A spectre is haunting the World — the spectre of ICO. All the Powers of Baby-boomer Generation have entered into a holy alliance to exorcise this spectre: Banks and Exchanges, Brent Fields and Jamie Damon, Korean Radicals and Chinese Communist state.
ICO movement continues to inspire its multiple critics as well as its harden supporters to throw at each other arguments and counter-arguments, the whole collection of which now threatens to broke the camel’s back of mainstream finance.
As a venture industry’s professional, whose practical experience in this field exceeds 20 years, I have been challenged to present my own views on latest unusual developments in the Venture Capital world.
I decided to consider one particular side of ICO vs VC controversy, which closely concerns me and my colleagues in the Silicon Valley. I want to explore to what extend the current VC model facilitates the rapid transition of closely guarded by multiple gatekeepers industry of private finance to a decentralized world-wide system of wealth distribution.
There are three major attack vectors on the existing mainstream VC model: social, business and ideological.
On a social side critics argue that in its present form VC model may more or less effectively function only under the unique set of circumstances, including, unusually dense concentration of highly educated work-force, wide availability of cheap financial resources and very stable political and legal systems.
In fact, there are only few, historically privileged geographical areas in the entire world, where the coincidence of such unique circumstances is currently possible with majority of those areas being located on the territory of U.S.A. That creates a direct challenge not only to world’s governments but also to multiple social and racial groups of earth population, which are now exempt from the on-going technological revolution only by the “virtue” of their birth.
It leads not only to the growing global discrepancy of incomes and standards of livings but also to an unprecedented disillusion with proclamations of equal human rights and the uniformity of life opportunities. On the other hand, it also creates a new class of hereditary aristocracy, which now possess an unchallenged monopoly on the redistribution of scarce investment resources all across the globe.
As for the business side, other critics say, there’s been already more than enough practical evidence accumulated to clearly demonstrate the financial insolvency of the great majority of VC firms, where only about a hundred companies from thousands are able to demonstrate strong income performance, while others are lingering far below red bottom line for decades.
It has already led to a formation of giant, virtually integrated VC conglomerates, where at the bottom there are several top-notch investment houses, which capitalization exceeds hundreds of billions of dollars together with few renowned Universities, which endowment funds’ size rivals GDP of many African states. At the top of this unseen pyramid stand leaders of Fortune 100 list, which try to out-compete each other in the never ending race for the new, shiny technological breakthrough.
On the one hand, such abnormal investment capital dispersal has led to the amazing phenomena of startups “unicorns”, the better part of which have never seen a cent worth of profit in their entire lives, which, in most cases have already been artificially extended far outside of any natural limits. On the other hand, hundreds of thousands of fledgling technological companies around the world struggle to find 20–50,000 dollars to demonstrate the validity of their original ideas and products.
Moreover, those few companies among a group of carefully nurtured startups, which have managed to outspend the crowd and to get over the critical market-share threshold prior to their competitors (coming from the same pool), almost inevitably became so dominant in their industries that it has already created not one but several most gigantic monopolies ever known to humanity.
On the ideological side it has already gave rise to a whole collection of issues, which are to be paradoxically associated with the economic model of Marxist-Leninist type rather than with the capitalist system based on the open market competition between free business agents.
For example, it’s nobody’s secrete that many among the current world’s celebrated technological leaders have gained their dominant market positions largely thanks to almost unlimited access to unnaturally cheep credit resources and lavish government’s subsidies.
Additionally, even long after obtaining unfair market advantages, under various pretexts those companies continuously and persistently refuse to became subjects to public scrutiny of their real financial status either through public audits or IPO. As a result, it poses a serious question of a complete inadequacy of the contemporary system of elitist private finance (VC including) to the current realities of the new, interconnected Earth, with the rapidly growing universal demand for more satisfying jobs, proportional wealth distribution and fairer market competition.
To conclude this paragraph, here’s the short list of current VC model’s major deficiencies as described above:
- it disproportionately benefits certain countries and specific geographical territories;
- it produces a grossly inadequate distribution of seed and initial investment capital among equally promising startups originated in different countries;
- it encourages startups’ financial and business ineffectiveness;
- it inflates startups’ capitalization;
- it creates large monopolies;
- it discourages open and fair competition;
- it promulgates elitist mind-set into the startup community;
- it creates a class of privileged PE investments gait-keepers;
- it is also characterized by the fundamental resistance to public scrutiny and by an absence of long-term financial solvency.
However, the great majority of VC industry’s insiders have not been willing or capable to openly recognize the above-mentioned fundamental deficiencies, not to mention to try to introduce long-overdue changes into the current VC model. Certainly, it’s not difficult to see why. For those selected few, who have derived unreasonably large profits from its existence during the past several decades, to publicly address those issues carries an unmitigated risk of losing their social and material status. For the rest this model for the very long time hasn’t had any viable alternatives, which has made all criticism useless and even counterproductive. Not any more.
The new crowd investments phenomenon, which had been enhanced by the invention of the crypto-currency block-chain technology in 2008 and which has very inconveniently received the name of “initial coin offering” or “ICO”, jumped into spot lights of mainstream medias at the mid-2016 and quickly reached its hysterical apotheosis in July-October 2017.
Despite the dominant public notion, cultivated and vulgarized by the world’s major news channels, which stipulates that ICO-mania is mainly promulgated by the unlimited greed of inconspicuous or fraudulent pseudo-entrepreneurs, it is much more likely that this unprecedented rush of technological startups to quickly grasp a seed capital from international small private investors is to be explained by the grossly exacerbated unbalance of supply and demand on the venture capital market.
Although many VC operatives try to argue that the artificially created deficit of seed finance is by itself do more good than harm to the VC market by increasing the quality of startups, which now have to face an insane competition before they may obtain their first investments, this argument is too obviously bias towards VC establishments to be taken seriously. Suffice to say that it stays in the direct contradiction to the basic principles of free-market economy, where availability of capital must be a subject of open market competition and not of politically and legally enhanced ersatz barriers to business.
As opposed to the current VC model, which has been continuously strained by the man-made barricades to the free flow of money and ideas, the decentralized system of public investments, supported by block-chain technology, addresses this issue head on. It makes possible for all entrepreneurs across the world to get their first shot at implementing their ideas into life and to originate more new jobs in the process.
That of course gives rise to an other argument, traditional for numerous proponents of the current VC model. This argument, basically, states that VC investments business is so breathtakingly complicated and insanely dangerous, that it may be successfully carried on only by top-notch professionals with impeccable pedigree and professional credentials, officially blessed by government’s bureaucrats. Although, there’s no point to dispute one of the claims of this argument that successful investments requires a certain level of knowledge and practical experience, its other reasons and evidences are mostly skewed.
On the one hand, that argument’s validity fully relies on the supposed efficiency of the current security market regulations, which, of course, far from being efficient and, even, fair. The attempt to patch this dazzling lack of justice was entertained by the White House administration in 2012 with the signature of “The Jumpstart Our Business Startups Act” or “JOBS”. However, the shock-waves of the stock market crash of 1929 have continued to haunt innumerable legislators, with daring lack of practical business experience both on the federal and states levels.
Those ill-informed legal advocates of “consumer financial protection rights” in their manifold “amendments” almost pointedly disregarded vastly disproportionate legal compliance burdens, which their overzealous regulatory activity imposed on fledgling businesses, which is now gradually pushing seed-level startups towards the edge of extinction. It seems that this unreasonable and outdated legislative strategy is silently supported by big VC firms, with access to almost unlimited legal budgets, for which it provides an unfair advantage over their smaller competitors.
On the other hand, this argument completely disregards the urgent necessity for all venture investment market’s participants to work together towards creating free and fair market conditions for all types of law-abiding newcomers, private or otherwise, by providing them with necessary guidance, instruction and eduction rather than to hit them with new sophisticated restrictions and exotic punishments. It appears that exactly this tremendous deficit of commitment towards free-market values has led to the recent ICO-madness. As it always happens with artificially fabricated roadblocks to the free-flow of humans’ best instincts of entrepreneurship and ingenuity those blocks are sooner or later crumbled by the growing hydraulic pressure of the upcoming waterfall.
The third argument, which is often put forward by ardent opponents of ICOs, consists of the following simple-minded statement: “All ICOs are fraudulent because their organizers do not bear any responsibilities for their improper actions.” Even if we put aside the important notion that according to the elementary human rights standards for the treatment of suspected persons nobody can be accused before a fair trial is performed (and as far as I know in more than two years, during which ICO practice has became a world-wide phenomena, nobody has ever been properly accused in the court of law for ICO), we still can easily demonstrate that the above-mentioned statement is widely misplaced.
Suffice to mention that, although there has never been the “official” ICO standards established by any type of bureaucratic organizations (let alone a government body), those standards have, nevertheless, appeared as a result of the market self-regulation. One of the most important among those self-organized standards is the rigorous scrutiny of the ICO team performed by would-be investors through multiple cross-checked sources and channels, including social networks, initial program codes depositories, various communication mediums and personal meetings. Besides, there have been already created various new forms of contractual agreements (such, for example, as the Simple Agreement for Future Tokens or SAFT) which already serves as a legal guarantee from some forms of ICO initiators’ potential fraudulent activities.
As a result, the collective reputation, financial and legal losses, which ICO founders, fully exposed to an everyday on-line audit of the world-wide Internet community, will endure as a result of their meddling with the law, far exceed those, of “mainstream” startups founders, which improper actions may be easily hidden behind the legal and financial walls of Fortune 100 corporate incubators.
The forth type of counter-ICO argumentations concerns itself with international, cross-border character of the related monetary transactions. While rising this issue, colorful and widely exaggerated accusations, with obvious lack of supporting factual evidence, are pointlessly thrown again and again into the ICO crowd. It appears that in this case the long-term, inherent and mismanaged malaise of our society is once again blamed on the most politically vulnerable but unrelated to its true causes agent.
As Henry David Thoreau once said “there are a thousand hacking at the branches of evil to one who is striking at the root.” In the ICO case there are now too many people with authority who are more than willing “to toss a baby out with waste water”. That madness must be stopped. If we think about the number of unique business opportunities, which ICO movement has already created for millions upon millions of talented entrepreneurs, and which may now drastically improve their and their families lives in developing countries of the South America, Africa, Middle East and the Southeastern Asia, there must be an absolutely unheard-of level of unimagined damage, which ICOs must cause to overdone this good-doing, job-multiplying effect, which has been already experienced by various underprivileged peoples all over the world. The current VC model, which, after more than 50 years of its active development, still can’t take roots in the great majority of world’s countries is obviously incapable to reach anything close to this world-wide effect.
Now, the fifth, and, from my own, personal stand point of view, the most substantiated objection against ICOs, which old VC model propagandists usually mention, is the absence of stringent capital control. Indeed, in the most current cases of ICOs, founders, after a smart contract expiration (as in the case of ERC 20 tokens), receive almost instantaneous access to all funds accumulated in a crypto-wallet during ICO campaign. It certainly may create two types of risks.
Firstly, it is possible that founders, dumbstruck by the sudden influx of “free-money”, may suddenly loose their financial incentives to continue to do the necessary amount of hard work needed to complete the project within the designated time-frame. Secondly, due to the prevailing among new ICO organizers lack of the previous business experience founders may easily misplace the received funds, which may quickly lead to project’s over-budget.
However, there already exists a proven method to address this obvious ICO shortfall. If funds are to be primary send to an intermediate multi-signature wallet, which is hold under the control of investors, then only a designated portion of those funds will be send to founders wallet upon a completion of major project’s milestones. Nevertheless, by and large, controlling and managing such transactions within the old VC model is far more easy then in the proposed new one. That presents itself the important trial to face and to overcome for the fast growing ICO community.
To conclude the second paragraph of this essay here is the short list of the key ICO movement’s benefits:
- it provides an immediate, long-term exposure of all startups to an unrestricted public scrutiny and criticism;
- it ensures world-wide reach and universal inclusiveness of the startup movement, which makes it widely available for all social and racial groups;
- it stresses an open, free-market competition;
- it creates an indiscriminate potential for new wealth creation in all countries;
- it leads to almost instant startups’ market liquidity, unimpeded by a privileged access to high-cost technological equipments and costly information data, which ensures equality of profit/ loss opportunities for all market participants independent of their social and material statuses;
- it establishes an highly democratic system of the decision making, propagated by the block-chain technology;
- it addresses an issue of small credits availability for fledgling businesses and creates multiple new job opportunities all over the world.
In a conclusion and in order to keep this piece from being too unjust towards the old VC model, which we all own our past successes, it would be suitable to mention the most important of its advantages, which are as the following:
- it has created the VC market as we all know it exists now;
- it fully complies with the recent regulatory requirements;
- it is based on the established industry standards universally propagated by the contemporary educational system;
- it’s fully integrated into present-time corporate management and financial networks;
- it’s wholeheartedly supported by the political and business establishment as well as by mainstream medias.
Additionally, my VC colleagues would frown on me more than already necessary, if I miss to mention other glaring shortcomings of the present ICOs. Well, here they are:
- non compliance with some laws;
- insufficiency of coins’ support infrastructure and, as a result, a deficit of coins’ usability cases;
- vulnerability to hacker attacks;
- high requirements towards the level of users’ familiarity with IT and cryptography;
- bad PR and an absence of self-organization and self-regulation.
Although, those flaws may seriously undermine the future of ICOs if left un-addressed for an unnecessary long period of time, I firmly believe that all of those faults may be and will be confronted by ICO and crypto communities themselves without unnecessary and, as in most past cases, very harmful, hasty and inconsiderate government’s interventions.
Warning: This information is not intended to constitute financial or legal advices and should not be relied upon in lieu of consultation with appropriate financial and legal advisors in your own jurisdiction.
The author: Svyatoslav (Svyat) Sedov
Angel investor and founder of The First International Incubator for Silicon Valley Companies (FirstInternational.In) in the Bay Area, CA, USA.
- Twitter: https://twitter.com/SvjatoslavSedof