Old models are giving way to new ones. VCs are increasingly finding themselves not s relevant as before. They however are adapting.
With U.S. venture capital companies lining up to grab a slice of the burgeoning digital currencies market, in a weird twist of fate, that market itself is grappling with a novel challenge – what do you do when tech startups have access digital currencies?
In recent times, with tech startups offering their so-called initial coin offerings (ICOs), they have very quickly raised millions of dollars by creating and selling digital “tokens”, however with a lack of regulatory oversight, the traditional relationship, has turned upside down.
“The day when VCs were the elusive elite and primary source of capital for startups has ended,” said Jamie Burke, founder and chief executive officer of VC firm Outlier Ventures, which specializes in blockchain and other technology investments.
He went on to add, “When a startup can raise $35 million in 30 seconds without any dilution, the genie is out of the bottle and it isn’t going back in,” in reference to Brave, an open source web browser that blocks ads and trackers, which sold its Basic Attention Token in June.
This year by mid-July tech companies have raised $1.1 billion in 89 coin sales. This is nearly ten times more than that witnessed in 2016.
Proceeds from ICOs have already eclipsed funds from venture capitalists, who incidentally have invested more than $300 million in equity in the sector in the first half of this year, as per Coindesk.
Tokens have registered hefty gains on dozens of online exchanges which naturally has drawn the attention of venture capital firms who have sought a slice of the market. Well known venture capitalists Tim Draper and Blockchain Capital co-founder Brock Pierce have participated in ICOs. Many VC companies have also opted for an equity stake in the start-ups.
The basic model has however changed: the old business model that gave venture capitalists and founders the lion’s share of a company is no longer relevant with blockchain firms, clarified Pierce of Blockchain Capital.
“Whether VCs like it or not, venture capital will become a very small part of capital formation,” said Pierce.
Tech startups issues tokens not only to raise funds but also to attract a broader group of enthusiasts who can help develop their projects hoping to lift the value of their investments.
“Tokens can galvanize a community: lots of individuals and corporations are able to work together and improve a decentralized network,” said Ryan Shea, co-founder of Blockstack, a New York-based tech start-up.
“I think if you have a few venture capitalists that come in and sweep up all the tokens, to me that’s a failed token sale,” she added.
One such investor issuers target is Stelian Balta, a developer, entrepreneur founder and chief executive officer of Singapore-based hedge fund HyperChain Capital.
“We help in the security audit of the tokens, we help introduce developers for coding purposes, and we have introduced the start-ups to our own network of connections,” said Balta.
As per tokendata.io, a website that tracks ICOs, these tokens trade on the exchanges at 20 times their initial sale price, on average. This number is skewed by high-performers; the median multiple is actually three.
And yet venture capitalist form have to at times make do with less than they bid for in token sales.
Venture capitalists are increasingly coming to recognize ICOs as a genuine disruptive force. They however still see a role for themselves – helping blockchain startups build teams and devise longer-term business strategies.
“The investors who bought your token, like public market investors, may be gone tomorrow, next month, or next year, having moved on to the next big thing,” said Fred Wilson co-founder of Union Square Ventures, which has participated in coin sales.
“VCs, at least the best ones, are there for your company in good times and bad.”
These arguments apart, as long as ICOs provide a quick hassle-free access to funds, start-ups will tend on focus on them and will not see the urgency on tapping venture capital funds.
“People who provide value are those who have insight on how blockchain works,” said Jake Brukhman, a partner at CoinFund.
“I think VCs are two years behind on blockchain,” he added.