Study Says – Venture Capitalist are Replacing a Declining ICO Market
It is safe to say that 2018 has been a historically transformative year for the blockchain industry as it moves past being considered as a fringe technology that creates magic internet money and instead is growing into a robust industry with many real-world applications.
After 2017’s crypto-market explosion saw unprecedented market capitalizations and billions of dollars pumped into startups through initial coin offerings (ICOs), the industry has established a presence in mainstream public discourse, with governments and institutions endlessly endeavoring to understand and regulate the technology for better or worse.
However another interesting shift is occurring in the space, blockchain startups are slowly uncoupling themselves from ICOs and moving toward more traditional means of raising capital from institutional backers like venture capitalists and hedge funds; seemingly, the decline of the cryptocurrency market is running parallel with the declining capital raised by ICOs.
State of ICOs
Charts from ICOData.io shows that so far in 2018, 1227 ICOs have been launched, raising just over $7.5 billion USD in total; comparatively, 2017 saw 876 token sales raise just over $6 billion USD.
In January of 2018 ICOs had raked in over $1 billion USD, and as the year pressed on, this number shrank significantly by November, where the total ICO capital barely scratches the $200 million USD mark.
In a Q3 2018 market research study conducted by ICOrating.com, it is revealed that over half (57%) of ICO projects were unable to raise more than $100,000 USD with a mere 4% of ICO tokens managing to get listed on exchanges.
It further details that a vast majority of projects (76.15%) were “nothing but an idea”, with companies lacking a viable product or even a prototype, though according to the research, 1.37% had a “fully-ready product”.
The report offers logical insights into why ICOs have lost much of their popularity, which can be boiled down to the ongoing development of regulations around the world, “overall market downtrend, lack of new ideas” and the slow speed in which blockchain technology is being implemented in traditional markets.
This is backed by another recent study conducted by GreySpark Partners who go on to cite “disappointing product advancements, difficulties in execution, scams, no market and poor marketing strategy” as factors also contributing to the downturn.
At this point, despite all the positive news surrounding blockchain developments, the sector is still subject to harsh scrutiny and still has a tough crowd to convince. An article on Forbes this year (Sep. 17th) speculated that the technology is a “venture fad”, and could soon die off.
Whilst this may be true for a majority of cryptocurrencies, blockchain technology is being widely adopted by governments, banking institutions and major companies like Amazon, IBM, and Samsung who are all leveraging the technology for a multitude of real-world applications.
Whilst ICOs have become far less impactful for the blockchain ecosystem, there is still money pouring in from institutional investors who are forming the backbone of the blockchain startup ecosystem.
An article published by Diar (Sep. 30th) found that venture capitalist (VC) funding is ramping up in a big way; in the first three quarters of 2018, blockchain and crypto companies have managed to acquire a grand total of almost $3.9 billion USD through traditional VCs, which an explosive 280% increase on the year before.
The data provided by Pitchbook also shows that there are approximately 2,000 investors with investments in at least one blockchain company; upon closer inspection, Diar found that the “50 most active investors” had at least 8 blockchain investments on their books.
The shift from ICOs to VCs could be indicative of a maturing sector, or as one cutting-edge technology VC firm calls it, the “professionalization” of the industry.
Outlier Ventures released a report titled “The State of Blockchains Q3 2018: The Empire Strikes Back” (Nov 21st), in it, the firm identified that the funding gap is being filled by VCs at earlier stages of a startups life and furthermore, blockchain startups who “don’t necessarily require a network or token” are circumventing the issuance of a token sale which can be painful for a startup due to “legal expenses, marketing costs, and community building efforts”.
In addition to this, the research suggests that the extended bear market has resulted in larger funds having a chance to enter directly into the space, and if the markets remain this way, then blockchain enterprises will continue to seek funding through venture investors.
Data in the Outlier Ventures report builds on that of Diar’s with regards to the exceptional increase of VC investors, noting that this year has “seen more venture capital inflow than all previous years combined”.
Additionally, the report found that VCs are “active across all funding stages”, with seed stage investments hitting 119 deals in Q3 compared to 102 in Q2 and late stage raises “beyond $25 million” have become commonplace in Q1 and Q2 of 2018.
Later-stage projects are appearing more favorable to VCs than ever before; previously ICOs were the community-backed seed stages which would propel and sustain a startup through at least the first year of its operations, but as mentioned earlier, the lack of a minimum viable product has resulted in many of these startups failing completely.
Outlier Ventures notes that due to a lack of “public appetite”, larger capital raises have moved on to private raise, it also suggests this comes largely down to the state of the token markets, especially affecting projects that had intended to issue an ICO, which has resulted companies opting for private Simple Agreement for Future Tokens (SAFT) funding rounds.
The firm foresees further growth in this method of fundraising from private investors, which it believes is a positive sign that is indicative of “the maturation of the industry” and reflects the evolution of equity markets.
Evidently, blockchain technology is no “fad” and will be around for some time to come, however, the data gathered fails to consider what may happen if or when the cryptocurrency markets bounce back up for another year, which could result in another ICO spike and the launch of another 1000+ startups.
If so, will the blockchain industry and markets fall victim once again to swathes of pump and dump schemes, or result in an oversaturated market, with very few working products and a bunch of nuanced, unoriginal ideas.