ICOs, or, How VCs could get trumped at their own game?

As I explore new practices to finance our startups, I have been observing the ICOs movement. Here are some thoughts from a simple entrepreneur’s point of view.

ICOs or Initial Coin Offerings have been all the rage in the past few months financing amazing projects or better said throwing at great projects insane amounts of money.

What is an ICO?

Tens of thousands of people are now investing daily, left and right, putting their crypto-currency to play in projects that will help the blockchain community grow and thrive, paving the way for the technology to become the de facto standard for how we do business in the decades to come.

Based on this simple idea of decentralization promoted by the fathers of the internet, blockchain technology has given birth to a new way to finance companies where a startup can emit a few millions tokens (or coins, hence the acronym ICO) that are not based on any value (if it is offered as a utility token as opposed to a security one) but the network that is to be built in the planned road map.

Much alike a business angel or venture capitalist would do, crypto-investors assess any new project with the information made available on the ICO page and then follow other online influencers’ analysis to make their decision like Cliff High’s, titled the Grand Father of ICOs.

ICOs: a startup’s valuation booster?

Behind the ICO is a team and a product and therefore a company with its own shares, independent from the ICOs utility token! In other words, once an ICO has been carried out we now have a company with two different assets to its name: one liquid — the tokens — and the other privately held by founders (and investors?) — the shares.

Where it becomes interesting is when we consider the potential outcome. Let’s assume a company, named NewCo, is successful, makes revenue, have clients, etc. .
Although we are yet lacking data as the phenomenon is so new, it is reasonable to imagine that NewCo’s token price will be going up as a consequence of the actual momentum the company has as it drives more and more demand for its token thanks to its reported success. In other words, token value would be mostly derived from NewCo’s communication and its trading frequency.
Meanwhile, NewCo’s shares will also increase in value thanks to a combination of revenue, gross profit margin, or, more interestingly as VCs and Angels have been valuing internet startups in the past decades, thanks to … its market potential and people’s attention as demonstrated here by McKinsey(was the latter a precursor to today’s tokens?)

Many questions arise out of this new model as we tag along the blockchain revolution.
Is a NewCo’s value derived from both its shares valuation and the token’s market cap?
If NewCo was to be valued $100M by a new VC round and the token’s market cap would be at that time $100M (as an assumption) how much is NewCo worth?
How one would evolve or be discounted compared with the other?
Would the presence of the token create a distortion in the pricing of the share or vice versa?

Let’s discuss

Many questions that many brilliant minds will, I am sure, have great answers to and in any case the years to come will definitely show us some amazing stories as they unfold.

In any case, this awesome evolution is another sign that we are all growing and expand together as we are collectively stepping into a greater future full of — decentralized — discoveries and adventures.

Meanwhile, please share your comments and ideas to these questions. A very interesting debate is open.

Photo by Evan Kirby on Unsplash