Cryptocurrencies and the role of Initial Coin Offerings (ICOs) in the entrepreneurial finance

1. Cryptocurrencies and the role of Initial Coin Offerings (ICOs) in the entrepreneurial finance Dr Yannis Pierrakis Small Business Research Centre, Kingston Business School, Kingston University London

2. What is an ICO? • An ICO or Initial Coin Offering is the initial offering of a digital cryptographically secure piece of data (a digital token) created on a blockchain as part of a decentralised software protocol • An ICO is a popular way to raise money for a new project/start up by distributing a percentage of the initial currency supply to early supporters of the relevant project • Unlike conventional crowdfunding, however, tokens are usually tradable via online exchanges. This liquidity helps attract investors, and means that the overall ICO process has similarities both with conventional crowdfuning and with an Initial Public Offering

3. Top ICOs raised in 2017

4. Top ICOs raised in 2018 and return to investors Source: Bitcoinmarket Journal

5. ICOs trends

6. How does it work OR Users

7. How does it work Exchange Platforms OR Users Services

8. Digital assets – some definitions • ICOs (Initial Coin Offering): • Digital money: when a coin is issued (e.g. bitcoin, etherium, litecoin) • Utility token: when a token is issued for future participation in the ecosystem the startup is creating • STOs (Security Token Offering): Tokenised securities – a version of a fractional digital ownership of: • Equity • Real estate, debt, other

9. VC, CF, BAs vs ICOs • ICOs • Can raise money in seconds (e.g. Filecoinraised $252 Million in 30 minutes; Brave’s 'Basic Attention Token' raised $36 Million in 30 seconds) • No intermediaries involved • Low cost of token issuance • Transparent process • Offers immediate liquidity to investors • Paperless process • VC, Crowdfunding, BAs • Slow settlements • Many intermediaries • Costly process • Opaque process • Lack of liquidity for investors

10. VCs and ICOs • VCs are often invited to take part in ‘by invitation only’ pre-sale of ICOs • Emergence of VC funds investing solely on ICOs • VC funds investing equity (fiat) and buying coins at the same time

11. Key features of ICOs • Start up: creating and harnessing value • Fundraising (through platforms) • Due diligence ( i.e. medium) • Product validation and improvement (i.e. github) • Marketing and advocacy (i.e. advisors and social media) • Investor • Access to pre-vetted digital securities • Liquidity • Original valuation of the company is done by founders • Post-ICO valuation by crowd • No control of the company • No dilution • Often victims of fraud (e.g. Confido)

12. Current state of the ICO industry • Cryptocurrency bubble: original amounts raised by ICOs in 2018 are now worth much less due to the collapse of the cryptocurrency market [investors use cryptocurrency such as Ethereum (but not Fiat) to buy tokens] • As a result, ventures may not be able to deliver on their promises • Most tokens are now trading with significant loss – investors lost money • Most tokens are not in use yet • Only a small proportion of ICOs was originated by quality ventures • STOs are increasingly more prominent

13. Why policy makers should be interested (I) • Significant source of finance for startups (circa $4b in 2018) • Potential impact: loss of monetary policy, loss of taxes, creation of a parallel economic not controlled by governments • In the US, the Securities and Exchange Commission (SEC) declared that “almost all tokens would be classified as securities” under its definition and several ventures have been prosecuted since • There is a need for a speedy government/legislation response to fully realise the potential of the industry

14. Why policy makers should be interested (II) • Lack of investors’ protection • Tax incentives offered to investors through other forms of investments (Business Angels, equity crowdfunding investors) could be also offered to ICO investors once a regulatory environment is confined

15. Research objectives • Potential impact of ICO strategies in: • (i) fundraising success • (ii) product validation and • (iii) legitimacy of the new venture • We examine the extent to which ventures can improve ICOs success by adopting strategies aimed at building outsourcing and social capital, namely by providing free coins to outsource expertise and by adapting social media campaigns.

16. Sample • 2,721 ICOs between 2016-2018

17. Geography of ICOs

18. Why ventures raise money?

19. Allocation of tokens

20. Use of social media platforms

21. Human capital variables

22. Results – Outsourcing an Social Media strategies

23. Results – Human capital

24. Key findings • The higher the proportion of coins offered for sale to the crowd the more likely for the ICO to succeed • Offering free coins to outsource talent is not always a good thing • Strategies to attract advisors only work when they attract experienced advisors • The presence of a female in the venture team is associated to ICO failure, while the more founding experience the founders possess the more likely is for the ICO to succeed • The use of Githuband Linkedinis associated with ICO success • In contrast the use of Facebook is associated to failure

25. Conclusions • Post-ICO bounty programs allocation may be seen as risky by investors (i.e. lack of internal expertise) and it should be allocated prior to ICO • There is a need for better pre-ICO vetting of advisors • Social media platforms that allow interaction between IT specialists, advisors and investors are integral part of the process • The fundamentals of successful ICOs’ founding teams are similar to those raising money through other forms of funding