by Jeff Gapusan
The Advanced Technology Development Center (ATDC) recently hosted a panel on one of the hottest topics in the startup ecosystem: Initial Coin Offerings (ICOs). Concurrent with the recent spike in cryptocurrency valuations, the interest in ICOs has reached a fever pitch. That’s led to a healthy wave of skepticism in the funding mechanism to go along with the public’s rising interest. Questions range from “are ICOs 21st century tulips,” or worse, “are ICOs an unscrupulous means of parting investors from their money?”
My intent as host of the Aug. 22 ATDC ICO panel — which was sponsored by Worldpay US — was to discern fact from fiction and provide entrepreneurs with a basis by which they can evaluate what could be one of the most disruptive forces in early stage fundraising. When structured with forethought, ICOs can allow founders to leverage their time and energy to raise substantial amounts of funding for ideas they intend to bring to market.
Our panel of experts was comprised of two founders — Chrissa McFarlane of Patientory and Shawn Wilkinson of Storj — who, via the ICO market, raised more than $37 million in funding earlier this summer. The panel also included attorney Austin Mills of Morris, Manning & Martin, and Mitchell Kopelman, Partner-in-Charge of business tax, technology, and biosciences at Aprio. While we touched on several topics and cleared up a number of illusions, many questions remain. At the very least, we established some key truths:
- The Genie is Out of the Bottle: The current means of early-stage fundraising limit founders’ audience of investors. Modern networks allow founders to spread their ideas far and wide. By providing an immutable ledger of record that is held by all nodes within a network, the blockchain decentralizes the flow of actionable information within the investment community. The ERC-20 standard allows investors to codify the circumstances they will invest in startups. This is a powerful combination for startups and investors alike. No longer are angels and venture capitalists limited by geography to express their investment theses. ICOs will allow capital (and plenty of it) to flow to the best and brightest founders and ideas.
- There are Risks: Like many concepts and phenomena that burned white-hot at inception and attracted an outsized amount of capital, there will be risks. The number of bad actors and bad ideas are unclear, but there is universal agreement they do exist. As was seen during the technology boom of the 1990s and the mortgage boom of the early to mid-2000s, bad actors can smell the money. The odds of a spectacular bust (followed by regulatory and investor scrutiny) are extremely high, but given the rewards, many issuers and investors are taking that risk.
- Common Sense will Rule the Day: Like earlier boom/bust cycles that came before, there are a number of good actors and genuinely good ideas that will flourish in this current phase. Provided a backdrop of sound professional advice, founders will be able to structure offerings that raise substantial amounts of capital while preserving operational efficiency. Likewise, investors will be able to protect their downside through the construction of sound ICO contracts and proper due diligence of the issuing companies.
While these three tenets are by no means exclusive to the issuance of and investment in ICOs, they are good benchmarks by which to evaluate the space. This mechanism will open access for founders to pockets of capital they were previously unable to tap. For investors, their range of potential investments has grown exponentially. With a cogent and deliberate approach, there is no reason startups will not be able to benefit from this groundbreaking, capital-raising tool.
Jeff Gapusan is the Advanced Technology Development Center’s financial technology (FinTech) catalyst.