The Future of the ICO Market
By now more than 1,700 startups have raised about $4 billion by doing an ICO (Initial Coin Offering). Here are my thoughts on the future of the ICO market.
- The current wave of ICOs (the sale of utility tokens) will be over in 6 to 12 months.
- The biggest issue with ICOs is that there are too many scammers, too many half-baked business models, too many greedy founders and too many unscrupulous advisors (“crypto enthusiasts”) in the market riding the “let’s-get-rich wave” by ripping off inexperienced investors.
- The second biggest issue with ICOs is the misalignment of investors interests’ and founders’ interests as buying utility tokens doesn’t grant any shareholder rights in the startup. So, the value of the utility token is decoupled from the success of the startup (and ultimately the performance of the founders).
- The value of many utility tokens will eventually go to ZERO. It’s best to think of a utility token as a pre-paid voucher for a non-existing product or service. Possible exceptions: business models based on decentralized protocols or networks.
- There will be blood and tears among many token investors. Think dot-com bubble March 2000, and this time it’s NOT different! The inevitable token crash could be the beginning of a token economy. After the dot-com bubble shake-out, we have seen the rise of the attention economy (social networks) and the app economy(mobile internet). But nobody knows.
- The second wave of ICOs (starting 2019) will by the sale of equity tokens (or tokenized equity) granting investors shareholder rights like exit and dividend participation, liquidation preferences, pro-rata follow-on rights, reporting rights, voting rights, etc.
- Once there’s a stable technical and regulatory framework for tokenized equity (and a liquid secondary market) we will see the disruption of the Venture Capital industry as LPs (limited partners) won’t tolerate 10 years of illiquidity once liquid options exist.
- In the long run, the World of Venture Capital and the World of Blockchain will reconcile combining the best of two worlds.
- From the World of Venture Capital: deal selection, deal structuring and due diligence by an experienced lead investor, a proven legal framework for balancing investors’ and founders’ interests and active portfolio management
- Form the World of Blockchain: transparency, security, scalability, fast and easy transactions of shares, increased liquidity and more inclusivity (i.e. an opening to new investor groups). This will not be the end of the ICO. ICOs are here to the stay! But the ICO of the future will be different in many ways to all the utility token sales we are seeing today.
Exciting times!
Jan 25, 2018 by Florian Huber