Video Of The Week: Is Crypto the Future of Early Stage Funding?

A lot of people in the crypto sector have suggested that ICOs and tokens are the future of early stage investing and highly disruptive to my business (venture capital).

In this video (yet another from the Upfront Conference), VCs and other investors discuss why that may not be the case.


Comments (Archived):

  1. William Mougayar

    Here’s the nuance: ICOs are “part” of the future of early stage funding.Second, they should be called Token Generation Events, not ICOs.Third, ICO’s are the future of IPOs.Fourth, there will be an increased separation between TGE’s and ICO’s.

    1. awaldstein

      I don’t agree with the terminology change nor do i think it matters as of now.I think a new name will arise but we as a whole are clueless what this will look like in 6 years and that name will bubble up, not be mandated by the pundits top down.Non securitized ICOs can’t really replace ICOs though i think the amounts raised certainly will rival them. Different instruments in my opinion though I’m being a bit retro as I relished my experience doing IPOs and like the accountability of it on both sides.

      1. William Mougayar

        TGE is a real term that is being used. The tokens are generated by the blockchain/smart contracts. that is a real thing.

        1. jason wright

          An example of this please?

        2. awaldstein

          I know that it is your term so you are partial which is understandable.Not arguing just don’t care for it as it doesn’t clarify anything to me even though it may be literally correct.I often have a bias against creating new category terms rather than extending or changing the definition of the existent unless there is good reason for it.If there is then do share.

        3. SubstrateUndertow

          So TGEs are crypto-currency smart contract generated elements/behaviours who’s key attribute/function/utility is/does what exactly?

          1. SubstrateUndertow

            P.S,Could not fine a clear”superficial working characterization/definition”using Google search.That seems odd for even a marginally established/sharable noun/verb ?

    2. PhilipSugar

      It will be interesting to see if ICO’s are the future of IPOs. Maybe you can explain to me, but the beauty of the current market is I can seamlessly sell Apple for instance and buy Amazon (names only for illustration)Now I want to the IPO market to change. And maybe this does it. If I see a promising company, I’d like to invest way earlier than I can now, and the amount of regulations because of SOX etc means it is very expensive.Now that doesn’t mean there should be no controls. Even with all of these controls you see huge abuses.I will only say this, when I have the plumber working under the sink on the garbage disposal start asking me about investing in Bitcoin, and ICO’s or TGE’s as you say I know that we are in a bubble that will end badly.Early stage investing is VERY hard. VC’s that are successful start to hit stride after the often stated 10,000 hours of work. And that is hard work, and many won’t make it even after the 10,000 hours.

      1. William Mougayar

        ICOs are providing early liquidity, which ICOs did previously, although much later. If done right, ICOs could offer mid-term liquidity that might be desirable in some cases.

      2. LE

        Knowing human nature you are correct. However given that bitcoin went to 20k or close and then dropped to now over $10k ($10,850 according to google while I write this) I can tell you that human nature theory of mine says it is now going to go up more again and that it’s clear that it’s being manipulated to do so. It will go up because there are going to be more buyers than sellers until it hits a point (can’t predict) and then drop. Again. And they will possibly repeat. And it is that gyration that will keep people in the game. This is quite different than stocks. And honestly to me a much better gamble than horse racing or stocks or a casino.By the way I predicted (on this blog) that after it hit the magic number of $10k it would rise greatly. That attention would create all sorts of free publicity in main stream press that would drive the price higher. You know the thing that caused the internet to take hold wasn’t just what you could do with it. It was that the main stream press gave it billions in free publicity and legitimacy. Billions. Think about that.I don’t own any bitcoin and have never bought any and honestly don’t intend do despite what I am saying above.

        1. Vasudev Ram

          Good points up the human nature and about the price going up and down. A few quotes or commonly heard sayings:- Stock markets are driven by fear and greed(Fear could be FOMO when stock going up, or just fear when going down; greed is when stock going up; there could be other forms too)- There’s a sucker born every minute.(This one is attributed to Phineas Barnum, but Wikipedia often says such attrs are wrong.)…>And honestly to me a much better gamble than horse racing or stocks or a casino.Ha ha, that reminds me, once I was asked by a friend who was into betting on horse races, to write a program to predict the results of races. He had got hold of some obscure old book which was about how to do that (predict race results), by an author called just Rasajo (IIRC). If you google “rasajo horse races” you will get some links – I just did. I read the book and almost decided to write the program, for fun if nothing else, but then on reading it again it either seemed silly or impossible to implement (because of no logical rules, not because it was too hard). So dropped the idea.

          1. PhilipSugar

            Look me up. As somebody that has systems that track 75% of North American Horseracing bets I can tell you how it’s based. I have a classmate that wrote programming on it. Win Place Show Pools are usually fairly priced but exactas and trifectas are not especially if you want to bet in enough quantity to cover the risk.

          2. Vasudev Ram

            >systems that track 75% of North American Horseracing betsWow 🙂

          3. PhilipSugar

            Horse Racing and Sports Betting are a great analogy. You can positively make money betting on horses whose names you like, you can win NFL pools by picking teams that have animals as mascots, you can win in the NCAA tournament by picking schools you would have like to have gone.I’ve seen all of that happen. And when it does people with skill question, but over time you get washed out.I’ll end with a funny story. There are five guys that set the line on the NFL games each week. They set it, it goes down to the Caribbean where they see what the true pro’s think and then it gets published in Vegas. Remember they don’t care who wins, they want to set the line so half the action goes on one side and half the other, and they don’t have to move it much so they don’t have to take a position. Then they make the vig. (vigorish, you don’t get paid double your money they take about 5%)My friend got his own show, on a sports network, where he and some buddies drank scotch and smoked while discussing the line in a Vegas Sports Book.How did he get the show? He has a beautiful daughter who wants to be an actress. He went with her on a casting call, because there was going to be no “casting couch”. She didn’t get the part but he got his own show.

    3. Girish Mehta

      Can you unpack how ICOs are the future of IPOs ?

      1. William Mougayar

        Yes. I’m going to write a blog post on that.

    4. Richard

      See US Supreme Ct, SEC vs Howey

    5. SubstrateUndertow

      Can you give us the short tweet version ?

    6. JLM

      .The world is awash with money and crypto is a sexy class, but right now the SEC has put a bow around cryptocurrency and said it is an “asset” and the IRS has said, therefore, it is to be taxed like an investable asset subject to taxable gains and deductible losses.This creates a myriad of issues, solves one or two, but leaves each use of cryptocurrency as a taxable event. One must know their basis in the individual cryptocurrency “units” used and their value at the time of use. Then, they must calculate their gain and pay taxes on it.It is a taxable exchange.OTOH, if crypto begins to wander into the IPO arena — either directly or by practical use — it runs afoul of a lot of existing law related to how an entity can offer and sell stock (securities of any form) to the public.Much of the safe harbor for an IPO issuer is created by using an underwriter to evaluate, underwrite, and offer a written prospectus on the merits and dangers of the IPO. This is a far cry from typing up a white paper.Already, the US SEC has begun to bring enforcement actions which are based on garden variety fraud and failure to adhere to published standards. As they win a few of these cases, they will become infinitely more confident and reach into their bag of tricks to nail some of the perpetrators.The SEC loves to ban bad actors from the securities business for life. It makes it easy to get them a second time.If ICOs, in any of their variations, are even whispered to be like IPOs, there will be Hell to pay and the SEC will move with certainty.There is a very real Deep State within the SEC — witness their reluctance to follow up on the JOBS Act for four years after it was passed by Congress. Why? They didn’t like it.JLMwww.themusingsofthebigredca…

      1. jason wright

        Deep State – can you say more on that?

  2. Frank W. Miller

    What I hear from this group is the need to control. They repeatedly talk about when investment should be injected based on what THEY think is appropriate for founder liquidity and such. This is the real problem. The use of tokens to generate funding is happening as a reaction to the structure of VC in general. Its a way around all of that control I just referenced. It may not be the final solution, but what you should really be thinking about is the pressures on you. Something will come along to replace VC, it has to. As I’ve said many times before, the problem is too much money in the hands of too few individuals. You VC’s should be looking at tokens in this context as a canary in the coalmine.

    1. PhilipSugar

      This is nothing new. Technology always provides massive levers. Andrew Carnegie had massive leverage.Technology has made it even more so. Think of something like Uber (no politics just business) 5.5mm rides a day. 2B a year. I’m know they waste money like no tomorrow, but let’s say you have 100 core people that really make that technology happen. That means instead of a taxi dispatcher you have one person dispatching 20mm rides a year or 55k rides a day.

  3. awaldstein

    The most interesting takeaway for me was that as a child of open source projects I hadn’t focused on the difference that indeed you take the data with you as well during a fork.Have fun skiing Fred.

  4. jason wright

    probably, once the terms have become more balanced to address the legitimate interests of all parties concerned. ICOs as presently constituted encourage the first temptation of crypto, theft.Edit 20:24 GMT;Not wanting to hijack your question, but the question is not the most interesting one to me. Crypto may or may not take over early stage funding. Time will give the answer. It may come to eat a VC’s breakfast, lunch, and dinner. Adapt.What interests me most of all is the programmability of the tokens. Everything else is subordinate to that single characteristic of blockchain tech. It changes everything in time.

  5. PhilipSugar

    The amazing part to me is that just when I think there can’t be another cycle I am proven wrong. Early 1990’s PC’s will change everything (and they did) but we don’t need no stinking VC’s we will just Angel invest….then as the internet took over almost everybody got washed out. Then the in late 1990’s internet…..this time it’s different…..wash out. Smart Phone……wash out. Then Real Estate!!!! it never goes down, that one really didn’t end well. Now crypto. My plumber yesterday while he is under the sink put in new disposal. “Hey Phil I know you are a tech guy…..should I invest in Bitcoin?? How about these other ICO’s??)Every time. Oh, it’s different these pros will get washed out, we idiots are so much smarter. To which I say:

    1. LE

      Your plumber will only remember if you said to invest and crypto that he buys goes down. Or if you said to not invest and it goes up. He won’t remember anything else that you say. Next time tell him you are making your own ‘fund’ and would he like to invest it it. Play him along. I think I will try that just for fun to see if I can sucker people in (and of course I won’t actually take money).we idiots are so much smarter.There is definitely a pattern that I have seen where ‘idiots’ come out ahead. [1] I started to watch (with my wife) the A&E show “Vacation Rental Potential” which is essentially an advertisement for which is involved in the production. What amazes me is the people who appear on the show. Yes I know it’s reality tv. But they present as having no clue and are below average for anyone that I have ever encountered that is successful in real estate. (See @JLM) That is part of the secret sauce of many reality tv shows. [2] They are presented as just blindly believing that they will make money in spades when clearly that couldn’t be the case. Right? Because if it was, the price of the real estate would (in theory at least and with few exceptions) adjust to match the potential income stream. The big money would come in and do it much better (what will happen with pot a bit later). However forgetting the bias of the show and the entertainment value the larger point is that sometimes clueless people actually come out ahead. Because they don’t think about things, don’t ask questions and they don’t know the pitfalls or what they are actually getting into. And you know if enough of those people take enough gambles they sometimes come out in front of the smart people who know to much to take those chances. And then you read about those people but not about the 100 others who have failed and lost everything.I also think this relates somewhat to investors in companies. Since they have never run a company they don’t know seat of the pants other than from what they have experienced 2nd hand the day to day things that can easily sink a company that the entrepreneur deals with. This is actually a good thing though.If they did they would worry a great deal more than they do. I mean when you fly do you really want to know what the mechanic or pilot is thinking or if either of them got enough sleep or drank to much the night before? Or that the brain surgeon had a fight with his wife or hurt his hand doing a sport?[1] There are so many examples of this. Ever been on a cruise ship and seen the art they are pushing? And people sit there and listen and act like they are seeing an opportunity. And I don’t even know anything about art. But I know that if they are pushing people to buy it in that type of setting and after hearing what they say just by standing there for a few minutes I know most likely it’s a scam. It just fits the scam pattern that I learned as a kid reading junk mail at my dad’s office. But I am sure some of those art buyers managed to find greater fools and made out. A few at least.[2] That you can relate to the people as either being flawed or not super sophisticated. Even if they have more money than you do.

      1. Girish Mehta

        This is tangential to your point. Investing is one of the few disciplines where, by definition, a rank newcomer can outperform a veteran/expert with their very first investment. It is simply a feature (not a bug) of investing.If you are not a surgeon and not trained in medicine, you are never going to be able to walk into a OR and do heart or brain surgery. 1,000 times out of 1000, a trained and experienced surgeon will do it better than you.In investing, you have never done it in your life…and you can be right and win big with your very first investment.The nature of investing permits that outcome; the nature of surgery does not permit that outcome.But then, eventually, like Seneca said – Time discovers truth.All things have a continuum of luck and skill. M. Maubossin has a simple framework for determining where an activity falls on the continuum – can you choose to fail and be almost certain you will ? If you can ensure failure, there is a heavy component of skill. If you cannot ensure you will fail, there is a heavy component of luck. H/T M. MaubossinExample – In tennis, it is possible to ensure you will lose the service game. You double-fault to 15, 30, 40 and game. You can ensure that you will lose the service game because there is a level of skill involved in getting that serve in (never mind the quality of your opponent’s service return which comes later). Note: This argument does not work as well when you are returning serve.But in investing, you can make a very, very risky investment but you still cannot guarantee failure.

        1. LE

          a rank newcomer can outperform a veteran/expert with their very firstDitto for entrepreneurship as I found on my first situation out of college which was panned by someone with years and years of experience.However I think you have to separate ‘investing’ from ‘gambling’. Can anyone say that buying bitcoin (we will use that) is investing? This is not the same as buying stock in a company (gambling but way way down on the gambling scale) or buying real estate or even gold. In those you are generally dependent on things that allow you to gain an advantage over the competition. Even if ‘do your homework’ is a crock.The only thing that I see that allows (in this market) and advantage with btc is knowing enough to be able to see what will happen with human nature in the short term and then be able to profit.Lastly, would like actual statistics that show how many rank newcomers beat out the professional in investing (or entrepreneurship). I suspect they don’t exist. Most people don’t talk about their losses. This was typically true with stocks in the past.

          1. Girish Mehta

            Re Your last point…I was referring to that by the Seneca quote, maybe I was cryptic. Over time, the newcomer who does not understand what he is doing and who he is up against will be found out. That happens with subsequent iterations of the activity and time.The thing is – Investing as a discipline permits an outcome where a rank newcomer beats a experienced/skilled performer. By its nature.Many disciplines do not permit that outcome – Professional sports, Olympic-level competitions, Surgery, Mountain Climbing. Again, by their nature.

          2. sigmaalgebra

            > Investing as a discipline permits an outcome where a rank newcomer beats a experienced/skilled performer.There is nothing surprising here:On a few investments? Possibly? On average? Not a chance. How do we know? The law of large numbers. Setting aside such theory, in practice, for hundreds of years, the casinos got rich. Done.

          3. PhilipSugar

            As usual your quotes are priceless. And as usual you make my point much more eloquently. Yes you can make money with no skill, but over time no. And yes all of those technologies were and are transformative.As for housing and the plumber (actually HVAC) I told him to stick to his rental properties. Why? He has skill there. Plumbing, Electrical, HVAC minor other stuff….he can fix himself either off hours or on slow days like Thursday. Other stuff roofing, drywall, etc, he just makes a trade with another craftsman. Problem with a tenant? You call your buddies and make a house visit (heard those calls). Deal flow? You and your buddies get calls when things are seriously wrong. That Doctor who had no clue and now has a torn up house? Fixing it doesn’t make sense paying your rates, but you can buy it and fix it.It’s human nature to look at the skilled person, think that’s not that hard, I could do that, they are ripping people off.

        2. jason wright

          every investor makes their first investment.the investment guaranteed to fail is not an investment.

        3. JLM

          .Brilliant comment.JLMwww.themusingsofthebigredca…

        4. Vendita Auto

          Masayoshi Son strategy heads or tails I win & that’s before D-wave ran the numbers.Time is information I don’t have.Time is our ignorance. [Rovelli]

      2. sigmaalgebra

        Short version? Fools rush in, and a few of them get really lucky. Tough to compete with really good luck!

  6. Mike Cautillo

    Fred, what do you think of introducing a token which represents a group of VC’s that participate in only the projects that traditional VC is accustomed to and as per described by many in the video. Essentially the VC would be an experienced/wiser liaison of sorts for token holders for whom are interested in this sort of thing.

  7. Richard

    This ain’t the taxi commission folks. The SEC/FBI may not be fast but once a few celebrities get locked up exepet ICOs to dry up. SEC v. AriseBank, 18-cv-00186, U.S. District Court, Northern District of Texas (Dallas).

    1. JLM

      .The case itself… is very interesting as it was a case of some cryptocurrency guys trying to advance the cause one step further by buying a FDIC insured bank and putting the investor’s money in gov’t insured accounts (insured up to $250K).The novelty of it is extraordinary and ballsy.Big point is that the crypto guys were, in fact, inserting a “trusted intermediary” into the mix. Of course, the elimination of intermediaries is one of the touted advantages of a distributed network. Go figure!Listen to what was being said before the SEC stepped in.…Alas, the SEC did not see it that way and not only confronted them, but attempted to put them into receivership.Big takeaway — this wasn’t done by the SEC in DC. This was the Ft Worth office which means the focus on cryptocurrency and ICO scams has been distributed throughout the entire SEC.One has to suspect that the SEC is going to work from the big guys down to the little fish. This is not regulation, this is law enforcement.To put a bit of icing on this cake, read the book synopsis of the 28-year old Jared Rice Sr, sponsor. Who would not want to entrust their money to this guy? Oh, forgot to mention he pled guilty to felony theft and tampering with financial records in 2015.…JLMwww.themusingsofthebigredca…

  8. Tom Labus

    I would be very disappointed and concerned if there weren’t a bunch of scams and cons at this stage of the game. Free cash is very alluring.The wild west stage often produces something valuable later on. We shall see.But right now this is a one sided game, advantage seller until one works.

    1. cavepainting

      Money raised from ICOs represents 1-2% of the crypto market. (i.e. ~$5B raised through ICOs in last 18 months while crypto valuation is >$400b). >90% of crypto valuation is driven by bitcoin, ETH, ripple, and the other crypto currencies.ICOs are more of a sideshow than people think. They exist because people making money in crypto want to diversify and alt-coins are exciting possibilities for running the upside while it lasts.Expect 95+% to eventually crash. Some projects will prosper and I am really long blockchain, but a reckoning is in the offing.

      1. awaldstein

        Don’t see it that way.The amount of money is not correspondent to the amount of energy nor the focus of new projects.The point that @TomLabus:disqus doesn’t mention is that considerably more capital was created through forks than ICOs as a driving factor in investment and speculation.

          1. awaldstein

            That is not a correct statement technically.ICOs can and will more often be done around finished products acting like an A round.

        1. cavepainting

          I agree that money is not a proxy for energy or ambition of these projects… but my point is that the ICO craze or hype is in a significant part driven by the run-ups in price of mainstream crypto currencies.Are these projects all scams? Absolutely not. I am involved in a bunch of them myself and genuinely believe in their long-term potential, but their financial reality (as of now) is speculative and linked to bitcoin and ETH prices.

          1. awaldstein

            i don’t disagree with anything you’ve said except that I don’t necessarily see the speculative nature of the currencies as a problem, actually I see it as a potential upside.

      2. Michael Elling

        Have you considered hashgraph? Perhaps more efficient.

  9. Wyatt Brown

    Jim Robinson; “The company has to actually work” – current ICO investing success = ” whether or not I timed the investment correctly” vs. thoughtfully investing in value-creating fundamentals and a functioning product/company. Tom Loverro; “Nobody really knows how to make these things work (yet)”. – In the context of ICO-based early stage, is creating a properly structured ICO/TGE framework, that addresses SEC and other proper checks and balances what is needed most right now? Can that still be a “sexy” pitch to the current ICO (consumer)buyer market? Or, does it just get too complex for consumer investors (coin buyers)? Perhaps “Token Generating Events” are the re-packaging of ICOs that is needed for this new industry to succeed legally and commercially? (as @william m@wmoug:disqus suggests below?) Exciting stuff!