Yesterday Facebook and Google killed ads for ICO’s. My friend Josh Brown (@reformedbroker on Twitter) applauded it. Last fall, he blogged about getting a walrus sex ranch off the ground and funding it with an ICO. It’s preposterous and obviously a farce, but so are many ICOs.
I am not against ICOs. It’s important to go in with eyes open.
There is a whole cottage industry around them. Not only legal, but there are small investment banks that raise money for ICOs. I saw a pitch for an ICO yesterday. Without grading the pitch, or the company I will tell you it reminds me a lot of the very very early days of starting Hyde Park Angels. You cannot imagine the places I would go to hear pitches in Chicago. Many apartments. The crowd that showed up was a combination of sketchy, service providers looking to make a buck, and scammers along with real investors.
Warren Buffett famously has said he is staying away from the ICO market. It’s financially prudent. He stayed away from the internet back in the late 90s too. I think the internet is still with us. However, I don’t think Warren is wrong. I agree with him in many ways.
The problem with new technology is it is really really really difficult to pick out the winners from the losers at an early stage. Brad Feld likes to say it’s like picking a needle out of a haystack. I agree. You can line up 20 seed stage companies and it is impossible to predict which one will be the billion dollar company. That’s why there is so much variation and failure in venture portfolios.
However, you have to be in the market constantly and have a thesis on which to invest. Fred Wilson has done a great job of showing how that works. Post investment, you have to be in the trenches with the entrepreneur. A VC is not a general. They are a first sergeant. The entrepreneur is the second lieutenant that is giving orders, but perhaps not confident in what they are doing.
This crypto thing certainly looks like an unshortable bubble to me. NASDAQ was like that in the 90s.
I hear stories (daily) of CEO’s trading crypto at their desks. Stories of people who cannot afford to trade it trading crypto from their phones. People who have borrowed against assets like a home to buy crypto and now refuse to cover because all of a sudden they are full of smarts and know more than everyone else.
The problem today is that you cannot pick which ICO is going to be good, and which one will fail. It’s easier to be Buffett and say it’s fraudulent. When the dust settles and the technology proves itself years from now, successors to Buffett will invest in the winners. If Buffett were to be alive, he would too. But, this is a long-term deal and won’t play out for a number of years.
All the uncertainty leads to a total misallocation of capital. Who am I to say this one won’t work or this one will? The answer is NO ONE KNOWS. It’s hard to even calculate a real probability outcome with any degree of certainty.
I stick to the core thesis.
1. Is the blockchain solution solving a real problem that exists that cannot be solved with traditional technology?
2. Is traditional tech an okay solution, but a blockchain networked solution better for some reason? Is there a strategic business reason that is QUANTIFIABLE which is crying out for blockchain?
3. What are the costs to your company? Do you have the resources? Will it hurt top-line revenue and can you survive if the effort fails?
4. What happens to your company if the entire crypto market craters and every crypto is worthless? Is blockchain the best solution to the problem and will customers be willing to pay you for it?
5. What happens to your team if the market craters? Or, if it goes even higher? Will they leave?
6. Are you utilizing the network effects that come with blockchain to strategic advantage? Or is it simply totally private and controlled?
7. How are you going to account for tokens, cash, revenues and expenses on the financial statements?
8. Governance? You better have a handle on it before doing an ICO.
If your company is going to do an ICO and implement a tokenized blockchain solution you have to be able to answer the above questions. If you can’t, answer them. If you can’t answer them with any rigor, don’t do the ICO.
One ICO I can point to that seems like it is answering all these questions affirmatively is Filecoin. There will be more. Ripple seems like it might be answering them. But, without a lot of data and proof, anyone that buys their token is just trading on hope. However, there will be massive companies built off the blockchain with some massive winners.
We just don’t know which one it will be yet.