Token sale ICOs have raise 2.4x more than traditional venture capital investment projects according to new data research from a recently launched company by Nick Tomaino, a former Coinbase employee.
Among the notable VC funded companies is Bitfury, a bitcoin miner and ASICs manufacturer, and Shapeshift, a digital currencies exchange, which in combination raised $40 million while all blockchain related VC funded companies raised $140 million in total.
On the other hand, ICO token sales, a very new method of funding projects usually based on ethereum’s blockchain, raised some $330 million in the past 12 months, with the now defunct Slockit DAO accounting for almost half while Gnosis makes it to top five after raising $12.5 million in minutes at an eye watering valuation of $300 million.
The reason for this discrepancy might be explained by the far more inclusive ICO process which allows anyone to fund a project at a preferred amount or risk level. A traditional VC, for example, might not be bothered with investments below $100,000 or $1 million. While for an ICO, dispersed global investors can send just $10.
Moreover, an ICO is usually an IPO too due to the token formalization which can act as an easily tradable share with value appreciating or decreasing depending on how the market thinks the project is currently doing or may be operating in the future.
That brings risk because investors may not be incentivized to closely scrutinize the proposed business or its funding model, with their bargaining power usually limited. On the other hand, VCs can drill the project proposers with detailed questions which assume a certain level of professionalism to get a foot in the door in the first place.
But, VCs have considerable risk. Once they invest, they invest. They have no market place to pass gradual judgment. They are further limited to investing huge sums. ICOs, instead, allow anyone to participate at their own judgment or comfort level while giving them opportunity to re-evaluate that initial opinion on a constant basis.
The two models, therefore, are very different and have their own benefits as well as disadvantages. VC investment, for example, is seen as too elitist as well as, in some cases, predatory because VCs have far too much power at the pitching stage.
ICOs are a lot more democratic and far more inclusive, allowing many to pitch a small amount instead of a few acting as power brokers. On the other hand, they lack the same levels of quality controls or scrutiny as VC firms.
That can be resolved in two ways. A non-governing body can be set up to undertake due diligence paid by ICOs or VC investors start undertaking due diligence for ICO companies which they might wish to invest in, so benefiting others in the process too.
It’s all very much experimental, so we don’t quite know how it will develop, but ICOs appear to be opening risk taking finance to the people while at the same time testing the wisdom of the crowd and challenging VC’s ivory towers.