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The latest oversimplification of the story around initial coin offerings, or ICOs, is that the venture capital industry might eventually find itself replaced by this hot new form of cryptocurrency-based fundraising.
As much as ICOs are a fascinating innovation, as are the blockchain technologies enabling them, the idea that they will replace venture capital is a myth.
Like most myths, there is some truth to it. As of early June, blockchain-related startups have raised $327 million through ICOs, more than the $295 million blockchain entrepreneurs have raised through VC funding, according to CoinDesk.
And some VCs have been testing the idea of raising funds themselves with ICOs. At a recent CB Insights panel, Satya Patel, cofounder of seed-stage venture firm Homebrew, floated the idea of raising the firm’s next fund in an ICO, saying it had even been discussed among the partners.
Liquidity is a big advantage in ICOs. Venture investments can be tied up for years before seeing a return, while markets in bitcoin, ether and other cryptocurrencies allow for immediate trades of any currency purchased in an ICO.
But the narrative, at least for now, ends there.
The most successful ICOs have been tied to an influential VC: Tezos and Bancor, two of the biggest ICOs yet, were backed by legendary investor Tim Draper, and Mark Cuban recently said he would participate in Unikrn’s ICO, which lends it some celebrity cred.
Those are just two of the most high-profile examples. A number of other VCs have stepped into the space, including San Francisco venture firm Blockchain Capital (which was behind the BCAP ICO, which raised $10 million in six hours) and Andreessen Horowitz and Union Square Ventures (which put $10 million into Polychain).
This suggests that rather than replacing VCs, ICOs could actually be benefitting greatly from being affiliated with them. There are few validation agents currently in place to lend credibility to ICOs; VCs could be filling that gap.
Perhaps other entities much like independent rating agencies will emerge for ICOs, assuming the market sustains itself and continues to grow. For now, the crypto-fundraising concept is so new that having a respected entity involved goes a long way to reassuring investors.
Of course, we are seeing instances where this validation doesn’t necessarily have to…