What ICOs mean for corporate venturing

June 5, 2018

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Seven things to know right now. 

As the ICO market further expands, crypto assets may well end up in your portfolio. Here’s what you need to know.

Initial coin offerings (ICOs) are being positioned as a promising way for tech-savvy startups to get funded. They now outpace venture capital as the top source of funds for blockchain startups. And despite the stats and the headlines—the total number of corporate investors in the Blockchain space jumped 70% from 2016 to 2017, according to CB Insights—you might have dismissed ICOs as a fad, irrelevant to corporate venture investing. But that’s far from the case.

As the ICO market further expands, crypto assets may well end up in your portfolio. For example, you might take a position in a young venture that was funded through an ICO. You might also decide to experiment with the model yourself, or participate in an ICO by investing in one directly. Either way, you’ll need to understand the ramifications of the ICO and what its tokens represent.

So what exactly are ICOs? In an ICO, a new company creates and issues tokens to the public, often in exchange for another blockchain-managed cryptocurrency, such as bitcoin (which organizations typically convert to cash so they can fund operations). What these new tokens represent is completely variable: an access right, a voting right, or a cryptocurrency. Tokens are usually designed to be integral to the operation of the company—such as a custom currency used within a smartphone app—even though in most ICOs, the tokens are sold before the company or its app is ever actually launched.

Here are seven considerations that corporate venture investors should keep in mind:

1. ICOs are disrupting the status quo

In the past, corporate investors have invested in young ventures by using equity or debt financing. Now, ICOs represent a third option, and they are muddying the waters by changing the value of traditional equity. If token holders are the main beneficiaries of corporate wealth creation, what happens to the holders of traditional stock? Investors should rethink their positions, because the value of equity will likely decline in a world where ICOs become increasingly popular—and where regulation hasn’t kept up.

2. Not all ICOs are structured the same

Most ICOs come in two forms: pure ICOs and hybrid ICOs. In a pure ICO, a venture raises its first funds via a token sale. In a hybrid offering, the token sale comes after one or more rounds of traditional funding. Pure ICOs are often initiated based on nothing more than a white paper heralding an innovative idea, while a hybrid ICO will often have more underlying validation thanks to its early cash funding.

Each model has its advantages. Pure ICOs provide infinite flexibility and let their founders innovate their businesses. Hybrids offer some of the advantages of the venture capital model, allowing early validation before the ICO is marketed to the public, which may ultimately increase interest in the offering.

3. ICOs are fundamentally different from IPOs

The names may sound similar, but IPOs and ICOs are quite different by design. An initial public offering (IPO) of stock disperses ownership of the company and raises cash in the process. Precious few startups will ever become successful enough to launch an IPO. Conversely, a typical ICO does not involve a transfer of ownership and, as noted earlier, is conceptually available to any company, even if it has yet to launch a proof of concept or open its doors. IPOs are highly regulated, while ICOs today have very little regulation. Fundamentally, they are completely separate concepts and both have their place: ICOs are more focused on early stage financing (like typical venture capital funding or crowdfunding), while IPOs are generally considered an exit event.

4. ICOs continue to evolve: Enter the reverse ICOs

In recent months, a novel twist on the ICO model has emerged: the reverse ICO. The name isn’t completely descriptive, but the concept stands to gain traction. Reverse ICOs can be undertaken by mature businesses, and they much more closely model an equity IPO, following many of the same rules that govern a public issuance of stock. The difference is that in a reverse ICO, a company “tokenizes” itself by issuing tokens instead of shares of stock. These tokens don’t require a public stock exchange to trade and an investment bank to underwrite, so they are more liquid and can be issued directly to investors—with very little overhead. Because reverse ICOs are undertaken by going concerns, they more clearly represent value in the company. And critically, unlike a conventional ICO, the tokens issued in a reverse ICO are not necessarily integral to the operation of the business.

5. ICOs could make it easier for key employees to jump ship

When crowdfunding first became popular, it opened up doors for would-be entrepreneurs who had no access to traditional capital markets. ICOs lower the barriers to launching a startup even further, as anyone with a good idea and a decent white paper may be able to raise millions virtually overnight. The upshot for corporate investors is that ICOs could exacerbate brain drain, as top talent may find it easier than ever to strike out on their own.

6. The risks and regulations around ICOs remain in question

The feverish interest in ICOs has resulted in similar interest from regulators. For example, the US is taking steps that would classify all ICOs as securities, which would bring them under the jurisdiction of the US Securities and Exchange Commission (SEC). And as a result, many international ICOs are officially banning US participation. Switzerland, long a friendly playground for ICO launches, is taking steps to reconsider its policies. In China, ICOs have been effectively banned, pending the implementation of permanent rules.

Much of the regulatory concern over ICOs revolves around the large number of scams that have occurred. The SEC recently intervened to stop a $15 million ICO from PlexCorps when fraud was alleged, ultimately landing its founder in jail. There’s also been a cryptocurrency called PonziCoin, originally intended as a joke, but which netted a quarter of a million dollars for the founder.

7. Fundamentals should guide participation

Investors should rely on fundamentals as they assess the viability of an ICO. As with any investment, you’ll consider:

  • Team: The core startup team should be composed of qualified, well-rounded, and capable members. From that perspective, the evaluation of team quality closely resembles how investors approach traditional ventures. The team should exhibit strong leadership to operationalize the strategy and proven technical experience to build a compelling platform.
  • Use case: The use case pursued should solve a problem and have a clear purpose and real-world applicability. As ICOs are usually fundraising mechanisms in support of blockchain-inspired projects, investors should evaluate the relevance of the blockchain use case to avoid falling into the trap of a solution looking for a problem.
  • Business model: As with any traditional venture, the business model put forth as part of the ICO white paper should be considered sustainable and scalable. The ICO white paper should highlight key considerations, such as the commercial plan, token strategy, and scalability model.
  • Institutional mindset: The startup needs to focus on building a long-term institutional-grade business. This means emphasizing rigor and full transparency in the fundraising process, such as appropriate governance procedures, informed legal counsel, and thorough due diligence processes (that is, know your customer [KYC] and anti-money laundering [AML] procedures on all investors).

The takeaway

ICOs are an exciting and innovative new funding mechanism, but it’s important that corporate venture investors treat ICOs with extreme caution: Investors should carefully understand what an ICO’s token represents and whether the underlying concept has any real merit. Like the broader cryptocurrency market, ICOs are extremely vulnerable to hype and the massive fluctuations in value that come with it. That said, given the growth of the category, it’s clear that ICOs likely will be a part of the foreseeable future.


Paul-Marc Schweitzer also contributed to this post.

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Chris Curran

Principal and Chief Technologist, PwC US Tel: +1 (214) 754 5055 Email

Vicki Huff Eckert

Global New Business & Innovation Leader Tel: +1 (650) 387 4956 Email

Mark McCaffery

US Technology, Media and Telecommunications (TMT) Leader Tel: +1 (408) 817 4199 Email