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.
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.
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