Will ICOs Signal the End of the VC Industry?
In 2017, initial coin offerings proved themselves to be a very real alternative form of funding. Over 1,500 companies raised as much as $6 billion selling utility tokens on their networks. Many people have said this is signalling the end of venture capital as we know it. But this view might be a little premature.
Looking at the industries that are managing to raise capital via token sales can provide valuable insights into the industry.
Research by Credit Suisse highlighted the fact that token sales related to gambling outnumbered all those related to other industries. Video gaming and gambling are very often at the vanguard of any new technology, so it's not surprising that many companies in the first wave of ICOs came from the industry.
Gambling also happens to be one of the industries that have seen rapid adoption of blockchain technology and cryptocurrencies. Several casino websites now only accept Bitcoin and a handful of other cryptocurrencies. If you've already taken decent trading profits, you may be tempted to have a go at doubling your bitcoins with roulette. But, in terms of actual capital flowing into these ICOs, the stats are a little different.
Core Tech was the leading sector in terms of funding in 2017. Core Tech included projects building platforms on which other projects can be built. This sector also led in 2014 and 2015 when Ethereum, Waves Platform and other similar protocols were launched.
Projects that fall broadly under 'finance', may have actually raised even more than core tech when lumped together. However, most of this either went into large projects aiming to create decentralized banks or into new exchanges. Surprisingly the smallest share went to projects building wallets and payment infrastructure, which were well supported in 2016.
Media-related projects, gambling ventures and projects around the 'internet of things' attracted roughly equal amounts of funding via token sales. And finally, new cryptocurrencies received the least amount of funding via token sales.
Traditional venture capital is flowing to a slightly different set of industries. As is to be expected, internet ventures received the lion's share. This was followed by healthcare, business services and mobile.
Classifying funding under 'internet' can be a bit ambiguous as internet businesses often really operate in other industries. However, the dominance of healthcare, business services and mobile highlight the way in which traditional venture capital and tokenized funding are diverging. These are three industries that received a relatively small share of ICO funding.
The success of token sales in 2017 is likely to prompt many entrepreneurs to look to ICOs before seeking venture capital in 2018. However, investors may soon begin to discharge that some, or possibly most, companies are not really suited to tokenization. When that happens a more distinct divide may form between the types of companies that seek to fund from venture capital funds and those that are selling tokens.
Many of the initial coin offerings in 2017 consisted of little more than an concept and a whitepaper. It's likely many of those will fail, which will change the attitude of ICO investors. The result will be far fewer successful token sales, and more entrepreneurs reverting to traditional venture capital.