CONS OF INITIAL COIN OFFERING

[arvinabeabe]

LIQUIDITY

The degree of liquidity to me is actually a challenge as much as it is a pro. I understand why early pre-ICO investors and founders want liquidity but after issuance, tokens are traded on decentralised exchanges in what are effectively dark pools with zero to little transparency. That means the people you are backing can exit at the point of ICO before any real value has been delivered or gradually dump their holdings over time ahead of the market if they feel things aren’t working out. Currently you just have to trust they won’t.

TIMING & PRESSURE OF GOING PUBLIC

Firstly, many very successful companies choose never to IPO and ‘go public’ because it can be a real pain in the ass often forcing companies to become short-termist and reactionary which is the number one killer of innovation and why many public companies get disrupted. I think most startups that will ICO are naive to the implications of crowdfunding which demands having a permanent investor relations team communicating effectively with the community, and even when done well can still be very distracting from just getting the job done.

Unlike normal crowdfunding your investors are largely speculators who can and will actively short you in the markets. Some ICOs like Augur made sure their tokens weren’t tradeable immediately to reduce the effects of early speculation but the market dynamic is still there and can only be postponed. This is something I think will be the main cause of death for the large majority of ICOs.

Furthermore investing in startups before they have achieved ‘product market fit’ means pivots are very likely which requires supportive and experienced investors. To me going public pre-fit makes no sense at all, which is where I see a big role for early stage VCs prepared to assume the risk and ready startups for launch.

QUALITY CONTROL/SCAMS

Putting aside VC funding being limited to a few small regions in the world, most startups can’t get funding because they aren’t viable or the team have failed to get traction because it isn’t there to be had or they aren’t the people to achieve it. A lot of due diligence is carried out by professionals, or even just experienced angel investors, into the team and their stories. By losing a lot of money in the process they get good at reading signals and asking the right questions.

Now whilst I am sure the space will professionalise currently any man and his dog can ICO. There is no filter at all. This means a lot of people will get funding that shouldn’t. Worse still, very likely from people that can least afford it to lose their money. It then becomes an ethical debate if everyone, including those less informed, should have equal rights to lose their money.