By Samee Zafar | 2018-03-01T14:21:25+00:00 February 28th, 2018 | Categories: Mobile & Advanced Payments , News & Articles | Tags: Cryptocurrencies , Fintech |
Venture firms like to back innovative start-ups that have the potential to disrupt industries. Now an innovation is set to disrupt theirs.
Rather than raise funding through the traditional venture finance process: a series of financing rounds leading ultimately to an Initial Public Offering (IPO), some start-ups, especially those linked to cryptocurrency or blockchain, are sourcing funds directly from investors and donors through Initial Coin Offerings (ICO).
An ICO has many advantages over venture finance. The most attractive feature is that founders do not have to give up equity or even partial control of their business to outside investors. An ICO is a sale of coins or digital encrypted “tokens” which do not carry any ownership rights.
Venture firms not only take a stake in the company they fund but also require a seat on the board and can be meddlesome without fully understanding the founders’ vision.
Another benefit, at least to the founders, is that the company avoids the strain of rigorous scrutiny.
Venture funds do their due diligence before they fork out capital. But in an ICO, there may be thousands even millions of people taking part. If the coin buyers are also potential users of the platform, the start-up will gain customers alongside capital. It is like a community financing an infrastructure project that they will use.
All routes to raising capital require detailed analysis and documentation – strategic vision, product or service propositions, competitive environment, financial projections, future plans. But ICO’s only publish white papers – brief documentation that describes the company’s plans in descriptions of varying vagueness. There are many ambitious overarching statements relating to the problems the business will solve. They state that current processes in an industry are broken, the incumbents are inefficient, and a combination of crypto-platforms and blockchain technology will create a new “eco-system” or a market-place in which transactions will be undertaken at the speed of light in an open, efficient, and decentralised environment.
There are some explanations, not always adequate, on how the funds will be used. Team resumes and past successes of team members are added to complete the paper work.
Predictably, venture funds have called out coin offerings as suitable only for start-ups unable to raise funds through the regular and more rigorous process of venture finance. This is true. Not just for start-ups but even for governments. It even provides a path forward for countries with wrecked economies. Venezuela is reportedly planning a token sale of $6 billion worth of “petro” tokens.
However, there are many start-ups with sound business models and pragmatic plans for growth going the ICO route for reasons of independence and control mentioned above.
Coin buyers often do not understand the business the founders are trying to develop or the business they are trying to disrupt.
They are more likely to be interested in the market forces of supply and demand and the potential appreciation in the value of the token – bitcoin style. They know the investment is high risk and high return. A wild ride.
Telegram ICO
The recent much talked about ICO of Telegram, a secure chat platform, whose security is as much appreciated by libertarians and legitimate users, especially the “crypto elite”, as it is by cybercriminals and rogue social elements, has raised $850 million dollars. This makes it the largest ICO so far.
Now, there are reports that another round is planned hot on the heels of the first taking the total amount raised to around $2 billion. Telegram is planning to create a new crypto platform with two main components – a new blockchain system as the foundation of the platform – and a crypto token called the “Gram” to be the platform’s cryptocurrency in much the same way Bitcoin and Ethereum systems are set-up.
Like other white papers, Telegram’s white paper is brief. It sets out the company’s ambition to set in motion the next crypto revolution, building an eco-system, the Telegram Open Network (TON), that would not only be much faster than Bitcoin or Ethereum, the two most popular cryptocurrency systems, but outclass Visa and MasterCard in global payments. Its token will eventually become the “standard cryptocurrency used for the regular exchange of value in the daily lives of ordinary people”. How exactly this will be achieved is not discussed.
It will do things better, faster, and cheaper than everyone else.
It wants to create nothing short of a global “mass market cryptocurrency” – something both Bitcoin and Ethereum systems have been unable to do.
The demand for the second round of funding, like the first one, is likely to outstrip supply. This shows the confidence people have in the ability of Telegram to deliver on its promise.
But Telegram, over the past few years, has come under serious criticism. The Durov brothers created Vkontakte or VK, Russia’s Facebook-like site but were forced to sell it.
They have funded Telegram from their own money. Telegram itself does not make any money.
Telegram is running out of cash. Hence the ICO. Following libertarian ethos, Telegram combines “rigorous privacy and zero cost.” In other words, there is no business model, no revenues, but a lot of secrecy.
The way to ensure “zero costs” is to do an ICO. That should be the reddest of red flags to any investor. This is why many of the major VC firms have stayed out of the ICO. Pantera, for example, a leading cryptocurrency VC firm did not participate.
Telegram ICO is either a black box with no information shared or there is none to share at this stage. Another observer says, “they will figure out what to do after they get the money” and a major crypto-investor has called it “the biggest airball is venture history.
” Generally, people think, venture investors who missed the crypto bandwagon are now jumping on the Telegram ICO.
As indicated above, Gram token buyers are not interested in what profits Telegram will generate. They are almost exclusively interested in a Bitcoin-like digital-miracle in which, a simple cryptographic digital record, with no intrinsic value, could be worth thousands of dollars simply because of the market forces of supply and demand.
But then that’s what everyone said about Bitcoin and Ethereum. Maybe there is room for one more mega cryptocurrency while the craze lasts. Those who bought bitcoins and ether tokens early on, cashed in on mega returns.
Perhaps the world is changing and the crypto craze will last forever.
The Durov brothers are die-hard libertarians who certainly want to change the world. They want to transform the implausible libertarian dream of no international borders into a real possibility in the digital world. Investor appetite for high-risk high-return investments remains significant.
While we scratch our heads at the radical way the world markets are moving, regulators are gradually becoming less relevant in the expanding cyber-universe. The onus of consumer protection is being passed back to consumers – “caveat emptor” or buyer beware.
Simply put, in the words of a libertarian friend of mine: “This is pure capitalism”. Share this:.