Closing the funding gap with blockchain

October 21, 2019

The lifecycle of businesses can be categorized in launch, startup, growth and expansion phases. Throughout these phases, businesses have different options to finance their project and its growth. Traditional financing options include:


Crowdfunding is another financing option which occurred from time to time in history. It received another boost after the initial burst of the dotcom bubble since the online sphere allowed connecting people with entrepreneurs, and provided new investment opportunities in different regions of the world for ordinary people when VC financing was low. Legislation was created to make it much easier for smaller businesses to get funding, for example, through the introduction of the JOBS Act in the US in 2012.


Blockchain financing: ICO, IEO, STO & VCs

Crowdfunding was taken to the next level with Initial Coin Offerings (ICO). “ICO” is the umbrella term which includes a variety of token offerings. The purchase of ICO tokens usually provides the buyer with a certain utility at least - a right to access something. Most often an ICO of a utility token was used to finance a very early stage crypto project; sometimes, a team with an idea and a whitepaper. Check out this article on Crunchbase to see the incredible increase of ICOs throughout 2017.


Since then, the market capitalization of projects crashed, many projects went out of business, and the issuance of ICOs slowed down as well. In fact, many projects have delayed their ICOs and are waiting for a more positive market which will only come if more ICOs are being done successfully – a vicious circle. Nonetheless, ICOs are a good option to get funds in the early project stage. 


There’s not much hype around ICOs currently, though there are ICOs happening all the time (See Calendar on ICObench). FullBlock Solutions believes in long-term, real utility and hybrid token offerings outside exchanges when there are more users, the market is more ready, and the actual utility for users is more clear. However, currently, more and more companies are exploring STO and IEO financing options instead.

Financing options throughout the lifecycle of a company


After the burst of the ICO bubble early 2018, many turned towards Security Token Offerings (STOs) as the next natural step of the crypto evolution. Why security tokens? The purchase of a security token is very specific for a security offering on a blockchain -  it is a real investment, regulated by securities laws and the investor receives certain claims against a company. All kinds of securities can theoretically be issued as a token – bonds, shares and derivatives. Many great infrastructure projects are being built, and tokenization is already a buzzword, but the boom of security token offerings has not really achieved full flight as there were/are legal uncertainties and the liquidity in the market isn’t there yet. STOs are still becoming another great option of financing for early-stage projects nonetheless, as well as an exit alternative to an Initial Public Offering (IPO).


IEOs (Initial Exchange Offerings) are administered by a crypto exchange on behalf of projects which are fundraising. This option has become prominent in the last year, and has certain advantages over normal ICOs. First of all, the exchange usually does some due diligence and you don’t need to trust an unknown group of people, instead, an “established crypto exchange”. Second, for blockchain projects it’s much easier to target crypto investors as the big exchanges already have some exposure. Third, new token projects need to be on exchanges (multiple!) and usually pay for it in order to make their project accessible to crypto investors. Doing an IEO can help raise funds and make your go-to-market much easier, especially if the exchange gets a small share in tokens, and promotes the project as well. Success stories can be seen for example in the ICObench market report which highlights MultiVac raising 3.6M USD within 7 seconds, Veriblock 7M USD within 10 seconds and Fetch.ai 6M USD within 22 seconds on Binance. Another great example is Nervos which has already raised more than 65 Mio USD within 3 days after launching the campaign on Coinlist. Be aware that the selection of the launch platform makes a big difference, and IEOs outside large platforms are - on average - lacking success.


Besides ICOs, IEOs and STOs, over the last one and a half years we’ve seen seed venture capitalists in blockchain starting to invest at a very early stage. Some of the bigger crypto venture capitalists started investing in tokens including Bitcoin and other cryptocurrencies throughout 2013/14. On one side, some crypto VCs such as Metastable Capital stick to the strategy of investing in tokens because then only the token needs to appreciate in value which reduces the risk of both a company needing to be well executed, nor investors needing to wait for a liquidity event. On the other side, more and more seed venture capitalists have started investing in tokens and/or in equity, for example of infrastructure projects. The largest crypto VCs currently focus on projects which innovate either on privacy, new consensus algorithms, governance or smart contract functionality.

 

Electric Capital: Investment in equity, equity & tokens or only tokens

Electric Capital explains that investing in tokens or token+equity hybrids requires new strategies such as holding a probability-weighted basket of liquid and illiquid tokens, and accruing a position via exchanges outside a structured round of funding. As a project, you should make sure to structure your offer accordingly, and target the right investors.


Conclusion: Blockchain crowdfunding is an alternative

If you’re a traditional business, there may be possibilities to raise funds through token offerings through different channels. You can introduce a utility into your existing offering, digitize your existing offering (e.g. Loyalty programs) or issue a security token and offer it to a different target segment with other investment criteria than banks and VCs. Specifically, mid-sized businesses may get access to financing. Compliance with existing laws requires some upfront financing, and be aware that the market is not yet 100% ready for security offerings. 


Blockchain has enabled world-wide financing for projects in a cost-efficient way. It is possible to get financing in any stage of a (blockchain) project, and you can structure token offerings in a similar fashion to normal investment rounds which means you can issue, for example, 20% in the first round, and do multiple financing rounds thereafter. In the future many more opportunities will arise after security token platforms and security token standards are more mature, and the combination of security and utility is being explored more actively.  At FullBlock Solutions, we believe this opens many new doors and it is worth exploring opportunities.

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