by Lumai Mubanga
Every technological breakthrough certainly has its own drawbacks. This is the case with ICOs. How do ICOs compare with venture capital fundraising? This article will consider two possible ways.
By 2017, ICOs had surpassed Venture capital as a preferred way to raise cash for blockchain startups. Take for example the fact that about 6 billion dollars was raised by ICOs for startups. According to estimates, 25% of that was raised in December only. In addition, billions of dollars have been raised for other upcoming companies with some success. Could there be anything that could taint this new dispensation?
ICOs versus Venture Capital
High Possibility of Fraud
The possibility of a fraudulent ICO is much more likely than VC. It is a well-documented fact that there have been hundreds of bogus ICOs who have disappeared with investors monies. Take for example the OneCoin ICO.
Because ICOs seek to remove regulatory authorities, scammers took advantage to win the hearts of unsuspecting investors into buying the coin that was a coin just by name. There was no tangible project behind OneCoin apart from the fact that the so-called coin was just running an SQL Server. As it turned out, it was a scam.
Another one was the infamous project known as MIROSKII, raising over 70 million dollars in funding without even having a real team! Such occurrences are rare in venture capital undertakings which require stringent regulations, high levels of discipline and compliance procedures.
To win investor confidence in VC, the development team requires not just a white paper as in ISO’s. VC demands detailed financial credibility and answers to tricky investment questions as opposed to just an idea of a token. In this way, VC fair better than ICOs.
Managing relations and expectations challenges
Managing relations and expectations of investors has been immerging as a new challenge for ICO backed companies. Why is this case?
When the marketing of a new ICO is published, many potential investors do not even buy into reading the white paper. At the same time, ICO attracts hundreds to thousands of investors, all of whom have different demands and unrealistic expectations from the project. As a result, managing relations of all these investors with divergent views proves to be a challenge for many startups with small management teams.
This, however, is never an issue with venture capital investments which come with backup teams of financial stamina. Venture Capital undertake due diligence on many potential projects for both customers and founders. This is not normally the case with ICOs. When a venture capital agrees to invest in a company, then the potential founders have access to the venture capitals huge asset of connections and experience, leading to potential success and less fraudulent and mismanagement.
Of late, it has been reports that VCs are bouncing back and surpassing the four billion dollars mark from 2017 for startups.
Whichever opinions are formed about the two most common forms of fundraising, each investor has a personal responsibility to do due diligence in matters of investment.