The other week, a U.S. company based in Hicksville, NY, best known for selling iced tea changed its name to the Long Blockchain Corp.
Its stock rocketed up 275% even though it plans to maintain iced tea as its principle offering. What exactly has it to do with blockchain? It appears there’s not a single, so much as loose, agreement with a blockchain company in place at this time.
So if adding a bit of instant crypto is all you need, it’s no wonder all manner of start-ups are looking to crypto to add some FOMO (fear of missing out) appeal before trying to raise some cash to get started.
For many companies who need start money it must be a tempting option. Create a token sale, also known as an Initial Coin Offering (ICO), bash out a white paper, raise a few million, and you’re pretty much free of all the constraints other routes especially the venture capital route, might impose.
Certainly, the VC alternative, tried and tested though it is, has its problems. VCs can be quite heavy handed on what they want a company to be doing. And they take a large amount of the upside and immunize themselves against all of the downsides. Compared to this burden, raising money the blockchain way can look highly attractive.
So, is venture capital about to get a big disruption from the combination of blockchain and ICOs? Certainly, there are a number companies which owe very little to a VC and are happily trading in the alt coin market for their finance instead.
Rick Webb runs Startmesh which is dedicated to helping companies expand into markets beyond their own initial national patch. He sees a major disruption of the VC model as inevitable.
Hold the venture capital
“VCs have traditionally provided four things of value, of which all are now highly replaceable."
"The first and arguably most fundamental item, is a deep knowledge of the company finances and the competitive framework that the company sits in.”
“This is specialized knowledge, a bit like how an art dealer would know everything about the artist and his oeuvre before putting a painting up for auction. That valuable market knowledge has up to now been exactly what you paid your VC to know. But the blockchain changes all that because it completely commoditizes that mass of knowledge. And when knowledge goes from the realm of expertise to commoditized, unfakeable information, it stops being valuable, and that alone makes the VC model ripe for disruption by blockchain technology.”
But the disruption goes further.
He argues that the second function that VCs have performed is filtering out all the dud and non-investable projects. Knowing how to filter the dross was a hard-earned skill a good VC worth their salt would have taken a lifetime to acquire.
Webb believes that artificial intelligence algorithms will soon be using the blockchain to do that filtration and perform every bit as well as a seasoned VC.
Which leaves the third part of what a VC does and that’s get the cheque book out and stomp up the cash. That bit as we all know can be done very well by crowdsourcing using an ICO. Huge numbers of companies are now taking this route, whether they’re great teams with technical blockchain knowledge, or not.
“Of course, there’s the fourth element running the company, what we call human capital, but that can be done in a much lighter way than having a fifty-two-year-old going into work every day” says Webb.
All of which leaves a radically new way capital could be raised and used to develop a good idea.
Webb is so convinced it’s all going to be disrupted, his firm is concentrating on doing things that other VCs don’t. Webb’s company works on taking companies on beyond their initial stage of proving themselves, and this strategy is certainly proving very successful.
But not everyone is so sure the VC model has had its day.
Dr. Ben Miles is a CEO of a tech start-up in a bio-technology company in Bristol, U.K. and he thinks the VC route is secure for some time to come.
“I think there are too many different business models such as ours for whom crypto and blockchain funding doesn’t work, and the science and the tech ones are often the ones you just need a traditional injection of cash.
“If the project is a distributed asset it might be different. But even if we were to retrofit some spurious coin or blockchain connection it still wouldn’t be an attractive route. There’s too much hype. For someone working on building a business, that hype gets in the way of the management of things. The hype element of a coin offering could be more problematic than a VC telling you what to do the whole time,” says Miles.
Pumping and dumping
Samara Smith who heads a social media company that has handled a clutch of token generation events, says managing ICO rooms is not for the fainthearted. “With tens of thousands of boisterous members trying to pump and dump their tokens, managing them is a full-time job. They’ll never stop asking the alt currency speculation questions ‘when moon?’ or ‘when Lambo?’(Lamborghini) and it requires a 24/7 manpower with a good awareness of compliance.”
“It’s also important not to underestimate the influence a mob of boisterous token holders can have, so in a way you’ve replaced the VC’s running the show to somewhat random influence of token holders. When you’ve gone the ICO route, the secondary market becomes the source of control and opinion.”
“If a faction takes exception to something you do or say, you can find your price slumps overnight. If you want to be unencumbered by external control you may be in for a disappointment,” says Smith.
And let’s not forget that VC funding isn’t just about bringing in money. When you get that VC backing, you get a dedicated person driving your business to connect to people it needs, helping that company move forwards. That’s often as valuable as the money they’re giving. Companies which don’t have that heavyweight control at the top sometimes wish they did, and the fate of Tezos may yet demonstrate the problems when the tech guys at the top don’t have enough experience.
But Webb remains confident that VCs performance has been woefully inadequate over the years and can only get replaced by something better.
Webb points out that modern venture capital is forty years old and yet the success rate was around 15 percent. Ever since then the success rate has been pretty much that, 15 percent. How many other industries have been unable to improve their average over such a long period of time.
Says Webb, “We sat down with 200 high net worth investors to ask what’s missing in the investment landscape. Their conclusions were clear. Too much executional failure, not enough transparency around their performance, and not enough liquidity. Above all, investors wanted to invest direct and skip the VC layer. With a blockchain you get the kind of transparency that enables just this.”
Certainly, venture capital companies are responding by hybridizing the whole game, working in the token route, effectively disrupting themselves.
A number of them are changing their own limited partnership agreements to allow crypto in to their operations and this is throwing up some interesting issues. Paul Veradittakit is a partner at Pantera, says that there can be a few problems as a lot of people get on the crypto bandwagon without enough know how or clear pre-agreed guidelines.
Mix and match funding
“The token route is interesting but can create problems if you’ve gone through multiple rounds of conventional securities funding and then you suddenly put a token sale in.” Paul reels off a list of ills that can befall ill-considered mix and match efforts of funding. “Sometimes a company can do a token sale without the approval of the shareholders, and that can cause a lot of governance issues for existing investors. An obvious one is how and when do existing investors get their value out? Do they get a dividend or some sort of higher discount? What does dictate whether a company can do it or not? The token sale can also suddenly inflate the value of a company by a massive amount and then it makes it a lot tougher to get acquired.”
“Ultimately it’s best if you plan for a token sale right from the beginning rather than create a ‘bolt on’. We prefer to align interests right from the beginning and do a pre-sale so that all investors are aligned, and that avoids all those problems.”
Ultimately the answer to some of these and other problems is educating the investors and general public alike so they understand the issues.
Whatever the future of venture capital there’s one thing most people agree on.
With such a slew of decentralizing projects coming to fruition in the next few years the vapourware will evaporate leaving the projects that are solid to show what they’re made of. The proof of the investment route is always in the pudding.