Digital Finance | Emerging Trends
November 8, 2017

Initial coin offerings: a knight in the ‘Dragon’s Den’?

By Eric Duffy

When you picture an entrepreneur vying for Venture Capital (VC) funding, one might imagine a young, starry-eyed visionary trying to win the interests of a grizzled business veteran.  This image has been popularized with television shows such as ‘Dragon’s Den’ and for many prospective business owners, this has been the reality of fundraising.

In recent months, governments and investors are exploring an emerging alternative to the traditional VC approach of raising investment capital, the Initial Coin Offering (ICO).

Are ICOs on the verge of slaying these ‘dragons’?

An ICO, like an Initial Public Offering (IPO), is a system which allows organizations to raise capital to fund projects.  Unlike IPOs, ICOs use cryptocurrency instead of shares.  When launching the ICO campaign, the company issues crypto-coins (often called ‘tokens’) which may be purchased by eager investors with fiat currency or some other established cryptocurrency, such as Bitcoins.  These tokens are analogous to shares in an IPO, as they may grow in value as the organization becomes more successful and may later be sold to other investors.

ICOs have been garnering attention due to some high-profile cases, such as when Brendan Eich, the former Mozilla CEO, raised $35 million in under 30 seconds through an ICO in May of 2017.  These dramatic gains are not unique to established business-leaders either.  Ethereum, a cryptocurrency that took hold through one of the first ICOs, has grown by over 2,800% in 2017 YTD in recent days.  With the potential for extraordinary returns, it is understandable why ICOs may be turning the heads of investors.

So, are ICO investors simply after quick gains? 

Dr. Sebastian Bürgel, Co-Founder of Validity Labs AG in Switzerland, says that while there are cases where this is true, it is not the only interest.  In an interview with ITU News, Bürgel indicated that decentralized ownership is also attractive to investors, as tokens, like shares, can provide holders with voting rights:

“We’re talking about Decentralized Autonomous Organizations (DAOs) where you have … a globally distributed number of investors who are steering the direction of this company-like construct.  This reduces a ton of the friction that we have in today’s world.” — Dr. Sebastian Bürgel

On the other hand, Bürgel and others warn that some ICOs may be in a bubble primed to burst.  Due to the speed that the ICO infrastructure has emerged, the controls that traditional securities commissions have put in place to protect investors have not yet been established with ICOs. 

Miko Matsumura, founder of US-based Evercoin Cryptocurrency Exchange and ICOGovernance.org, told ITU News that these rules are crucial to the long-term success of the ICO framework.

“Unless the industry, the global decentralized capital markets, is able to self-regulate the whole thing will crash and burn,” believes Matsumura.

In the short term however, unregulated ICOs have the potential to increase the pace of innovation.

Bürgel indicated that in contrast to traditional fundraising, which can take time and involve costly legal and banking fees, ICOs are a relatively straightforward way to raise capital quickly: “If we can leap to start-ups focusing on building great products and bringing out great services, this is fantastic.”  This has been demonstrated by organizations like ChronoBank.io that successfully raised $5.4 million USD to build an online recruitment service.

It is clear that this emerging technology has disrupted the Den, but will it be the end for the Dragons? 

It may be too soon to predict if this challenger will reign triumphant or be crushed.  Considering the relative immaturity of ICO infrastructure combined with the abundance of regulatory hurdles, the only certainty is that the fight has just begun.

Eric F. Duffy, Vice-President, Logimethods
Head of Sales and Marketing at one of Canada’s premier consulting firms, at the intersection of business and technology.
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Initial coin offerings: a knight in the 'Dragon’s Den'?

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