As cryptocurrency gains steam amongst investors and businesses, many startups are cashing in on the trend by launching initial coin offerings (ICO). According to a report from the Venture Capital Journal, the ICO space managed to record over US$1.5 billion capital raised from April to August this year.
Digital currency enthusiasts are quick to claim that ICO will eventually lead to the demise of venture funding. For venture investors, however, digital currencies pose both an opportunity and a challenge for startups and investors.
Foundation Capital general partner Paul Holland, who is also part of social media app Kik's board, said ICO is actually just one of the viable options for companies to secure funding.
"There are a lot of articles and chatter about whether ICOs are going to replace the venture market, and the answer is no. It’s like comparing apples to basketballs," Holland told Venture Capital Journal.
To recall, Kik raised US$125 million by selling digital tokens dubbed as Kin. 40% of the funding has been raised from institutions including Pantera Capital, Polychain Capital and Blockchain Capital. The currency will be launched off the Ethereum blockchain. In a previous report from Reuters, Kik said the proceeds will be used to build a Kin ecosystem that will offer decentralised products and services.
"For some companies, it’s a very viable path to funding; for others, it’s not. For companies like Kik, you go through the ICO process and the proceeds end up in the company treasury, and you operate on the strategy you told your investors you would follow," Holland added.
He explained that Kik decided to go the ICO path when its management decided to marry the concept of digital currency with the business model of a messaging platform.
"Work on the ICO had been underway for many months before actually launching the ICO itself. I’m aware of other smaller players in the space who pivoted fairly quickly and recently to the strategy of being involved in digital currencies, but for us, this was a fairly long and thought-out process," Holland stated.
Joo S. Wong, an investor partner at True Global Ventures, was quoted by e27 as saying that ICOs create a brand new space in the investment realm where both startups and investors are provided with an alternative space to raise funds and inject capital.
“It opens the space up to retail investors, the more interesting companies have been in private domains of VC, so this gives individuals the chance…ICO also opens up opportunities for companies that are struggling to raise funds,” Wang said.
The challenge for VCs, he said, is educating themselves on the ICO landscape, as an unnecessary form of regulation could shake up the whole ecosystem.
He related the beginnings of ICO to the rise of e-commerce and said ICOs help nascent companies grow.
“Just a few years ago, to build a bookshop to compete with Borders, you need to raise big capital…but Amazon did it in a warehouse in Connecticut and they needed less capital,” he said.
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