Are ICOs better than Venture Capital?

There is still a conservative wave of thought that is hesitant to embrace ICOs as the overtaker of Venture Capital (VCs) as the main way of fundraising for new businesses. These conservative thinkers argue that several factors, most notably volatility, create too much uncertainty as compared to traditional funding by VCs. At Pool of Stake, we believe that these conservative thinkers are wrong, and that ICOs are the beginning of a financial revolution that gives greater freedom to both project developers and investors. In the following article, we make a comparison of growth for each of these fundraising methods, and then further explain some of the benefits of raising cash through ICOs rather than through VCs.

The start of this decade was a booming period for VC fundraising. Thousands of startups received millions worth of funding in exchange for equity and voting rights. This yielded several great companies, but it also paved way for many overfunded ventures that were not achieving what they had planned to. After a certain peak, VC funding has shown signs of retreating. There are two variables which we can use to measure the state of VC funding. The first one is the total number of VC deals that happened globally, and the second one is the total VC funding in dollars. The peak for the total number of VC funding deals was Q1 2015. The peak for total VC funding in dollars was Q2 2016. Using data from a report by KPMG, we will compare the peaks with the most recent verified numbers.

  • Q1 2015 – Peak for total number of VC funding deals: 5,250
  • Q2 2017 – Most recent updated data of VC funding deals: 2,985

Change = -43%

  • Q2 2016 – Peak for total VC funding in dollars: slightly over $45 Billion USD
  • Q2 2017 – Most recent updated data on total VC funding in dollars: $40 Billion USD

Change = -11%   

The trend is clear. Both the total number of VC funding deals and the total VC funding in dollars has decreased. What does this tells? VCs have stopped being so generous with their funding and more picky with their projects. The lower decrease on total VC funding in dollar accompanied by the higher decrease of the total number of VC funding deals sustains this theory. VC funding also comes with some disadvantages both for investors and the project team. Investors are stuck with equity of a company that they can’t sell in a public market if they want to opt out of their share. Project teams are restricted by investors that take an active management role in the company, which requires projects to already be running and limits pivoting the business model, which can lead to success.

ICOs paint a different picture. Last year was the first boom for the market, and this year is looking even better. According to data from coindesk, the $6.3 Billion USD that ICOs have raised so far this year represents 118% of the total invested on 2017, which so far had been the peak year. Given that we still haven’t concluded the second quarter of this year, we will compare the data of Q1 2018 to the same quarter in 2017, which was the peak year for ICOs (Q1 2018 is the all-time-high so far). We use similar metrics as the ones from VCs, taking into account the total number of ICOs that received funding and the total funds in USD that were raised. The data looks as follows:

  • Q1 2017 – Total number of ICOs receiving funding: 15
  • Q1 2018 – Total number of ICOs receiving funding: 203

Change = +1,353%

  • Q1 2017 – Total amount of USD raised by ICOs = $38,740,000 USD
  • Q1 2018 – Total amount of USD raised by ICOs = $6,330,150,000 USD

Change = 16,340%

Numbers speak for themselves. There is an increased interest in ICOs. Even with the uncertainty that volatility and regulation have brought this year, both investors and projects are still jumping into ICOs. Why? Because they add great benefits that other forms of fundraising do not have. One of the main advantages for investors is that they are not stuck with illiquid equity from a company that they can’t sell, like it happens to VCs. After getting listed in an exchange, a project’s token can be freely traded, so if the investor is not fully convinced by the development of the project, he can sell his stake, or buy more if he is loving it! From the perspective of a project’s team, there are many benefits. First off, it is easy to raise cash from investors all over the world, making it very easy to raise a budget to develop a project. Second, the company doesn’t need to give up any equity or voting power to shareholders, this way they can captain their project all the time. This is very important, since VCs sometimes interfere too much with projects and either kill the idea or don’t let positive changes happen due to an excessive focus on profitability. This is to be specially taken into account since almost every great company in the world has changed and pivoted its business model.

Pool of Stake is proud to be embracing this new method of fundraising. We are looking forward to reach our funding goals with an ICO. Besides that, we are looking to deliver to the people the helped the project become true. We are not giving away securities or equity of our company, but rather a token that enhances our product and has a true use for whoever adopts it.