Entrepreneur

Why Global Startups Are Turning To This "Controversial" Method To Raise Capital

  • In recent times, business owners and investors have seen a shift in the funding landscape, with ICOs overtaking traditional venture capital funding in funding amounts and overall popularity.
  • We reached out to two individuals familiar with both venture funding and blockchain technology to get their thoughts on this new trend.

Even as venture capital funding hit never before seen heights in 2017, Initial Coin Offerings (ICOs) have exploded onto the scene and made a mark of their own.

Since the beginning of 2017, it’s been reported that funds raised through ICOs have surpassed the amounts raised through traditional venture capital funding.

A recorded amount close to US$4.5 billion was raised by DLT-related companies within 14 months from January 2017 to February 2018, dwarfing the US$1.3 billion raised via traditional venture funding in the same time span.

Dictionary Time: DLT, or Distributed Ledger Technology, refers to the digital system that allows for the recording of transaction of assets in a way that sees details recorded in multiple places online at the same time. This technology is commonly referred to as blockchain.

Why So Popular?

The root factor that makes ICOs so attractive for both enterprises and investors is easy access to funding.

By allowing business owners to bypass the rigorous and highly regulated processes found in traditional VC funding, ICOs provided an easy and direct pathway for common folk to invest.

As illustrated by an article on Bloomberg earlier this year, ICOs also hold limitless potential as far as how much a company can raise.

So now with the funding landscape being shaken up by the ICO, we figured that it would be great to pick the brains of industry insiders for their thoughts on “VC or ICO” debate and what to make of the funding landscape moving forward.

We reached out to Wally Xie, CEO of QChain, and Wayne Chu, Investment Partner at Mindworks Ventures for their thoughts.

Disclaimer: The opinions expressed in this article is purely the personal view of the interviewees and should not be construed as financial advice or official representation of the VC funds, investors or any connected parties.

To ICO, Or Not To ICO?

With such a lucrative (and easily accessible) financial opportunity present within ICOs, the first question of the day would be whether or not all companies should look to ICOs for funding.

Wayne Chu of Mindworks Ventures holds the opinion that an ICO really isn’t for every company looking for funding, but instead more suitable for those with ideas and models that can actually validate the need to pursue an ICO.

“The type of project you’re engaged in is obviously a paramount justification to do an ICO, especially if it is, say a genuine crypto infrastructure development, an innovative fintech, or a true enterprise blockchain solution, and etcetera,” he said.

“This is as opposed to something where you just substitute USD with ‘token for X’ and conveniently slot in smart contracts.”

While the route of the ICO may tempt entrepreneurs with quick and frictionless funding, there is always the prospect long hours and mental stress to contend with.

“There is a heavy psychological burden when it comes to marketing the ICO and supporting your token down the line,” Wayne explained.

“I think everybody knows that the all-hour, buzzing nature of the crypto market isn’t great for mental and physical health, and when you hold an ICO, you’re definitely jumping into that.”

He pointed out that traditional venture capital raising is stressful but, “there is still the greater notion of limited hours to call and meet people, and some loose semblance of work-life balance”.

“Are you ready to make the sacrifices in your life that come when you’re expected to provide customer service with respect to your token at all hours?”

What Next?

Despite its popularity, the ICO is also still very much at the mercy of public perception and government regulations.

ICOs are treated differently globally, with some governments unable to come to terms with a funding practice that is rife with uncertainty and speculation; scams abound, rate of returns are sometimes exaggerated, and there is always the danger of the market turning into a bubble.

China has levelled an outright ban on ICOs, while countries like Singapore and Malaysia have moved to have their ecosystems heavily regulated.

On this particular topic, Wally foresees that such regulations on ICOs will only continue to become stricter with time, particularly due to the human tendency for unscrupulous behaviour where big money is involved.

“I do think there will be a distribution internationally with respect to permissiveness on ICOs—the EU will be less strict than the US and China, for one,” he said. “In these larger jurisdictions though, I think there will always be more wariness when it comes to regulating ICOs.”

“With respect to the scams and the human constant of devolving into poor behaviour when there is money to be made, I feel that this wariness is rightful because of the potential human cost and damage of scams,” he added.

“Anyhow, no, I don’t see the larger national governments around the world becoming more accomodating of ICOs—they are just held to a different standard than smaller, more permissive jurisdictions.”

The VC Isn’t Dead, Yet

Ultimately, the general consensus seems to agree that despite the huge momentum behind ICO funding, traditional venture capitalism still has its role to play.

For Wayne, one of the biggest plus points derived from traditional VC funding is the validation and recognition a company can gain by successfully getting funded.

“Startups who get funding from ‘blue chip’ VCs are like Ivy League graduates and may get additional leverage when it comes to subsequent funding rounds, general business expansion, and exits,” he said.

This also comes in addition to the support and mentorship that comes as part of getting funded by actual accredited investors.

“Founders I look after can count on me for whatever problem occurs, and if I can’t solve it, I’ll refer them to my 50 LPs (limited partners), 30 portfolio companies, and hundreds of stakeholders in my VC ecosystem,” Wayne said, illustrating the kind of support a company could expect to receive as part of getting financially backed.

Finally, addressing the topic of co-existence moving forward, Wally pointed to changes in the way traditional VCs were being done, all in order to adapt to the order of the day.

“What we are seeing is a definite convergence between traditional VCs and crypto funds,” he said.

“Globally, VCs are formally spinning off digital asset funds themselves to directly participate in ICOs or private and equity rounds by DLT (distributed ledger technology) startups—for example, Andreessen in the USA or Golden Gate in Singapore.”

“Meanwhile, earlier crypto funds and investors in the ecosystem such as Binance Labs are themselves using increasingly sophisticated approaches to investing into DLT (distributed ledger technology) startups, therefore both avenues will be able to co-exist.”

There Is No Right Answer

In summary, it does seem as if the debate of whether a company should pursue an ICO or go with VC funding is still very dependent on a company’s requirements—what do you intend to accomplish, and how much work are you prepared to put in?

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If you’re looking to learn more about ICOs and whether or not they suit your needs, there will be plenty of opportunities to discover more at the upcoming Blocfest 2018, where Wayne and Wally will both be present as main speakers.

In addition to learning about ICOs, participants will also get the opportunity to get clued in on the other facets of blockchain technology and their many real-world applications.

Tickets are up for sale now, but specially for our readers, Blockchain Asia is giving an exclusive discount for the entry tickets so you won’t miss out on the chance to attend this international event.

You can now purchase the VIP ticket (originally priced at USD$450) and/or the normal ticket (originally priced at USD$375) with a 20% discount by keying in the promo code KLBCW-8 during checkout.

  • For more information on Blocfest, and to check out the agenda for yourself, you can find their official website here.
  • If you’re interested in providing partnerships or sponsorships for Blocfest, you can reach out to the team at sponsorship@blocfest.asia.
  • For more information on KL Blockchain Week 2018, you can click here.

This article is written in collaboration with Blockchain Asia.

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