Getting Token for Granted
Our primary job at VentureSouq is to understand the pulse of investors who are or could be interested in tech. We don’t limit ourselves to big investment funds. We engage everyone: corporates, family conglomerates, individuals of all shapes & sizes. No question, the loudest and most interesting pulse of the last 12 months was around the ICO of a little-known instant messaging service with a few (180 million) users called Telegram.
This thing was so fraught with intrigue that it’s amazing Netflix hasn’t picked it up already. It is of global proportions; its founders have a high stake history of billion-dollar exits and Russian exiles; it is the platform of choice for the coolest & most rebellious fringe digital communities; it attracted capital from San Francisco to London to Hong Kong, in a mad rush “how do I get in” kind of way. It is mammoth: the first tranche raised was $850m, and they’re targeting a raise of up to $2.5bn. The largest ICO before this was Filecoin, at $257m. And the epicenter of all of this was right here in Dubai where, as rumor has it, the founders frequently stroll the Emaar 6 in the Marina and sip on grape mint shishas at Reem al Bawadi.
For us, there were a couple of other aspects of this deal that made us say to ourselves: “oh, crap.”
Telegram showed us that there was this burgeoning class of investors, right here in our midst, that haven’t really been there in volume for the whole venture capital thing: traders. I don’t mean professional or institutional traders. I mean people or business groups that think more like traders than long-term investors. They are highly data-driven; collaborative in terms of sharing information with one another; they move in packs, lending to the potential for virality; they are highly opportunistic. They are arguably more sophisticated than long-term value investors in actively connecting the dots between different investments, using options and forwards to isolate the precise exposure they want. Where the venture capital community tends to hone-in on defined geographic strategies (i.e. “we invest in MENA”), these people canvas the whole world for opportunities, often arbitraging between markets where pricing inefficiencies exist. And most importantly, they are completely fixated on liquidity. Money in VC deals is locked-up for years. These people won’t touch it.
For us, Telegram was a loudspeaker to the fact that this profile of investor exists here, and that they have now been turned onto the very opportunities that we as venture capitalists have been evangelizing for the past several years. They aren’t uniform in their form of existence – they are companies, groups or individuals – but they are all around. And they are deep pocketed. In this part of the world, one could argue that an ecosystem that appeals to these investors would be more effective than one modelled on traditional venture capital.
Every company in the world must be considering raising via a token issuance right now. This particularly applies to early-stage technology companies, who presumably have the skill-set and nimbleness to pivot an existing service into one that is suitable for an ICO. You can debate whether or not it’s the right thing to do for your company – track the volatility in the crypto markets; look at the robustness of regulatory frameworks; challenge whether this is really a permanent technological shift. You may make the call that no, it’s better if we don’t tokenize this business. But you have to consider it. There’s a choice that each entrepreneur faces now, between the slog of a Seed, Series A, Series B, funding sequence or bringing in $30 million in one go through purely click-through execution. Which one would you go for?
But for us as investors, a wide scale shift to ICOs in lieu of traditional equity participation raises a lot of questions that, frankly, we don’t really have an answer to right now. Corporate acquisitions can be the most effective way to scale, synergize, expand product offering and market reach, drive costs down. How do you even execute a corporate acquisition of a company that has ICO’d. The company has sold all its gross profit down the river. What’s left to be acquired? We’ve had world-class crypto traders tell us that they believe that once a company ICOs the value of the equity essentially becomes zero. What happens to an existing investor who previously invested money into a company if his/her portfolio company does an ICO? Do they need to convert their shares into token? At what price & terms?
For VentureSouq, this deal was not simply a question of market timing or opportunistically taking a bet that went well or didn’t. It was the announcement of the arrival of a phenomenon that we have known for some time calls into question the very asset class and investors that we built our entire existence around. So now our primary job becomes: getting on top of this.
If you want to get on top of this, come to Angel Rising this coming weekend @NYUAD. Saturday from 1-6pm, hosted by startAD & VentureSouq. People like Jake Zeller from AngelList, angel investor extraordinaire Fritz Lanman, Sam Hodges from Funding Circle and some of the most knowledgeable people in the world on angel investing will be discussing the interplay between venture capital & ICOs, liquidity in venture investments, and a number of other topical subjects. Register here, now!