Any time is a good time to start a company — latest in startups

The latest refresher on venture capitalism, followed by some great articles and posts for advice in the startup world.

In the wake of the Chinese central bank’s decision to ban initial coin offerings (ICOs), which sent Bitcoin tumbling despite the agency’s announcement making no specific mention of it or any other cryptocurrency, I thought it reasonable to introduce a new Refresher feature with a breakdown of the latest method of raising capital, specifically as it relates to the venture capital ecosystem.

An ICO differentiates itself from other methods of fundraising insofar as investors receive virtual tokens as opposed to traditional shares for their investment. The tokens, which are offered only by the company, increase in value as a company or network proves its viability and boosts liquidity, thereby attracting interest from other investors. ICOs tend to be issued by companies with little more than a blueprint of a business model, which, combined with the fact that some have provided returns multiple times the original investment, has resulted in some analysts seeing a massive amount of speculation beyond the practice. The SEC has indicated that ICOs could be considered securities and therefore fall within its purview but has not taken further steps towards regulation beyond requiring the transactions to be reported. The agencies skittishness regarding the investment model is understandable, as ICOs have raised $1.6B over the last year alone, and, as CNBC reports, have now surpassed early-stage VC funding.

TechCrunch has reported that two companies, OmiseGo and Qtum, have already reached unicorn status following ICOs occurring in July and March respectively. Interestingly, neither company has yet to offer an actual product. This raises the question as to what unicorn status will mean for these companies, given that it has arguably functioned mostly as a status symbol in the VC world, in addition to offering companies publicity to attract new customers and investor interest. On top of this, having a unicorn in a firm’s portfolio was a mark of a VC’s prowess, even more so when the investment was made during an early-stage round. What does a unicorn entail when it only represents a massive sum of liquid capital?

If it turns out to mean a lot, one can understand a recent Founder Collective piece that began by framing ICOs as an existential threat to venture capital. The author effectively made the argument that the accessibility and liquidity offered by cryptocurrency, combined with the mentioned possibility of a 10x upside (the return on OmiseGo’s coins bought at the ICO stage comes in at 40x), has the possibility to disrupt the industry providing capital to the companies who have historically provided disruption. Irony aside, assuming VCs will react to this by protecting their firms, it is pertinent to ask the question as to whether (early-stage) investors should be allowed to participate in token sales, especially when considering issues of transparency and self-serving motivations. Furthermore, as Flybridge’s Jess Bussgang asks, if VC firms start buying into the plethora of new cryptocurrencies becoming available, how will this be different than purchasing fiat currencies; to what extent would this put VCs in competition with hedge funds or cryptocurrency hedge funds; what will VC funds’ LPs think of this sort of practice? What this boils down to is: will VC firms be forced to fundamentally alter their investment models in order to accommodate the new tastes of entrepreneurs? If not, will startups that bypassed early-stage fundings turn around and contact VC firms for their series B and beyond?

This largely depends upon the fallout for companies that opt to eschew traditional private funding for ICOs, which largely remains to be seen as the companies themselves are still so young. Cooperation between an experienced VC and an ambitious founder has shown itself to be a combination hard to compete with, and as such, the prospect of founders answering to a slew of possibly impatient investors lacking in foresight seems a little hazardous. The first stages of growing a fledgling company require a steady hand, and the ability to know which early hits to take for bigger gains later. Moreover, the network provided by the right VC can very well be the factor that makes or breaks a company, and it certainly doesn’t seem like token holders will be able to offer the same sort of connections. Even if ICOs offer infant companies the capital they want, it doesn’t fill the gap that traditional VC has in the last years with regards to honing a company’s model, focusing them on the raison d’etre of their product, and otherwise discipling them/letting them loose at the right moments.

The first 60 seconds of a business pitch can be the difference between achieving your highest dreams or falling flat on your face when seeking venture capital. Watch Entrepreneur Elevator Pitch stream Wednesdays on starting September 20.

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