Early-stage startup investing hasn't changed. Investment approach and what active angels and venture capitalists look for in startups haven't changed, so why should it change for cryptocurrency investors? I probably sound like a retired John Wooden or Obi-Wan Kenobi to some young millennial crypto investors, but there is no reason these factors change if it's only the funding mechanism and not the actual paths to building successful companies.
Just a couple of years ago, many startups that couldn't secure seed funding are now launching their own ICOs. Did their business models change? No. Their team? No. What changed? Just their target audience of investors.
Why is the bar so low for startups raising through ICOs? You have a nicely written whitepaper, so you should be able to raise $10 million? You have a team from Google and Facebook or co-founded a prior company that was sold as an acquihire? Maybe most of these new startup investors don't know how high the bar is in some sectors for seed capital. Most seed funds don't even look at mobile applications with retention rates below 20% after six months or e-commerce companies with less than $500,000 in revenues. Don't Become Dumb Money
Obviously, there are mechanics behind the scenes that benefit from these low standards (i.e. products in alpha or vaporware) since many ICOs are driven by whales that pump and dump
. Even if the price of a token drops 20%, these investors still do very well since they probably bought at a 40% discount.
Do not become the retail person at the end of these ICOs sitting with a bunch of phantom tokens or equity in a paper tiger that never launches a product. There is a problem with the whole "industry" of ICOs when most of the company research reports read like reports from the 1990s when information was thin and hype was thick. Convert Your Seed Investment at the ICO
Investment standards shouldn't change, and the terms shouldn't either. We recently invested in a blockchain related startup that was planning an ICO. After reviewing their convertible note documents, our team brought up the fact that our investment doesn't convert at the ICO. If a company is raising $5 million, $10 million or more through an ICO, the seed round investors' convertible note shouldn't be left in limbo and it should convert to equity. We had a simple conversation with the founders, who also agreed, and the terms of the convertible note were changed. Look Out For The Hairy-Nosed Wombat
Opinions may vary, but to me it seems clear that as regulators step in and the ICO craze tempers down utility tokens will be tied to equity. It's hard enough to create a successful startup and product, but on top of this to create a successful ecosystem around your tokens? This is like creating Eventbrite and Evernote concurrently while circling the globe in 80 days -- a monumental task. So I believe the vast majority of utility tokens will eventually be tied to equity in some manner.
There will be rare utility tokens that can successfully justify their existence, but not many. Maybe as rare as the hairy-nosed wombat, of which there are approximately 200 in existence. Presently, the ICO-focused legal community itself is debating whether a pure utility token will be deemed securities in the Cardozo Blockchain Project's response to The SAFT Whitepaper published by Cooley LLP. Therefore, it is possible that many ICOs which are positioning themselves as "utility tokens" to avoid being deemed securities will not succeed in that effort.