ICO: An Industry Landscape Study

Oliver Venn, KC Shashidhar, Aji Kurian, Roy Luo, Schuyler Cullen


In this report, we aim to evaluate the hypothesis that ICO will replace current modes of venture capital funding as the dominant funding source for early stage startups. We view differences in marginal cost between ICO and VC driving this replacement. We unpack the hypothesis in this section and assess current evidence to support it.

The financial industry is a series of disruptions. Development capital was borne out of the family wealth of business magnates, VCs were borne out of US legislation, ICOs were borne out of blockchain technology. Early Stage VC is currently vital to generating new businesses. However, recent trends in seed and early stage VC funding have declined year-on-year for the past 4 years across every major region. In contrast, ICO funding has shown a positive trend.

The digital ledger decreases the opportunity cost of fundraising (pitching versus building the product), and scales to millions of investors (the audience of telegram messaging app versus the tens of investors on Sand Hill Road). These changes are important to enabling company births and scaling.

VCs are geographically isolated. Ideas, talent, and market opportunities are not. Companies are now increasingly virtual, and geographic dependencies are less important. There is no reason why funding sources should have geographic structure.

If this assertion is true, then we would expect increased geographic diversity across ICO funded startups versus VC funded startups. This is indeed the case. US-based companies accounted for about 20% of 2017 ICO raises versus 57% of VC raises.

Companies will seek out opportunities for funding that minimize opportunity cost. The opportunity cost of fundraising is high and is not amenable to parallelization. In this document we explain the innovative mechanisms that allow startup companies to communicate their value proposition to investors simultaneously.

If this assertion is true, then we would expect growth in ICO funding over time. Current trends indicate that this is the case. There were 43 ICOs in 2016 totaling $95M, 210 ICOs in 2017 totalling $3.8B, and 224 ICOs in the first quarter of 2018 totalling $6.4B.

These observations are encouraging. However, we note potential impediments to the sustained adoption of ICOs, in particular the lack of clarity around regulation. We will discuss these considerations in Risks, Regulation and Mitigation.