We’re Witnessing a New Kind of Crowdfunding on the Blockchain
Something odd is going on in Silicon Valley and Venture Capital, seed-funding for early-stage startups is down by number of transactions by 40% since a peak in mid-2015. According to LinkedIn, while the amount of money being invested has remained more or less steady, funding has concentrated in later stage companies, away from newly-minted startups.
Is this the Decline of Access to Innovation?
You can’t enable startups to scale without the funding to attract the engineering talent needed to create world-class tech company and translate the passion of entrepreneurs and their bold new ideas into solid market-tested products that can scale globally.
Risk-average angel investors and a number of other contributing factors means it’s harder to get off the ground. Cyber-token crowdfunding may have sounded sketchy in 2016, but now it’s nearly 2018. A lot can happen in a few months at current rates of technological progress.
If cryptocurrencies and altcoins were for the most part invented by people who didn’t much like regulators, how will countries “regulate” ICOs that help crowdfund startups and boost local innovation? Perhaps we should take a second and serious look at how this is good for innovation. The blockchain revolution has incredible potential via ICOs to also stimulate entrepreneurship.
Are ICOs really the democratization of fundraising? That might be going a bit far, but certainly with Angel investing, VCs and Kickstarter-style crowdfunding — startups need more valid alternatives. Startups need to find investors in one way or another and options that align with their values, and sync with building companies of tomorrow might be the answer. Old ways of doing this won’t always work.
It’s Time to Regulate Trust and Empower Transparent Crypto Crowdfunding
As startups launch an ICO by issuing crypto-tokens on the blockchain and offering early investors a chance to acquire tokens, in exchange for cryptocurrency — there are distinct pros and cons. But how will the legal classification of ICOs and such crypto-tokens evolve in that they resemble aspects of crowdfunding and even IPOs, but obviously have more potential for shady things to occur? With the right regulation, ICOs could be a kind of crowdfunding on the blockchain that’s more sustainable.
With the unregulated nature of the blockchain itself comes new interactions in the blockchain, that can spur innovation at a time like now, where early-stage funding and investment is even harder to come by than usual. Depending on where your early-stage startup exists, this can be a significant barrier to entry to becoming a successful entrepreneur. We should rely on innovation like blockchain and ICOs, to fuel the next generation of tech startups, but we need very precise and clear rules to make it happen that takes the Bitcoin craze and uses it constructively in favor of entrepreneurship.
The blockchain is all about transparency and new ways of building trust and consensus, this has to scale as to how ICOs are conducted and how startups can benefit from them. If an ICO sounds like a childish money making scheme to folks in finance, but some have contributed to how entrepreneurs can grow their business to the next level, how can the blockchain and VC community come together to stabilize this new form of crowdfunding?
Harsh Reality for Entrepnreurs
The fact is Angel investments for early stage startups and the entire funding landscape has changed significantly and stumbled badly within the last few years. That’s bad news for grow-or-die stage startups who have considerable risk, yet on the other hand, ICOs themselves have been growing and multiplying at incredible speeds. So what gives? Why isn’t this method of crowdfunding hitting the mainstream of global startup communities? Odd that in 2017 we’ve heard more about cryptocurrencies than the demise of early-stage VC options for startups. And yet, there are stats that show things are shifting:
Initial coin offerings have raised $1.2 billion and now surpass early stage VC funding (Source: CNBC, as of August, 2017).
ICOs are becoming more recognized and if the current Venture Capital landscape continues to be risk-averse, ICOs will increasingly become legit ways for startups to survive, and a few of them will thrive! Startups will be able to raise money by selling investors tokens in exchange for equity, similar to an initial public offering (IPO) and have a vote on their future direction (definately that’s not a donation).
Some suggest the biggest winners of ICOs are actually seed investors themselves. Yet this stuff is still brand new, it feels like it was just yesterday in 2013 when the first ICO started with Mastercoin’s starting ICO. In many places the regulatory scrutiny is killing the enthusiasm, and even the possibility of ICOs on a legal basis. Cities that value innovation, will have to look at the facts and see the enormous potential for startups in ICOs.
However, since ICOs create the opportunity for startups to sell a token which is an asset to potential employees, developers, users and investors; it’s far more fluid and “collaborative” than Angel investors, a Kickstarter or anything truly resembling an IPO-model. The token that is generated from the ICO is a new kind of asset, not really an equity. No more equity diluted from future rounds, the equity holders before the ICO get all the benefit, and thus, there could be a win-win here that enables startups funded via ICOs a sneaky advantage over their old-world competitors.
So why does it matter to startups again?
The Implosion of Early Phase VC Funding
The implosion of early phase VC funding might be what was needed for ICO crowdfunding to take off. Think about it, where better could the future of innovation come from then via the trust advocating blockchain? Between unregulated crypto bubbles and a mad race to Bitcoin futures (derivatives), it’s make or break time for the Bitcoin madness and we are probably witnessing a new kind of crowdfunding and entrepreneurship.
We are witnessing new technologies and blockchain experiments that are creating new jobs and new avenues of how new companies can thrive, and could receive early-phase startup funding in the future. On the other hand, Venture Capital in Silicon Valley is also changing.
Since 2014, the amount of VC rounds in technology companies worldwide has nearly shrunk in half from 19,000 that year to 10,000 in 2017. While the amount of money being invested has remained more or less steady, funding has concentrated in later stage companies, away from newly-minted startups. There are a number of possible reasons for this: the popping of a seed funding bubble during the shift to mobile, the movement away from funding apps, Fintech and SaaS startups, and increasingly risk-averse angel investors. Source: LinkedIn.
Why we aren’t talking about this more is beyond me? Not only does it seem like Venture Capital sexual harassment scandals have hit leadership in VC, Silicon Valley is no longer making it rain so much as it is making it trickle. What’s a startup to do?
As the level of diligence at the seed stage seems to have increased significantly over the past few years, at the same time, we’ve witnessed the rise of ICOs and blockchain innovation. Many formative waves of tech verticals, are no longer hot and have either made it, or no longer exist. Regulation of the blockchain must be careful not to curtail the positive impact it can have on democratizing innovation itself.
It might be the wild west of ICOs in recent months, but as better regulation occurs, a rating-system is put into place, and more case studies of startups who create win-wins with this new method of crowdfunding occur, yes ICOs could play an increasing role as a proposed solution to the early phase startup funding crisis.
This then, means that the crypto hype can fuel not only new kinds of innovation on the blockchain, but the startup community and entrepreneurship itself ushering in a new paradigm of consensus based community and collaboration, in what was once such a cut-throat elitist game of tech.
Correct me if I am wrong?
I’m a futurist in residence.
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