
Let's look at the numbers themselves.
Not only have ICO's or Initial Coin Offerings become a popular route to raising capital they surpassed venture capital funding from May this year onwards. All this in 12 months.
ICO's are less than perfect.
As Initial Coin Offerings have risen in popularity in such a short space of time it has taken regulators a while to catch up. That said one thing is for certain, they are.
We are already seeing SEC restrictions placed on US citizens. This is both a good and bad thing. On the plus side more people are protected against scams but on the downside everyday people aren't being allowed to participate in one of the most exciting industries of our time.
As time moves forward there's no doubt that a middle ground will be found to support the space and bring institutional investment into the market. It's now down to the projects who've successfully raised funds to show they can build a real product + business and build mainstream trust.