In the past three months, companies have raised more than $300 million, not through venture investors or banks, but from token sales, also known as initial coin offerings.
Venture capital has become synonymous with innovation and wealth creation over the last half century. Today, corporate VCs (established corporations that with dedicated funds for external startup companies) are on the rise; the number of active corporate VCs per quarter more than doubled between 2012 and 2016, according to CB Insights. Enthusiasts of token sales are optimistic that they can unseat venture capitalists, as an investment vehicle that removes the need for the middle man and provides more liquidity.
The VCs themselves haven’t shown much concern over that idea (it may be too early for that). If anything, some are looking beyond that detail at all the possibility for innovation.
“It’s much like you agreeing to pay in advance a two-year subscription to the Wall Street Journal or New York Times,” said Ryan Gilbert, partner and founder of Propel Venture Partners, the BBVA Ventures spinoff that launched as its own LLC last year, at the Tearsheet Money Conference this week. “The subscriptions we used to know are the coin offerings of today.”
Of course, it’s not clear if the tokens sold constitute securities. The Securities and Exchange Commission hasn’t issued any formal guidance on tokens as securities and regulators tend to take a do-no-harm approach to new business concepts and technologies that haven’t proved harmful.
“Yes, what’s happening today might be controversial,” Gilbert said. “But when regulators learn more about what’s truly happening, they’ll recognize… what’s going to help deliver financial services to everyone at the lowest possible price, how are we going to truly have transparency, is knowing both where a transaction starts and ends and what the true costs are going to be.”
Gilbert’s stance reflects a growing interest in public blockchains by bank executives as well. A Cognizant survey released this week of 1,520 executives from 578 financial services firms shows 86 percent see public blockchains becoming more prominent in the next five years; 80% said the same about private blockchains.
In the original bitcoin blockchain, transactions are recorded on a public ledger anyone can see, although users are pseudonymous, identifiable only by alphanumeric addresses. That doesn’t mesh well with the need for privacy in high-stakes transactions between massive companies, which is why banks — which were initially hostile have sought “permissioned” blockchain-like solutions that allow for more privacy in terms of how data is stored and who can access it.
At least two of Propel’s portfolio companies have raised money through token sales. For example, the blockchain-based digital advertising system Brave “managed to raise $24 million in about 29 seconds,” Gilbert said.
In financial services, the token sale opportunity could perhaps manifest in payments, through a bank transfer service that uses these types of tokens as a means of compensation.
It’s hard for the everyday person to justify paying $17 to wire $100 from the U.S. to Mexico, especially when the cost of that wire probably looks more like 75 cents. But using these kinds of tokens, the supply and demand sides can come together to “dictate the true price of that token for the value exchange… whether that payout point at Guadalajara or Mexico City actually has that cash from the sales of the day to disperse to you as a recipient.”
Other investors are more cautious. Mike Sigal, a partner at 500 Startups, didn’t comment on his investments but noted that one of the hardest things for an early stage company to do is acquire customers and activate the entrepreneur’s community, and that a token sale could be a tool for it to truly get its community engaged, speaking at the Bloomberg Bloomberg Buy-Side Week Focus on Fintech event this week. For Citi Ventures, they’re still a solution in search of a problem. Arvind Purushotham, the group’s co-head, said it looks at blockchain investments with direct applicability to its business. It’s an investor in Chain, but hasn’t made any cryptocurrency investments.
The early-stage fund Future\Perfect Ventures has several portfolio companies now planning ICOs, said Jalak Jobanputra, its founder and managing partner. But it’s a Wild West, and it’s unclear whether these token sales have real technology behind them or if it’s just a quick way to make money and take advantage of momentum, she explained.
“There will be something really lasting out of this but there will be a lot of catches in the process,” she said. “Tokens related to the business are one element of it but some companies want to raise just to have a capital raise. You really have to dig in and see what you’re going to own… It would be dangerous for these companies if there was immediate liquidity or lack of liquidity. All of those terms are up in the air right now.”