ICOs giving venture capital firms a run for their money

October 17, 2017 10:00
As ICO provides a chance to exit a startup investment quickly, it has become increasingly popular with investors. Photo: Reuters

Numerous startups worldwide have rushed to the initial coin offering (ICO) market to raise funds, and this trend may disrupt the long-time reliance on traditional venture capital, according to Heatherm Huang, founder of MailTime.

ICO is a fundraising mechanism based on a cryptocurrency such as bitcoin. Typically, newly issued cryptocurrency is sold to investors in exchange for legal tender or other popular cryptocurrencies.

Since cryptocurrencies issued can be sold in the secondary market quite easily, this becomes a big draw for investors.

“A new investor called me and we chatted around three minutes about some basic questions about measurable data token [MDT]. Then he decided to invest 5,000 ethereum, which had a market value of US$1.55 million back then,” Huang said.

MDT is the currency MailTime issues through a fund it controls.

“Some virtual currencies surge several hundred times, and everyone got so crazy and don’t care much about what’s the real business of the company,” he said.

MailTime has set a lock-up period for its MDT. For example, institutional investors have to hold MDT for at least six months.

Traditionally, venture capital funds will ask a lot of questions before investing in a startup, and go through sophisticated due diligence as well, Huang said, given 90 percent of startups cannot survive longer than three years. Venture funds typically consider an exit three to five years later.

But this is changing. Venture capital investors in Silicon Valley such as Andreessen Horowitz and Sequoia Capital have all set up cryptofunds.

“Investors can move in and out quickly with virtual currency, rather than waiting for years for the target company to be acquired or go public,” he said.

Most startups may also set up non-profit funds to get around regulation. For instance, if a for-profit company raises money from more than 200 people, the company would be labeled as illegal fundraising in China.

By contrast, a non-profit fund can raise funds from the public as a donation.

This article appeared in the Hong Kong Economic Journal on Oct. 16

Translation by Julie Zhu with additional reporting

[Chinese version 中文版]

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Hong Kong Economic Journal