Nearly $1.3bn has been raised so far this year by start-up technology companies via “initial coin offerings” — the blockchain community’s version of crowdfunding — according to a new report from Autonomous, the financial research provider.
What is unclear from the report is whether this is a bubble linked to hype around cryptocurrencies such as bitcoin or if it represents deep change in the way start-ups raise money, equivalent in disruptive power to the launch of the internet.
An ICO involves a company focused on blockchain technology selling digital tokens or coins — such as ether or bitcoin — that often enable investors who buy the tokens to use the software or service that the start-up plans to produce.
The money is usually raised in about 30 minutes and investors are not given any stake in the company or voting rights. The report said some specialists were now calling ICOs “token launches” to avoid attracting scrutiny from securities regulators.
Autonomous said: “Imagine there are plans to open a new casino, and for funding, the casino sells its own plastic chips before opening, in anticipation of customers using these chips and creating economic value.”
“Further, the buyers start trading these chips based on the expected value of the casino, how well attended it will be, and whether other chip holders are trading,” it added.
But it warned that some investors were pouring millions of dollars into companies with at best partially formed business plans.
“Unfortunately, many ICOs are fraudulent and intended to take advantage of excitement in the ecosystem by leveraging social media for promotion and a lack of enforceable consumer protection, raising legitimate regulatory concerns and attempts by select market participants to self-regulate,” it warned.
Autonomous calculated that $26m was raised from ICOs in 2014, $14m in 2015, followed by $222m last year. It found that by the second week of July there had been 56 token sales this year, raising $1.27bn in total.
More than half of this year’s proceeds have been raised since the start of June, as the price of leading cryptocurrencies such as bitcoin and ether surged to record highs. In the last few weeks, their value has fallen sharply, which is expected to put a damper on activity.
To put ICO funding in context, this year’s total is still a tiny fraction of the $34bn raised via crowdfunding platforms in 2015 and an even smaller sliver of the $127bn of venture capital investments made last year.
Neil Rimer, co-founder of Index Ventures, one of Europe’s biggest VC investors, said: “Some of these (ICOs) will replace some VCs, and some will replace some [initial public offerings]. But we don’t just allow people to raise money as quickly as possible, we bring a lot of other help and advice and I think there will continue to be demand for that.”
Yet two start-ups — Tezos and EOS.IO — have raised more than $200m each in the past few weeks from ICOs, a record amount for a single company.
Lex Sokolin, author of the Autonomous report, compares the ICO phenomenon to the rush to float dotcom companies in 1999/2000. He points out that while 86 per cent of those tech companies had failed within a decade, those that survived included big winners, like Amazon and Netflix.
“We have heard how many unscrupulous actors are out there and how much fraud there is — particularly in China where some ICOs are being marketed to retail investors online,” said Mr Sokolin. “But as an asset class as a whole I think it will create a ton of economic value.”
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