Five Elements To Make An ICO Attractive For Venture Capitals
CryptoBit News Today3 min read
The line between ICOs (Initial Coin Offerings) and traditional equity financing is blurring, as venture capital firms increasingly use non-traditional methods to invest in blockchain companies. Tokens look like an entirely new financing mechanism, and many VCs have found themselves with a case of FOMO (fear of missing out) as they try to participate in the "token economy."
To get a piece of the action, VCs are employing novel financing methods, often investing in tokens before there is even a public token sale. Traditional investors are acquiring tokens outright through pre-sales, SAFT (Safe Agreement for Future Tokens) contracts, and other regulatory-compliant offerings — a development that would have seemed unlikely just months ago.
A common version of this is the SAFT, a forward contract for tokens that converts upon deployment of a functioning network. With a SAFT, token conversion can happen within one or two years, providing quick liquidity to venture investors. Investing in tokens via a SAFT or certain pre-sales may allow for compliance with asset class requirements, whereas buying tokens via an exchange or directly from an ICO likely would not meet those requirements.
While public ICOs used to allow anyone to invest, that is increasingly being replaced by a new approach: limited, private token sales available only to accredited investors and close connections. The crypto sector has recognized that securing funding from a small group of professional investors—such as venture capitalists, family offices, hedge funds, or strategic firms—can provide greater benefits than raising from the general public. In addition, VCs tend to take a longer-term view on investments compared to retail investors who often seek quick profits.
Designing strong token utility and protocol incentives
Polychain does not necessarily view token offerings as a novel funding mechanism or a disruption to standard Silicon Valley deals. The firm is looking for tokens that incentivize core actions of a protocol, seeing that as a path to 100x opportunities.
Polychain is closely following initiatives to tokenize fundamental blockchain elements, including the scripting languages used to convey instructions readable by distributed networks. Carlson-Wee stated that application developers, much like those on the standard internet, want a variety of programming languages to choose from because certain applications work better in particular languages. Beyond that, Polychain believes blockchain can programmatically replicate entire company functions, with projects like IPFS, Cosmos, Polkadot, and Ethereum forming the backbone of a more decentralized internet.
For many utility token ICOs, the value proposition is that the token's value should rise with the value of the network, enabling a decentralized platform with important features.
Demonstrating proven team leadership and security standards
Assisting with security auditing is a key value-add for Polychain. The firm continues to invest in talented and robust teams, relying on the rules of early-stage investing that haven't changed. The absence of a legitimate team, as observed with Pink Taxi Coin, represents a major red flag for prospective ICO investors. A lead founder or CEO possessing an entrepreneurial professional background is strongly linked to success.
Ensuring regulatory compliance and comprehensive project disclosure
To protect investors, the ICO process should be designed with regulators to comply with securities law. Proper terms and conditions should connect an ICO’s tokens with the deal presented and describe the future promise in a legal document. Measures tied to success include sharing source code publicly on GitHub, releasing a white paper, publishing an intended budget for proceeds, and fostering community engagement on Telegram.
Leveraging structured pre-sales as market quality signals
Before its main public offering, Protocol Labs ran a private pre-sale granting token discounts to insiders, earlier equity backers, and strategic investors such as Sequoia Capital and Andreessen Horowitz. These pre-sale investors paid an average of $0.57 per token with long vesting periods. These pre-sale discounts mirror the reduced prices early investors obtain in traditional startup equity to compensate for assuming higher risk, supplying services, and demonstrating quality to the market.
Other quality indicators associated with success include previous venture capital equity funding in the issuer, holding a pre-sale ahead of the public ICO, providing clear utility for the token, and intending to establish a new blockchain protocol. Raising more money in the ICO is also a positive indicator of a project's potential.
