Bitrazzi
Bitcoin, Cryptocurrency And Blockchain News

Two Key Reasons Why Venture Capitalists Are Getting Pulled Into the ICO Space

Funding through ICOs is up at least 20x since 2016 as venture capitalists are joining in

0

ICO Funding Has Seen a Meteoric Rise

An Initial Coin Offering (ICO) is a crowdfunding method by which small startups raise capital by issuing digital assets called cryptocurrency tokens. Funding through ICOs is up at least 20x since 2016. In 2017 alone, 360 ICOs raised ~$5.5 billion in funds. It’s also steadily emerging as the new alternative to traditional venture capital (VC) fundraising. In the blockchain space particularly, the year 2017 saw $0.95 billion being raised in venture funding compared with a staggering $5.5 billion that was raised by startups via the ICO route; that’s 5x the amount raised through VC funding. In 2016, the math was reversed with VC funding amounting to over double that raised via ICOs.

Now, there are two key factors that are pulling more and more venture capitalists into the ICO space:

  1. High Market Capital growth

The phenomenal growth seen by the cryptocurrency and token market validates the popularity of cryptocurrencies. From $18 billion towards the end of 2016, the market now boasts a market capitalization of over $370 billion; that’s a 1956% return over a year and a half.

Moreover, the ICO route also helps these startups raise a larger amount of money in a shorter period of time.

  1. Liquidity

Venture capital investing involves investing in an idea / startup in its initial stage, waiting for the idea / business to grow, and exiting with profits when the setup is big enough to reap adequate returns for the risk taken. So, essentially funds remain locked till the business starts growing and the VC decides to exit and take the profits. ICOs, on the other hand, do not require the investors to wait for the business to grow big enough to reap profits on exit. Since the investment is tokenized, the investors are at liberty to convert their tokens into other crypto with a ready market like Bitcoin (BTC) or Ethereum (ETH), thereby converting their investments into crypto profits. Investors with a preference for liquidity have, thus, have come to prefer ICO funding over venture funding.

The lack of regulation surrounding ICOs is also what’s driving a good number of businesses to take the ICO route. However, this factor does not warrant much support as the lack of regulation is often taken undue advantage of, to indulge in unsolicited activities or to promote unlawful practices.

Image Credit: Deposit Photos

Comments