It was an innovative solution to a familiar problem.
Tech startups were looking for funding. They had bright new technologies to benefit the world, most importantly blockchain-powered software. But financing them was difficult.
Then, in 2013, the first initial currency offering (ICO) took place. The sale of Mastercoin’s cryptocurrency tokens raised hundreds of thousands of dollars to boost the new company. Others soon followed, raising funds by selling their own crypto for established tokens.
A whole new wave of investment was unleashed.
ICOs have their problems. Some commentators believe that they are part of an investment bubble that will soon burst. Others fear that growing regulatory interest will rob them of their unique value.
But ICOs have raised billions over recent years, completely changing the game for tech startups. Whatever happens next, that impact will be felt for years to come.
Funding After the Crash
Following the 2008 financial crash, investors became more cautious. The subprime mortgage crisis had forced them to behave more responsibly or risk bringing down public and governmental wrath. Where technology was concerned, they’d already been stung by the dotcom bubble. Risky investments in bold tech startups weren’t what they were after.
Meanwhile, technology continued to leap ahead, thanks to the efforts of bright innovators. The ideas were out there but it was often hard for smaller tech companies to find funding to commercialize them.
Then came the ICOs.
ICOs were modelled on the initial public offerings (IPOs) used by more conventional companies. In an IPO, the company sold shares to raise funds. In an ICO, the company sold its crypto.
ICOs reached a far broader market of potential investors than IPOs. They allowed ordinary people to invest in tech companies, effectively crowdsourcing the funds needed to support innovation. By tapping into the growing and enthusiastic blockchain community, and soon a wider community of potential investors, ICOs provided a way to quickly raise funds.
The Advantage of ICOs
For pioneers already working in the blockchain, this was a dream come true.
Previously, there had been two options for small tech startups. Either they faced the financial hardships and desperate gambles of self-funding or they put their beloved projects at the mercy of venture capitalists. ICOs were a way out of that dilemma.
ICOs had several advantages over IPOs. They weren’t bound up in the regulations that existed for IPOs, meaning that it was easier to launch one. They weren’t subject to all the same taxes, reducing the financial burden on both the company and its investors. And while the sale of shares gave equity and voting rights on company business to investors, the sale of cryptocurrency tokens did no such thing.
ICO issuers got the money they needed while retaining control of their companies. It was a win/win.
An ICO even set the stage for future funding. The team behind a startup could hang onto some of their tokens to sell after they rose in value, providing a second wave of finance.
The Advantage for Investors
None of this would have worked if ICOs didn’t also have advantages for investors.
Though ICOs didn’t provide the rights over a company that IPOs did, they still allowed investors to profit off the company’s successes. In many instances, they also provided rights over the company’s output, in access to services or discounts
The lack of regulation made it easier to invest in an ICO and reduced some taxes. This made them appealing to investors who were more interested in streamlined investment and fast profits than in the security that regulation brings.
Crypto tokens had a higher level of liquidity than many other investments. It was easy for an investor to extract their funds once the token had risen in price, using the cryptocurrency exchanges. It was useful for any investor to have some investments like this, that could quickly be turned to cash and reinvested when another opportunity arose. For someone interested in making regular, fast investments in the latest trends, it was particularly valuable.
The Advantage for the Sector
The growing popularity of ICOs led to some scams and pyramid schemes, as unscrupulous chancers sought to make a quick buck. But the majority of ICOs supported real businesses providing real goods and services. The success of early cryptocurrencies and ICOs encouraged others to follow this path.
The rising value of cryptocurrencies, especially bitcoin, made a group of early investors known as the bitcoin whales extremely wealthy. Their experience had taught them that crypto was a good investment but like any good investors they wanted to diversify their holdings. ICOs for new crypto gave them a chance to diversify while focusing on blockchain startups. Previous successes powered new successes in a virtuous cycle that saw the blockchain world boom.
ICOs changed the game for small tech companies. Startups that previously couldn’t have found their funding or that would have lost control of their companies could now forge their own path.
ICOs have opened the way for a huge growth in blockchain tech companies, and that growth looks set to continue for years to come.
How ICOs Changed the Game for Startups Looking for Funding was originally published in Data Driven Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.