The Pros and Cons of ICO Funding Compared to Venture Capital Funding

Previously for startups looking to raise capital, terms like Seed Funding, Series A, B, C, Seed Funding were common. Today, there is a disrupter in the global finance industry that is powered by blockchain. Therefore, startups have another option of raising funds through what is known as an Initial Coin Offering (ICO). Last year, blockchain startups raised over $1B through traditional Venture Capital, and a more than $5.6B through ICO capital.

Traditional venture capital is highly regulated. Companies, products and services are vetted and go through a procedure, industry contacts, advisors and networks. For startups raising funds, it usually means giving investor a big portion of the business. For investors, venture capital model is one of the safest ways to invest in the risky sectors.

On the other hand, Initial Coin Offering provides the best way to raise capital fast from anywhere around the world. The model allows company founders to retain more control of the business. However, ICO remains highly unregulated and there are many cases of fraud where some companies are only interested in raising money. Although ICO has the potential to change how startups raise capital, it has its own drawbacks.

Since both venture capitals finding and ICO have shortcomings, the ideal funding mechanism would be a marriage between the two, increased due diligence, safer investment, more control for founders and higher returns.

References

https://irishtechnews.ie/the-pros-and-cons-of-venture-capital-vs-ico-funding/

https://medium.crypto20.com/vc-vs-ico-an-insiders-perspective-5d497099e9b4

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Venture Capital Firms Focusing on Technology for Children

With technology catering to every individual, startups focusing on services and products geared toward children have seen an increasing amount of VC interest over the last several years. Since the baby and kids tech space is still in a budding and evolving category, a few VCs have made many investments into the space.

500 Startups is the most active venture capital firm in children technology. The firm has particular interest in Ed tech startups, with over 50 percent baby and kids tech startups in its portfolio operating in the area of education and childhood learning, such as startups Lingokids and Mystery Science.

The size of funding rounds that venture capital firms focusing on technology for children have participated in varies. New Enterprise Associates boasts participation in deals with the highest average deal size, at about $10.8 million per disclosed deal. On the other hand, seed-focused fund 500 Startups focus on rounds with the lowest average deal size, at about $1.5 million per deal

Some venture capital firms have a mission-oriented focus and finance startups in specific areas, rather than across software and tech more broadly. BBG Ventures only funds startups that have at least one female founder; Newschools Venture Fund backs education-related startups; and Forerunner Ventures backs startups in the commerce and consumer products sector

References

https://www.cbinsights.com/research/baby-kid-tech-startups-vc-investors/

How to Become a Venture Capitalist Without Money

Many people want to become venture capitalists. Startup veterans and newly minted MBAs want to get into the investing game in large numbers. Unfortunately, VC jobs available in any given year are so few that it makes the prospect unlikely for most.

If you want to be a venture capitalist, just get started. You can do a VC job without a dollar to your name. You also don’t need a list of specific credentials on your CV, a specific degree, or a lot of family funds to do the job of a VC.

The job of venture capitalists can be broken down into four different tasks: Sourcing deal, diligence, negotiation, and financing. Sourcing deals involves finding entrepreneurs and identifying the most interesting startups. If you can find these people, you are on your way to becoming a VC. Diligence is the process where one looks into the background of the entrepreneurs to see if they are honest and credible. After due diligence, the next step is hammering out finances through negotiation.

Unless you can fund the startup alone, you will need to find some investors who are willing to take a risk. Although this sounds hard, you should know that money chase opportunity. If you can find compelling startups and give reasons why the market is attractive, there are plenty of firms or angels out there who will be willing to work with you.

References

https://techcrunch.com/2015/09/19/how-to-be-a-vc-without-any-capital/

https://lendedu.com/blog/how-to-be-a-venture-capitalist-without-the-millionaires-price-tag

The Main Differences Between Investing in ICO and Venture Capital

An initial coin offering (ICO) is a method used by crypto currency startups to raise money from the public. It is similar to an initial public offering (IPO) in corporate law. An ICO involves the sale of digital assets (tokens) associated with a proposed block chain project. Venture capital on the other hand is a type of funding for a new or growing business where startups or private investors (the venture capitalists) provide the growth equity capital or loan capital. It has also referred to as risk capital by certain authors. The main differences between these two methods of fund raising emerge in the areas of liquidity and ownership.

Liquidity

ICO’s have faster liquidity. Tokens are tradable once they have been listed on an exchange hence quick return on investment. However there is a risk that the token may depreciate in value once they are on the exchange. This has necessitated the creation of ‘vault’ smart-contract by founding teams who wish to mitigate against this risk

With venture capital, the investor has to wait until a liquidity event occurs or an IPO is offered. This could take years. Further, venture capitalists are known to have strict and specific requirements as to return on investment creating further uncertainty as to when money can be recovered.

Ownership

Tokens obtained in ICOs do not offer equity in their business to participants.  The value assigned to a token depends on the access it gives you and its scarcity corresponding with its demand. ICO’s are also open to the general public unlike Venture Capital that is restricted to a small group of wealth investors.

Venture capital usually demands a portion of equity in return for their funding. Further venture capital investment involves use of accredited investors in certain jurisdictions and are regulated with regards to the amount of money that can be made or lost

References

https://tokenradar24.com/4-big-differences-between-investing-in-icos-and-venture-capital/880/

https://hackernoon.com/differences-between-ico-funding-and-venture-capital-funding-

Some Venture Capitalists Believe Cryptocurrencies Will Run the Show in the Future

Venture capitalists are seeing a future that is run by tokens and cryptocurrencies. In order to achieve that, however, there must be regulations so that the two will not be classified as securities.

Andreessen Horowitz, a private American venture capital firm, is spearheading the efforts. Early this year, the firm formed a group of investors and lawyers who met with members of the Securities and Exchange Commission. The group comprised Union Square Ventures and lawyers from firms such as McDermott Will & Emery, Perkins Coie and Cooley.

Regulators are looking for a “safe harbor” for some cryptocurrencies, according to The New York Times. Lawyer Richard Levin claim that many firms in the cryptocurrencies community who may have been poorly informed or ignorant of the law are now coming to terms with the fact that they are regulated.

Unregulated cryptocurrencies have mainly been used as initial coin offerings (ICO). Entrepreneurs involved in the ICO say that since tokens or cryptocurrencies are being used as a payment method, they should not be classified as security. On the contrary, S.E.C. Chairman Jay Clayton believes they should not be categorized as security.

Coinbase CTO and venture capitalist Balaji S. Srinivasan sees a future where entrepreneurs will just create their own virtual currencies. Blockchain will turn everybody into a VC. The internet will become the biggest stock market in the world where basically any person in the world can put money into crypto.

References

https://born2invest.com/articles/venture-capitalists-cryptocurrencies/

https://ambcrypto.com/cryptocurrency-replace-fiat-currency-future-says-famous-venture-capitalist/

Basic Words that Might Help You Understand Venture Capital

Venture capitalists keep talking about things like seed-stage venture, leading a round of funding, LPs and exits. If you are planning to meet venture capitalists in the future, there are some basic words that you need to learn in order to keep up. Here basic words that will be helpful to know.

Bootstrap: This is a situation in which an entrepreneur starts a business with little capital. A person is said to be bootstrapping when he or she tries to found a company from personal savings or from the operating incomes of the new company.

Exit: This is a point at which an investor sells his or her stake in a company to realize his or her gains (or losses). Normally, exist occurs when a company either is bought by another company or goes public.

Fund: This a pool of money that investors use to finance companies in exchange for equity. The money comes from investment banks or wealthy investors.

Limited partners or LPs: institutions and groups who provide venture capitalist firms with money to invest. They include high-worth individuals, university endowments and pension funds.

Lead A round: The venture capital who “leads” a round of funding sets the financial and legal terms for the investment. A lead investor is the one contributing the largest amount of cash and help in finding other investors.

Seed: Seed capital is the initial funds used when starting a company, often coming from the founders’ personal assets, family or friends, for covering first operating expenses and attracting investors.

Series: These are stages of venture funding, usually occurring after a seed round. These series include Series A, Series B and Series C.

References

https://www.marketplace.org/2017/09/07/tech/venture-vocabulary

https://www.techrepublic.com/article/glossary-startup-and-venture-capital-terms-you-should-know/

Startup Funding Deals in Africa Are Entering the Million-Dollar Era

The first decade of tech startup funding in Africa has been led by early-stage and angel investors. Most of that funding was modest: usually ranging from 10,000 to $50,000. Still, it was adequate to help entrepreneur get off the ground with limited market capacity and infrastructure.

Even after tech incubators began to proliferate around big cities, big deals were uncommon, and $1M-plus deals were a myth. However, over the last one to one and a half years, that has been changing.

According to research by Partech, African venture capital funding topped $560M, up 53 percent year on year, in 2017. Compared with 77 rounds in 2016, 124 startups participated in 128 funding rounds last year.

A regular flow of Series A fund deals are coming to maturity, as the major startup ecosystems move to the next stage of development. Last month, TradeDepot, a Lagos-based software-as-a-service platform, banked $3M in Series A funding. In Kenya, Africa’s Talking, an information technology company, raised $8.6M in Series A funding led by Social Capital, IFC World Bank and Orange Digital Ventures.

More deals of this size are expected in Africa. Although there have been options for seed funding (at most $500,000) and from private equity funds (at least $10 million), there have been a small number of options for funding between $1M and $5M, an important stage for young businesses looking to scale.

References

https://www.theatlas.com/charts/S1dpnqcDz

https://qz.com/1211233/how-much-did-african-startups-raise-in-2017-partech-disrupt-africa/