BUT, when I suspect that some VCs are actively suggesting to their companies to think about token sales, then I start to worry.
And I really worry for them, but most of all for all of the venture ecosystem.
As usual when something wanders through my neural paths, I posted it to twitter
, but this time I'd really like to explore the topic a bit more in depth, as well as solicit the feedback and ideas of both crypto and VC people.My current view is that the game that ICO-pushing VCs are playing is all risk and very little reward, which doesn't make it a great one.
- Let's assume
we have a non-performing company in our portfolio with a large user base.
This is maybe a company that has failed to find a way to monetize, or doesn't have enough growth metrics to attract the next VC round, or just plainly hasn't found PMF yet.
- Let's also assume
we are well aware of the ICO trend, and are capable of providing a strong signal to the wider market, bumping up the chances of said company to raise substantial funding in a public token sale.What do we do? And why?
My mental model has to split or fork here, based on one crucial factor:do we, as investors, actually believe that an application-specific token with no cryptographic reason of existence would generate and retain value both for the company and the token holders?
If we do believe that, then it's all good. We don't care about the equity anymore, are happy to relinquish governance to a foundation maybe, and will just hold the token for the long term until the company has developed its ecosystem and has been able to align the value exchanged on the network to the token.
But I have a hard time thinking that some of the smartest minds in the world believe that introducing more friction in an ecosystem, with no underlying "platform protocol" which would need a token, would result in any more value (especially at the valuations for tokens that are flying around).
- So, let's now also assume
that we don't really believe the token should exist or would improve the chances of success for the company.
What do we do now?
Do we condone / suggest an ICO?
Do we advise against one?
It's a VERY tricky question.After a bit of thinking, my bottom line is that there is no real positive outcome in a situation like this for the VC firm.
Let's assume the positive scenario where there is a successful token sale, and the company raises $100M.
The company gets some nice new runway, but even if it's then able to find its real path, it would have trouble to get acquired. Who would ever in their right mind acquire a company that sold hundreds of millions of dollars of securities around the world to god knows who? That would not pass one single due diligence meeting with any reasonable acquirer.
Same goes for a public market listing.
So the equity of the company, even if it might not have been worth much earlier, is now worth probably even less.
Obviously if the company raises the money and then fails to achieve anything, we'd now have thousands of pissed "investors" all over the world.
In both cases, the VC doesn't really come out of it too well, and I think could go down in flames like some firms that were financing pre-bubble internet firms.
Because, now, instead of being remembered as the VC who backed that startup that failed, we'll be remembered as the VC who backed a startup that failed and also sold extremely high risk securities to users all around the world for a lot of money.
One of my favorite comments on a group was:
"If they were to incorporate a token for a novel use case, and sell a small amount, at a fair valuation. And if they didn't use that funds to pay back investors, I would be excited to see adoption by a large app.
But this isn't adoption. This is a bailout."
And, FWIW, this is the feeling with almost everyone I consider smart and informed in the crypto community.To my surprise, I got an answer to the previously linked tweet, from none other than Fred Wilson himself.
I've revered Fred for most of my life, and have been extremely impressed with his ability to grasp new trends and get conviction on them, so I have nothing but respect for the man,
But the answer wasn't really too convincing this time around.