The cryptocurrency world’s investor profile has undergone a marked change during the course of the last year.
Funding for tokens generally come from a private sale that caters to qualified investors, a pre-sale round where limited and discounted tokens are announced and a crowdsale that caters to the general public.
As the dust settles around an industry that has experienced record-breaking funding levels as well as unprecedented swings in market cap, more and more entrepreneurs are looking to (Sometimes multiple) private coin sales as their preferred approach towards their funding efforts, often omitting the public sale completely.
We take a look at the reasons behind this shift in approach:
The undeniable appeal behind the private ICO
The figures are astounding. Out of the USD 2 Billion raised this year in initial coin offerings, 84% of all funds have come from private investors. It should be noted that this figure also includes funding from pre-sale rounds.
The private token sale diverges from the traditional crowdfunding model in the way that it basically allows larger/qualified investors to gain access to a token before it goes public, often at a considerable discount and with preferential terms.
Private sales tend to benefit the issuer (s) for many reasons. At the top of the list lies the fact that the company – often with little more than a whitepaper – is able to pitch to institutional investors, venture capital firms and angel investors without the considerable red tape associated with taking one’s funding efforts public. The private sale also entails a much-reduced amount of operational risk and complexity. Many countries, for example, prohibit citizens to participate in crowd sales – with private funding regulations remaining less stringent.
If further rounds of funding are on the cards, private ICOs also provide immediate resources to allot towards targeting a much broader base of investors in the foreseeable future. There is also the intangible benefit of larger (non-retail) investors having a broad network of fellow-investors to tap on through word-of-mouth. This often saves considerable advertising and marketing dollars, at least in the short run, sometimes mitigating the need for going public entirely.
The perceived level playing field questioned
One of the main issues of contention that lie within exclusive private sales is the fact that they go against some of the central promises that cryptocurrencies made from the get-go. Democratic platforms through a diverse, engaged community. Our very own member Matt Dibb of Astronaut Capital put it well, “Those who invest in an ICO are supposed to be the same people who will be using the token. Complete private funding contradicts this value”.
The funding that the secure messaging app Telegram received, for example, created quite the buzz – for both the right and wrong reasons. On one side, the company managed to raise an unprecedented USD 1.7 Billion. However, criticism soon followed when the company cancelled its public offering of tokens.
The participation of Benchmark, Sequoia Capital, and other investors meant that Telegram accrued much more than they set out to with no need for any additional funds. This upset many members of the public who were following Telegram’s progress from their inception –after all, they helped to add to the traction from the start.
There is also the fact that these large investors more often than not obtain the privilege of entering the market at a huge discount. To be fair to the industry, this practice also exists in the world of IPOs – it’s just that the world of ICOs is comparatively in its infancy stage, open to much scrutiny for any perceived advantage that one party may have.
It is undeniable that almost any industry goes through a pivot of some sort as it matures. To find that desirable medium, many pundits across the crypto-world – Matt included – hope that the token sale of the future will still involve a healthy private sale layer, followed by a pre-sale one and then the crowd sale. The private and pre-sale rounds will provide for sufficient funding and stability while the public round will help the company to gain further traction through the necessary and desirable creation of a community. At the end of the day, the exercise is an effort to raise funds and many proponents of the private sale will justifiably argue that it is the most efficient way of doing so.