Group Co.
Will ICOs Render Venture Capitailists Obsolete?
Traders Magazine Online News, May 18, 2018
The Luddites are everyone’s favorite group of radical technophobes. During the Industrial Revolution, these 19th-century bands of British workers were so enraged by the onset of technologically-savvy tools and the impending loss of jobs that they went about breaking the machines that threatened their livelihoods.¹
It’s understandable, as I’m sure it wasn’t fun to be replaced by a mechanical contraption. I wouldn’t enjoy it either.
Recently, I was on a panel discussing crypto, hype, potential roadblocks, and, of course, ICOs. For those not steeped in Silicon Valley speak, according to Investopedia, an ICO (which stands for Initial Coin Offering) is “an unregulated means by which funds are raised for a new cryptocurrency venture…[and is] used by startups to bypass the rigorous and regulated capital-raising process required by venture capitalists or banks.” I gave my well-rehearsed, curmudgeonly rant about how value creation gets people more excited than the potential of technology?—?from history we know this is how humans work, but I digress.
For me, a recurring theme at such events is being asked if ICOs will replace venture capital (VC). This is somewhat akin to asking me if I will be replaced by a bot. While self-interest calls for defending what I do for work, my engineering past has sufficiently trained me to know that “automating your job” is a badge of honor in the tech industry.²
The idea of technology making capital raising more efficient is actually pretty exciting. I recently worked with a fantastic engineering and product team that successfully automated many of the more onerous aspects of fundraising. So, bots and unconventional fundraising mechanisms, by all means: Take our jobs.
However, we do need a reality check on this lively conversation. The ICOs vs. VC fundraising debate misunderstands some of the truths on both sides. There are plenty of reasons why ICOs and venture capital fundraising are fundamentally different.
VC math doesn’t translate to retail investors
We don’t talk about venture fund economics enough. Technology/startup investing is hard. A majority of investments go to zero because the odds of picking a winner are low. But these odds are baked into the way VC funds are raised and deployed. Venture capitalists can make a good number of solid bets and still make very good returns even if many of those bets fail?—?remember, the average VC investment takes 7–10 years to generate returns. VCs are generally good at patiently holding on (HODLing, if you’re in the know).
The average retail investors on the other hand:
- May not have large pools of capital to deploy to a diversified set of token positions that can make meaningful returns.
- Can only make a relatively smaller number of bets.
- May not want to take the risk that comes with the possibility of tokens going to zero.
- May be more interested in short or medium-term returns.
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