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Why You Should Say No to VC Funding and Go for an ICO Instead

August 28, 2018

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Why You Should Say No to VC Funding and Go for an ICO Instead

When it comes to launching a startup, there’s one thing that’s an absolute necessity: funding.

As is typically the case, most of us don’t have enough spare capital sitting around to launch a new business from scratch. However, that doesn’t mean that the ‘doers’ out there can’t get a hold of the funding they need to successfully launch their new venture.

Over recent years, crowdfunding has become increasingly popular as a method of funding new projects. And now it’s available on the blockchain as an Initial Coin Offering (ICO), your Initial Public Offering (IPO) of the crypto world.

While there is merit in the tried and true methods of fundraising, here’s a case for why your new startup should consider saying no to venture capital (VC) funding and say yes to an ICO instead.

The Issue with VC

Anyone involved in the world of startups is likely already familiar with venture capitalists.

Though there are a lot of benefits that come with VC backing, there are a substantial amount of drawbacks as well. The benefits, of course, include everything from guidance, counsel, valuable connections, and experienced business professionals who can help you and your vision along the way. Additionally, there are some added PR benefits for your startup, especially when receiving backing from a prestigious VC firm like Benchmark or Sequoia Capital.

However, there are other factors every startup needs to consider along with the VC benefits. For example, the biggest potential concern is that you will be giving away a portion of equity in your company in exchange for the funding. On top of that, you’re also looking at an extensive amount of work that will need to be done before even approaching VCs for potential investment, something you may not have the time or resources to complete while continuing to develop your project.

But what other option do you have as a founder? Enter: crowdfunding.

Crowdfunding

In response to the traditional methods of raising funding for new businesses, so-called “crowdfunding” appeared on the scene (now a highly recognized term, though it hasn’t always been that way). With a crowdfunding model, startups were able to start raising the capital they needed from a large pool of people without having to give away any equity (read: ownership) of their company.

Platforms like Kickstarter and IndieGoGo became massive disruptors in the funding world to provide startups with alternatives to VC and other methods of acquiring seed funding.

As crowdfunding entered the scene and began offering alternatives for businesses seeking funding, another highly disruptive movement was entering the tech sector: blockchain technology.

With the advent of distributed ledger technology and the blockchain revolution, a new age of crowdfunding soared through the use of cryptocurrencies and utility tokens. The initial coin offering (ICO) hit a record of $800M in Q2 of 2017.

Why was the ICO so wildly successful?

A Tale of Two Companies

To understand the outcomes of going with either VC funding or an ICO, let’s take a look at two companies working towards similar goals that took two distinctly different routes.

Earlier in the year, Bloomberg did a comparison of two Southeast Asian entrepreneurs: Aung Kyaw Moe and Jun Hasegawa.

Aung, the founder of 2C2P, a payment processing business, opted for the traditional route since he deemed the ICO unstable and risky. He was able to raise $30 million in venture capital and was considering going public in the coming years.

Like 2C2P, Jun wanted to tackle payment processing as well. The difference between the two projects is how they got their funding.

You may already be familiar with Jun’s project, OmiseGO, which brought in an impressive $25 million in its ICO (actually pre-ICO sale, the cap was reached before the ICO date) and currently has a market cap of over $500 million (at the height of the crypto boom, OMG’s market cap exceeded $2.5 billion).

OmiseGO was able to raise funding quickly without giving up any equity, and before having their network up and running. So he was up and running in 6 months while Aung looked on in envy.

Should Jun have decided to go the VC route, he would likely have stalled until they had a functioning platform to show investors. Instead, the ICO gave them the funding they needed to focus on creating that platform and not relinquish any equity in the company itself.

That being said, 2C2P became a success too with the likes of Facebook and major airlines under their belt as customers. But they could have gotten to the market much faster with an ICO.

Why it Matters

At the end of the day, you have to take stock of what you need most for your company: time, control, and/or money. Only you will know what’s best for your company.

Token crowd sales done via blockchain has easily become one of the most disruptive movements in the financing of fintech startups thanks to more autonomy, time, and often more funding than VC.

Meanwhile, VC’s own part of the company in equity and/or control — not to mention the time they eat in pitches, demos, meetings, etc.

In the case of OmiseGO, Jun and the founding team still maintain ownership of their company without having to appeal to investor control or giving away parts of their business. And they were able to raise the funding they needed much faster than the traditional VC route. Along with that, projects running ICOs also don’t have to worry about the time and resource consuming process of preparing material, pitches, product demonstrations, etc. for firms. Instead, an ICO allows your team to focus on what you were seeking funding for in the first place: building your platform.

Claire Polansky is the managing editor of Blockanics. She ate, slept, and breathed Friedrich Nietzsche's anti-establishment theories while working on her multidisciplinary Ph.D in religion, philosophy, and environmental ethics. She believes that Nietzsche would have absolutely loved the decentralized mission behind crypto. When Claire is not editing or quoting Nietzsche, you can almost be certain that she is rescuing strange animals.