A lot of startup firms are doing ICO’s. There seems to be no end to them. If you are just waking up and don’t know what an ICO is, it’s an initial cryptocurrency offering. What’s that? A company creates a token and literally auctions them off in a manner similar to an IPO. There is no dividend, claim on the future profits of the company embedded in the token. The token is simply a ticket to use the blockchain it is associated with.
There are a lot of reasons for the success of the ICO market. Over $3B has been raised. Without delving deeply into the details, here are a few generalizations:
- It’s hard to raise venture capital money and there is a fixed supply of venture capital money.
- There is money in places like China and Russia that are looking for ways to get out of the jurisdiction of the country. When your risk is that the government can capriciously grab your cash, you will have a higher risk tolerance because money isn’t “worth” as much to you.
- The crypto technology has staying power. Except, no one really knows at this point which blockchains are going to be the winners and which ones will be the losers.
- The ICO space is 100% unregulated, and the regulated capital space is way too over-regulated.
When I first started looking at Bitcoin, I assumed that tokens could be issued in place of equity. I haven’t seen any major corporations do an ICO yet, but I don’t think we are too far away from one doing it. I postulated that CME should do it because it could fit with their core mission. By too far away I am thinking a couple of years.
Last night at both of the holiday parties in Chicago I was at, the talk was cryptocurrency. My old high school buddies are texting me every day wondering why I didn’t tell them to buy crypto seven years ago and if they should buy it today. Clearly, we are at some sort of inflexion point.
For startup firms, a ton of capital has been raised. Yesterday I blogged about the common mistake startups make. Clearly, crypto was on my mind. It would be a totally tragic mistake of epic proportions if a firm raised millions in an ICO and then blew through the cash with nothing to show for it.
Here is some friendly advice.
- Convert all the crypto your white paper allows you to convert into fiat currency. Bank the crypto. Put it in an interest-bearing account. Don’t touch it.
- There are general metrics around the life cycle of startup fundraising. Adhere to them with very strong discipline. For example, in a seed round it’s typically $500k-$1.5M of investment. If you are doing an ICO and haven’t done a seed, use that guideline as your runway for the next 12-18 months.
- Set hard metrics and guideposts to guide you. If you are a SaaS company and you know that Series A SaaS rounds are only contemplated when you hit a minimum of $100K in monthly recurring revenue, don’t dip into the kitty until you hit that bare minimum. Instead, force your company to examine why it’s not hitting that metric. Do what a normal company would do. Pivot, let people go, cut costs. Force yourself to make the hard decisions.
- If you have $50M sitting in a bank account paying you 3-4% interest, you should be able to fund your company off the interest. It’s sort of like telling a pro athlete to bank their contract and live off their shoe contract.
- Put in transparent governance with a board that has at least one independent board member on it to oversee everything.
- If after a few years of fighting you have nothing to show for it, buy tokens back from your investors and return the money to them. You’ll be able to look in the mirror and feel good about yourself. If I was an investor and got some money back from a failed investment, I’d respect the entrepreneur and might invest in them again.
All this takes is discipline, and the ability to take a step outside the whirlwind of building a startup to try and see what is actually going on. Admittedly, it’s super hard to do. In a totally unregulated wild west environment, the ones with discipline, honor and self-worth will do better than anyone else.