Investing in Blockchain-based idea or actual product? The investor's dilemma
Correction... Name of the first developer of bloackchain application, bitcoin, is Satoshi Nakamoto and not Hiroshi Sakamoto as was mentioned in the copy- Editor
I was pitched an investment recently. The essence of the investment was that if I invested a little bit of money, enough for the founders to generate a white paper, and begin work on the product, they would, in return raise pots of money from a token offering or initial coin offering (ICO) and they would be able to use that money to hire a great team, complete the product, buy a bunch of companies and kick start their blockchain-enabled business. And, the blockchain-enabled business would win. Why? Because they would be first; but more importantly, because decentralised blockchain solutions are vastly more democratic, the story went.
Businesses built on blockchain do not have the technical, control and financial inefficiencies of centralisation. Cutting out the middleman, increasing transparency in the system and allowing anyone to conduct a transaction with anyone else (allowing suppliers to interact seamlessly and directly with buyers, for example), is just better. Better on an absolute scale and more technically compelling than the opaque black box that is the walled-garden Internet of today.
An Internet in which companies are simply extracting way too much money for being middlemen in a transaction, while simultaneously not providing real transparency so nobody actually knows or can determine how inefficient the transaction truly is. What is worse, companies are getting away with it because there is no reasonable alternative. That is, until now. Finally, thanks to Satoshi Nakamoto, who developed bitcoin, the first application based on blockchain, that provides a transparent, decentralised, democratic alternative…or that is how the story goes.
The new revolutionary blockchain technology, transparency and decentralised democracy (who can be against any of that) that is promises is all well and fine, but independently of whether the specific idea I was being pitched was a good one or not, the investment process seems completely backwards to me. Yes, you can call me old school, traditional, unable to keep up with the new wave and all that.
But let me explain what I mean:
A good team working on a potentially great idea that has not yet found a product-market fit should absolutely be able to raise money. It could be a seed round or a series A, perhaps few million dollars, or, if you prefer, a couple of hundred bitcoin at today’s rates. And then, once they are able to show the product-market fit, they might sell another tranche of now-more-valuable equity tokens (or bitcoins, or raise more capital via a traditional financing progression that includes a series B or C) to scale up the business.
But this pitch was quite brazenly the opposite of this. No users, no product, no team, no technology (yet), no nothing. Only the promise of a potentially great idea and raising enough money through an ICO to conduct a rollup and buy other companies? To this writer, that smacks of the kind of opportunism that creates and perpetuates bubbles such as those made of Dutch Tulips.
Being opportunistic and taking advantage of any new revolutionary technology and the huge hype surrounding blockchain to kick start a business is one thing, but this feels a tad over the edge. Arguing that blockchain is so revolutionary, that once people invest enough money, the next Alphabet, Amazon, or Apple businesses will happen is just backward thinking. The pitch seemed to twist the old adage, “If we build it [a great product], they [investments] will come, to “If we raise enough money (using an ICO), we will build something great (on blockchain)”.
To be sure, the ICO or token sale phenomenon is here to stay. According to a December 2017 report of Pricewaterhouse Coopers (PwC), more than 438 ICOs took place in 2017, raising over $4.6 billion. The majority of this was raised by companies without a product, many with just a whitepaper. It is yet to be seen whether these 438 companies will be successful for their investors at a rate greater than traditional funding mechanisms from private equity and venture capital.
That said, prospectively, ICOs could perhaps be thought of as an alternative to classic debt or capital-funding as performed by Venture Capital (VC), Private Equity (PE) firms and banks today. Alternative funding mechanisms are fine, but using the popularity and hype surrounding ICOs to skip past simple things like team, product, (let alone product-market fit) seems like folly at best, and at worst adding to Tulipmania-like bubbles.
ICOs are still largely unregulated and it often remains unclear whether a token represents a security (traditional share or portion of asset of a company), utility token (future or present access to a product or service) or a digital currency, and how any of these can be enforced or how investment returns are measured.
That said my counsel to those who made the pitch was that they should not worry about the funding mechanism, but instead worry about having a great product. They should round up a great team, flesh out the idea, raise a seed round or series A and work on producing a great product using blockchain. Hopefully, they should then show a market fit for the product that proves the business value by reducing the cost of the middleman and increasing the transparency and efficiency of the transaction.
Once the company had a proven the business or at a minimum product market fit, using an ICO or a standard equity financing are both further financing options that can be pursued. Running an ICO to raise funds because they may be able to do so well before the company has anything, I said, is not the answer to build a successful enterprise. There is much more than funding to building a company and neither a decentralised protocol nor a pile of cash are sufficient conditions in and of themselves. I had a feeling I would be ignored, and I found out later the company had ignored my advice and filed for an ICO. Best of luck to them.
(Jayant Kadambi is entrepreneur, technologist, and business leader who led his most recent company, YuMe, to an IPO as a global leader in digital media technology.  Jayant is based in Silicon Valley and is spending his time as an advisor, board member, and angel investor.)
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    Ravindra Malve

    3 years ago

    Which R the entities working in blockchain technologies.
    Also agree to Akash's comment.👍Kindly rectify the error.

    Akash Karmakar

    3 years ago

    Satoshi Nakamoto is the pseudonym used by the person who invented the blockchain not Hiroshi Sakamoto, who is a japanese swimmer.


    Amit Gupta

    In Reply to Akash Karmakar 3 years ago

    Satoshi Nakamoto is 'inventor' of bitcoin, not blockchain. The blockchain concept was designed/invented in 1980's. But Satoshi's credit is that he developed the first application based on blockchain- the bitcoin.

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