What You Need To Know About ICOs: Carlos Domingo, Co-Founder and MP, SPiCE VC
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Entrepreneur Middle East asked a few UAE-based investors and entrepreneurs about their thoughts on the brave new world of Initial Coin Offerings (ICOs). Here’s what Carlos Domingo, Cofounder and MP, SPiCE Venture Capital, told us.
What is driving the rapid growth of the ICO market at the moment?
“It is driven by the appetite of founders on one side to bypass the traditional fundraising process with VCs and also avoid dilution, and on the other hand, by a lot of new investors looking to invest in new startups via a mechanism (issuing tokens) that has liquidity and using crypto. It is true that there is a lot of hype and noise, but there are also many legitimate projects that might become the new Amazon or Google. In terms of capital deployed into ICOs, US$5 billion, it is still tiny. Yearly, there are more than $600 billion of VC money being deployed, so ICOs hasn’t even reached 1% yet. Also, I think that the hype and growth of the ICO market, like any other market like this, has attracted a lot of bad actors trying to take advantage of the opportunity. However, regulators have started to step in to avoid the retail investor being harmed by some of these bad practices and I do not think that this will affect the disruptive potential that blockchain technology holds.
"I think that outright banning ICOs or shutting down mining operations or exchanges is not the solution. Those companies just might move somewhere else. I think that regulators need to find the right balance between protection and freedom to introduce technological innovation. There has been a lot of abuse on the utility token side of things, particularly where companies are artificially creating utility tokens that make no sense for their business model but just to justify bypassing the existing regulations and selling them to retail customers. But the US Securities and Exchange Commission has already taken the lead saying that many utility tokens have features of securities. Going forward, what I believe that we will see is an increased adoption of security tokens as an improvement over the current crowdfunding model where you get much broader inclusivity, scalability to handle more investors and distribute money back to them via smart contracts as well as liquidity in the secondary market.”
Tips on approaching ICOs- for investors and entrepreneurs
“For investors, my advice would be to look carefully at the projects you are investing in, and if you do not think that you have the skills or the bandwidth to do a proper due diligence, then just choose a regulated investment vehicle for ICOs. I think that the only thread ICOs have are for the rich people and institutions, the 1% of the 1% who before were the only ones that could actually invest in some opportunities. Digital fractional ownership through tokens and smart contracts allows for inclusivity and reach, and therefore, unlocks liquidity. The consequences of this new way of ownership are still yet to be seen although I am sure it will be all positive for the majority of the population. For entrepreneurs, I think that ICOs are a great way to raise money, to avoid dilution, at least partially, and to reach an entirely new class of investors and pools of money that might be completely impossible to reach the traditional way. So, if you can do one, you should do it, but think very well about how to structure it, the reason for the token to exist, the regulatory framework, and finally, assume that it is still hard work to successfully raise a good ICO. Finally, regulators need to find the right balance between protection and letting innovation flourish, as just prohibiting things is not the right answer.”