ICOs vs. Venture Capital: Which is Better for Startups?

Bitcoin investment

Initial coin offerings (ICOs) have exploded in popularity during the last few years, going from being relatively unknown to becoming a widespread method of securing funding.

Venture Capital (VC) firms, which invest in startups with the potential to generate very high returns, have a much more established track record.

While seeking out VC funding may offer a path for startups that has been proven many times over, there are numerous benefits to holding an ICO.

This article will compare VC funding and ICO funding point by point.

1) Perception

One major benefit of getting funding through VC firms is perception. Competition for funding in this space is tight, and it is estimated that less than one percent of the startups seeking to fund through this method end up receiving the money for which they are looking.

Industry participants know this, and will likely think of any firm that has secured VC funding as having met a certain standard.

ICOs, on the other hand, do not necessarily have the same image. These digital token sales are largely unregulated, generating an air of uncertainty for would-be investors.

With a flashy website and a well-written whitepaper, many entrepreneurs have been able to generate funding through an ICO.

2) Mentorship

One benefit of working with VC investors is that they can provide helpful advice and mentorship.

However, the level of participation that VC investors have after providing funding can differ quite a bit.

Daniel Schwartzkopff, a serial entrepreneur who founded CRYPTO20, a tokenized cryptocurrency index fund, wrote:

“A VC partner is motivated and aligned with founder interests and run the entire gamut from being entirely hands-off (money only) to being actively involved in the day-to-day running of the business. The level of assistance they can offer beyond capital varies.”

A Harvard Business Review article came to similar conclusions.

3) Equity

In order to receive VC funding, entrepreneurs will need to surrender a portion of their equity.

Should entrepreneurs found a company and sell it for $20 million, for example, a 20-30 percent stake represents a considerable sum.

This is one benefit of using an ICO to raise funds, as the founders can retain 100 percent of the equity in the company they have created.

4) Control

Another important key consideration is control. Accepting VC funding will undoubtedly come with significant strings attached.

ICO funding, on the other hand, comes with no such stipulations, allowing founders to keep the ball in their own court.

5) Easy Access to Funding

ICOs have opened up significant opportunities for entrepreneurs by providing them with a simple way of raising funding.

However, those interested in holding digital token sales should keep in mind that while some have proclaimed that “anyone can launch an ICO,” holding a token sale that succeeds might require significant time, planning, and money.

6) Liquidity

By relying on ICOs for funding, entrepreneurs can benefit from substantial liquidity. Through one of these sales, founders could end up with millions of dollars’ worth of financial resources.

This is different from going through a VC, where entrepreneurs may not be able to benefit from liquidity without holding an initial public offering or selling securities in some other way.

While ICOs may look like the clear winner in this comparison, it is important to keep in mind that not all token sales are the same. These offerings can provide a wide variation in the terms that go along with their tokens. While some sales might give founders tokens immediately, other offerings could drag this process out for years.

Summary

Entrepreneurs seeking funding should keep in mind that while VC and ICOs both offer their benefits, neither route is without its drawbacks.

Would-be entrepreneurs and founders who are considering either of these methods should keep in mind the importance of due diligence.

One good way to keep up with the ICO space is to research individual sales, which can be tracked at our initial coin offerings page, where you will find valuable information about current and upcoming token sales.

Another good way to stay on top of the latest developments in the space is to subscribe to the Bitcoin Market Journal newsletter.

Comments are closed.