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When initial coin offerings (ICOs) first entered the financial world, a major part of their emphasis was put on circumventing traditional funding methods for startups. With the explosive growth of crowdfunding seen from platforms like Kickstarter and GoFundMe, ICOs were engineered to simplify, democratize, and expand the funding of startups without the help of traditional lenders.
However, now that ICOs are undergoing more scrutiny from regulators like the US Securities and Exchange Commission (SEC), the landscape is beginning to shift. The days of unlimited ICO participation are coming to a close as the cryptosphere is looking less and less like the ‘Wild West’ and potentially more like Silicon Valley.
While blockchain-based startups are still launching with token generating events to raise funding, the same funding model of an ICO, they’re changing the way they approach the execution. For example, it’s now common to hear of different funding models like Simple Agreements for Future Tokens (SAFTs) meant to raise for capital in private sales and Security Token Offerings (STOs) taking the place of the once-ubiquitous ICO — here’s why.
Drawbacks of an ICO
Though once heralded as the new paradigm by many excited about crowdfunding startups and disruptive funding models, ICOs are losing the allure they once had. As regulators continue to put restrictions on offerings, the token generating events are becoming less accessible for retail investors.
For the United States in particular, most would-be investors aren’t able to participate in many ICOs due to not being accredited investors. The industry has seen the effects of the shift taking place as well. While it’s true that ICOs raised more in 2018 than previous years, the trend is tapering off as the year continues.
https://www.icodata.io/stats/2017
https://www.icodata.io/stats/2018
Looking at data from 2017 and 2018, investors see a significant rise in funding towards the end of 2017 and the beginning of 2018 with a decline as 2018 continues. This change in funding can be attributed to multiple factors beyond the legal status of ICOs as well, including the decline of prices in the cryptocurrency markets as a whole.
With regulators clamping down on who is eligible to participate in ICOs, blockchain-based startups are looking to other sources for their funding to make up the difference.
Venture Capital in Blockchain
The ICO and other crowdfunding models were brought to the industry to disrupt more ‘traditional’ funding methods like venture capital, yet that outlook is changing. One of the clearest examples of blockchain-based startups changing fundraising efforts can be seen with recent news of venture capital involvement in the industry. Earlier in the fall, TEMCO, a Korean startup providing supply chain solutions based on bitcoin smart contracts (RSK), received funding from the leading venture capital and private equity firm in Korea, Korean Investment Partners (KIP). Though VC funding has been around in the blockchain space before, often it went to companies servicing the industry rather than actual blockchain-based startups themselves.
For example, consider one of the largest VC-funded projects in the blockchain space, Bitmain, which reportedly raised $400 million in funding led by Sequoia Capital. The Chinese powerhouse in the crypto markets is known for producing mining machines and running mining pools, not for implementing blockchain-based solutions.
But TEMCO isn’t the only startup seeking — and receiving — VC funding either. According to research from Diar, VC funding in the blockchain sector has been steadily increasing year over year since 2013.
Venture Capital Firms Blockchain Investments, 2013-18. Source: Diar
Other blockchain-based startups securing VC funding include projects like Dfinity, which is building what it calls a decentralized public cloud. Dfinity recently raised $102 million in early investments led by Andreessen Horowitz and Polychain Capital, which brings their total amount raised in private funding to $190 million.
What’s Next?
Now that the cryptocurrency and blockchain sector is being made aware that ICOs are no longer the Wild West they once were, more traditional financiers appear to be stepping into the industry. Moving forward, it looks less like VC funding is going to topple the blockchain investment space, but rather organically become a part of it.
Along with the shifting fundraising models of blockchain startups, the space is making room for many blockchain-focused funds and institutional investors. Part of the changing landscape for the industry includes the introduction of firms specializing in early stage investments into startups which may previously have opted for an ICO. New investors like Blockchain Capital, Polychain Capital, and more are paving the way for VC activity in a nascent industry previously dominated by large scale crowdfunding.
While no one knows the definitive future of the ICO funding model, it’s apparent that other methods of funding are becoming increasingly accepted in the blockchain startup space. Moving forward, investors should watch for more institutional involvement as the unregulated days of wide scale ICOs look to be coming to a close.
