ICOs VS. Venture Capital and Banks
Traditionally, if you have a great business idea but lack the finances to get the project started, you would pursue funding through a venture capital outlet. There are hundreds of venture capital firms that spend tens of billions of dollars helping businesses get off the ground. However, not all startups attain venture capital funding, and some estimates on venture capital rejections are as high as 99%. In this way, attaining venture capital funding can feel like an episode of Shark Tank in which brilliant startup ideas are at the mercy of a wealthy cadre that determines their future.
The process of attaining venture capital is dubious, and it’s muddled by rumor, speculation, and ambition. The Harvard Business Review explains that “One myth is that venture capitalists invest in good people and good ideas. The reality is that they invest in good industries.” In general, this means that most companies seeking venture capital are unqualified based solely on their industry. HBR goes on to note that only “10% of all U.S. economic activity occurs in segments projected to grow more than 15% a year over the next five years.” As a result, startups are forced to spend valuable money and talent just to ensure that the process of attaining more capital goes as smoothly as possible, even without a fundraising guarantee.
For a long time, venture capital has been the financial mechanism for achieving the American, and now the universal, dream of launching a business and achieving independent success. Fortunately, emerging blockchain technology is making it possible for companies to raise capital through ICOs or various blockchain powered platforms such as Starbase, without succumbing to the costly, high-risk pursuit of venture capital.
The blockchain is the decentralized ledger system that powers popular cryptocurrencies like Bitcoin and Ethereum. It has accounted for these cryptocurrencies with unbridled security, capability, and reliability. More importantly, for startups looking to acquire capital, this technology allows companies to launch independent crypto-tokens that provide specific benefits to purchasers and provide valuable capital for the company.
These tokens, known as Initial Coin Offerings (ICOs), have grown increasingly popular this year. According to CNBC, “In 2017, there have been 92 ICOs which collectively have raised $1.25 billion.” Already, ICOs have surpassed venture capital in funds raised, and, as more people grow accustomed to the practice, it looks poised to continue to proliferate.
ICOs have many benefits for companies and consumers. First, ICOs represent the democratization of capital raising. While venture capital relies on a small cadre of rich bankers to supply funds, ICOs allow average investors and interested parties to support companies and projects that they believe in. Moreover, the personal buy-in from ICO funders ensures a group of loyal supporters who have an interested stake in the company’s success. As The Wall Street Journal notes, “It’s a way for these companies to raise lots of money without giving up decision-making power to venture capitalists or surrendering any equity to them.” For consumers, they receive valuable perks for projects that they personally believe in. To accompany their ICOs, companies offer everything from exclusive access to discounts and everything in between.
Of course, launching an ICO isn’t without its challenges. Creating a crypto-token requires programming and coding skills that most people don’t have and that most startups can’t afford. The prohibitive costs are made even more challenging by the fast-paced environment of the ICO ecosystem. As legislators and regulators grapple with the significance of ICO funding, new laws or even outright bans are being put in place that are dampening company’s abilities to raise funds in this way. For example, this fall China implemented an outright ban on ICOs until regulatory oversight and legal procedures could be devised and implemented. There is a real benefit to companies being able to quickly develop and release an ICO so that they can enjoy the full potential of the ICO marketplace.
One way that ICOs are being made simpler and easier to implement is through launch platforms like Starbase. Their platform allows companies to quickly conceive of and launch a digital token without having to manage the technical aspects of the process. “It’s like an equity funding platform in terms of the due diligence done on the startups” states Tomoaki Sato, CEO and founder of Starbase in an interview. Much like Squarespace makes it easy for everyone to launch a website, Starbase allows companies to effectively launch ICOs without having to employ the technical or logistical know-how. Easy-to-use platforms like this allow companies to avoid many of the pitfalls associated with ICOs while maximizing the potential of this rapidly increasingly capital raising mechanism.
Every capital raising enterprise has its place. Venture capital will continue to serve a limited portion of the population by providing funding and expertise. However, as HBR acknowledged, “the venture capitalist buys a stake in the entrepreneur’s idea, nurtures it for a short period of time, and then exits with the help of an investment banker.” Meanwhile, companies can utilize platforms like Starbase to quick launch digital tokens that can fund new projects, create community investment, and provide new, previously unreachable opportunities. ICOs may be the future of capital raising, and they are already poised to make a real difference for many startups.