In the early 2000s, there was a lot of hype around B2B portals that would replace expensive EDI (electronic data interchange) infrastructure. I worked on three of them: one in aerospace, another for a specific airline and a third that was meant to be general purpose. The idea was the same: a centralized platform, owned either by a consortium of participants or operated by some third party, would replace EDI with a bunch of XML messages. Sprinkle in some Enterprise Java Beans and let the cash roll in.
Today’s blockchain platforms are telling basically the same story, minus the EJBs. the 2000s-era B2B portals had massive challenges and complexity around technologies, data standards and integration. These are the same technical head winds slowing deployment of blockchain platforms. From a business perspective, those B2B portals also had problems getting other companies to participate. After all, why would I work with a competitor? As recent news for TradeLens (the aspirational IBM/Maersk blockchain product) indicates, ecosystem development remains a core dilemma for blockchain adoption.
Maersk’s competitors don’t want to use a platform that they don’t own, either from a platform or intellectual property perspective. They also don’t want to undertake massive investment over several years for a project that may not work in the end. Lastly, how these platforms will be governed is still an open question.
Ultimately, I believe these grand blockchain platforms meant to unify industries will go the same way as those 2000s-era B2B portals. Some will succeed in extremely limited fashion but most will fail with a whimper. The most common scenario is that large companies, like WalMart or Toyota, will create and operate their own blockchain-based platforms and smaller competitors will create their own centralized consortiums to realize the same benefits. Rather than industry-wide unification, it’s much more likely the status quo will be maintained because the business challenges can’t be resolved.
So far in 2017, there have been 92 initial coin offerings (ICOs) that have raised over $1.2 billion. That surpasses the amount raised by startups from angel and early seed rounds. This hype has me thinking about how startups may fund themselves in the future, and what role VCs might play, if any. I don’t pretend to be an expert in either space, just interested in both.
ICOs aren’t a transfer of equity or ownership
Unlike VC funding, ICOs do not transfer company ownership from the issuing organization to the buyer. ICOs issue tokens (“appcoins”) that you can use within a project’s ecosystem, usually in the form access to some product or service that either exists or will exist at some point in the future. If the service is desirable and demand goes up, the value of the appcoin goes up due to presumably limited supply.
Holding an appcoin doesn’t allow you to influence the company or drive product direction. That’s one likely reason why startups are taking the ICO route over angel or early seed investors: why give up equity – and control – if you don’t have to?
Appcoins can be considered an asset, even if they’re completely unregulated. It’s not unreasonable that VCs will start buying and holding appcoins, hoping for appreciation. Appcoins are also more liquid than startup investments, which take several years to pay off (if they ever do). What happens if VCs start making more money from appcoin trading than from traditional venture investments? Will LPs just take their money to dedicated appcoin firms? I don’t know the answers to these questions, but the eventual answers will be interesting.
In the short term, the ICO hype will continue as an unregulated, poorly vetted source of crowdfunding. Hearing how some ICO’s are pitched by eager supporters, it feels like today’s ICOs are a shared speculative fiction largely driven by greed, without accountability for the issuer. Over the long term, my guess is ICOs will become regulated or outlawed by entities like the SEC. If regulated, launching an ICO will likely carry as much overhead as an IPO, and VCs are back in business. The People’s Bank of China (PBOC) has already banned ICOs. Additional regulatory agencies will likely follow suit.
Everyone seems to have thoughts about ICOs and what they’ll mean for the financial industry and the broader population. Let me know what you think in the comments.