A lot of people have been dreaming of starting their own start-ups. According to some entrepreneurs, it is the most inspiring job to start your own business. However, one of the four major challenges for start-ups is to get funding. Especially if your business plan requires a lot of capital and your aiming for rapid growth and huge expansion. In this case, start-ups are depending on venture capitalists (Patel, 2018). Venture capital is a form of private equity and a type of financing that investors provide to startups in which the investor sees growth opportunities (Chen & Scott, 2020). Obtaining this venture capital as a start-up can be a very challenging task. The process of obtaining venture capital starts by submitting a business plan. Once there is interest, due diligence must take place and this includes an investigation of both the firm’s business model, the products, management, and many more things. If the start-up will pass this phase, it will receive venture capital in exchange for equity of the start-up (Chen & Scott, 2019).
A recent trend is the rise of Initial Coin Offerings also known as ICOs. An ICO is when you as a company decide to offer a blockchain-based currency and in return you receive money. The money you receive is from individual investors that have read the whitepaper that you have published, and they see potential in your technology. Their hope is that your technology will become widely used creating more demand for ‘’your” coin making the price rise (Sherry, n.d.). ICO’s are on the top of the hype cycle. An example of a successful ICO is Telegram that has obtained a $1.7 billion-dollar funding in 2018 (Olsson, 2018)
My prediction is that ICOs are becoming more and more frequently used. Their main advantage is that the process to obtain capital is a lot quicker than with venture capital. In addition, compared to venture capital with an ICO you also don’t lose ownership. However, there remain a few drawbacks to the use of ICOs. First of all, in order to be able to launch an ICO, your start-up must be tech orientated. Also, with an ICO the investors can only send money and not provide the start-up with managerial and technological advice. This is different in the case of venture capital. Nevertheless, with the advantages of an ICO and the fact that the blockchain technology is showing a lot of potentials, I do expect a rise in ICOs compared to venture capital.
References
Chen, J. & Scott, G. (2019). Venture Capital Definition. [online] Available at: https://www.investopedia.com/terms/v/venturecapital.asp.
Lars Olsson (2018). ICO Funding has overtaken Angel & Seed Venture Capital. [online] Medium. Available at: https://medium.com/cashlink-crypto/ico-funding-has-overtaken-angel-seed-venture-capital-c44affbb6dd3.
Patel, V. (2018). 4 Startup Funding Challenges and How to Overcome Them. [online] Bplans Blog. Available at: https://articles.bplans.com/4-startup-funding-challenges-overcome/
Sherry, B. (n.d.). What Is an ICO? [online] Investopedia. Available at: https://www.investopedia.com/news/what-ico/
Interesting article Martijn! There is a big rise in ICO’s, and the gains can be huge. On the other hand, in my opinion, there are more risks to ICO’s than mentioned. There are strict regulations, and in for example in China ICO’s have been banned because of lack of regulation. Also, 20% of the ICO’s analysed by the Wall Street Journal had plagiarized documents or other red flags. The option is still seen as risky. On the other hand, i do agree with you that there is huge potential in the future.