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Heavy weights in startup funding: ICOs vs VC

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successful ICOs
successful ICOs

Initial coin offering vs venture capitalist funding

It is fair enough to state that initial coin offering is the new form of project funding. Hatching a revolutionary idea is one thing and funding the idea is another thing altogether. Traditionally, startups have sought funding in form of bank loans, angel investors, venture capitalist funding, public and private grants. However, the most recent addition to the forms of startup funding is the initial coin offering which is credited with raising the largest amount of money for internet startups in 2017 in comparison to venture capitalist funding.

Definition of key terms

Initial coin offering– initial coin offering is a form of startup funding which entails issuing cryptocurrency tokens to investors in exchange for money. Essentially, the investors stand to gain when the value of the tokens increases over time. Just to mention, most of the ICOs are launched on the Ethereum blockchain.

Venture capitalist– a venture capitalist funds a startup or a company that is looking to expand in exchange for a stake in the company. Notably, venture capital funding is not long-term. As soon as the startup gets to a certain size, the venture capitalist exits with the help of an investment banker.

2017 funding comparison

As at August 2017, the amount of money raised through initial coin offering for blockchain based startups had surpassed the initial funding for internet companies by venture capitalists. Notably, the concept of crowdfunding through ICOs was not well known until last which explains why 2017 an extremely large number of blockchain startups opt for this mode of funding. As at April 2017, the amount of money raised through initial coin offering was slightly under $100 million. According to coinschedule, this amount had more than doubled to approximately $250 million. Additionally, ICO funding had surpassed the $500 million mark by June thereby surpassing the funding by angel investors and venture capitalists.

Notably, in the same month when the funds raised through initial coin offering surpassed the $500 million mark, angel and VC funding was approaching the $300 million mark. Notably, June marked the period when funding through ICO surpassed angel and VC funding for the first time. The total number of ICOs in 2017 were 92 and collectively they raised approximately $1.25 billion.

It is important to note that not all ICOs have lived up to the expectations. On the other hand, some ICOs have yielded significantly large amounts of money. For instance, Tezos, a startup whose ICO was launched last year yielded over $230 million. Like most other startups, Tezos is a blockchain based startup. Bancor, another startup raised about $153 million through ICO crowdfunding as well.

Despite their contribution to funding startups, ICOs received quite a lot of criticism from different regulators. Notably, the major concern with ICO crowdfunding is the same concern that has derailed vast crypto adoption and that is money laundering and association with terrorist activities. some of the countries that have impressed these concerns are Singapore and the united states. However, the US Securities and Exchange Commission (SEC) intends to make securities laws in the country applicable to the sale of new crypto coins.

Despite the concerns surround ICO crowdfunding, the effectiveness of this approach in this regard is unquestionable. Thus instituting smart regulations as opposed to banning the mode of financing might be the best move by the legislators.

 

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