13 May 2019
Starting up a company is easy, bringing it into the big time is another thing entirely. Doing that requires a lot of money and traditionally startups have looked to venture capital to finance their early prototypes. Venture capital funds help promising startups succeed by investing a significant portion of the money and the best have contacts in industries that are applicable to the startup in question.
Bitcoin brought about a decentralized currency revolution, but one thing that came about because of this decentralization was the ability for anyone, anywhere to get involved in projects and startups. This lead to the development of a game-changer in raising capital for crypto-based startups – the ICO. First tried in 2013, it gained steam in 2017 when there was a blockchain and ICO frenzy. Everyone wanted in on the action and it lasted until the middle of the following year.
The most obvious difference is that VC funding is given in exchange for equity in the company, whereas a token offering does not give any right to equity in the company. While VC funding has long been used as a gold standard for wise investments, it is still a large risk being undertaken by a single fund which is why equity is needed for Venture Capital. That gives the fund a say in how the business is run and it shares directly in the profits of the business should it succeed.
There has always been a slight divide between venture capitalists and startup owners, and the relationship is rarely as cordial as many would believe. The pressures of adding another partner that has given a large amount of money to your idea are substantial and many founders are not able to do deal with the pressure and simply lose interest in their creation.
That is why what made ICOs so appealing. They were able to directly involve the community in financing projects that they were passionate about while also managing to raise funds for the startup. It created an ecosystem prior to a token being officially launched. Though this relationship between users and companies has been harmed by the number of scam ICOs that have been launched, it is still a unique and clever way to get the best community involvement.
The other difference is one of experience. VC firms will typically have an army of lawyers and economists that a startup can draw from, as well as having a beeline to the best talent through their talent acquisition program. They can put the right people in the right positions (usually the business side, leaving the tech to the people who are most passionate about it) and in that way ensure that the business grows. The business grows and their investment grows and they are able to mitigate the risk of a bad venture.
ICOs do not have this type of experience to draw upon, nor do they have experts in fields not related directly to the technology they are producing. However, what ICOs do have is community power. They are able to leverage the best and brightest in the community and incentivize them with the growth in value of a token that was bought.
The primary buyers of tokens are technically minded people and if they are willing to give their time to make the project a success, it can have a profound impact on the startup and the ecosystem as a whole. However, one weakness of this is that the business side of things is not as well represented and many teams have lopsided management (too many technical people, too few business people).
However, that can be rectified with proper planning.
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