Why Venture Capitalists Have Largely Missed Out On Initial Bitcoin Offerings

Not sure what to make of it, not sure whether or at what level to participate - and, perhaps for the first time - finding that much of the action is happening in financial centers and other locales around the world rather than in Silicon Valley. JL

Yuliya Chernova reports in the Wall Street Journal:

Many early-stage venture firms are still catching up with the explosion of cryptocurrency deals. The boom has left them uncertain about their role, and whether to treat ICOs as a threat, an opportunity or just a passing quirk employed by founders looking for a fast way to seed their ambitions.World-wide 120 businesses have raised about $1.5 billion through coin offerings this year, up from about $256 million by 43 companies last year

Seemingly out of nowhere, the surge of initial coin offerings that have helped fledgling software startups haul in hundreds of millions of dollars in recent months has forced the venture-capital industry to confront a potential dilemma.
Are VCs becoming irrelevant?
Many early-stage venture firms are still catching up with the explosion of cryptocurrency deals. The boom has left them uncertain about their role, and whether to treat ICOs as a threat, an opportunity or just a passing quirk employed by founders looking for a fast way to seed their ambitions.
But in 2017, amid a blistering pace of coin offerings, a growing group of venture investors have concluded that the rise of blockchain-focused startups and their novel ways of gathering cash signals an opportunity that is too compelling to pass up. And they are determined to get a piece of the action in some form or another.
“If all the best, smartest technologists were building stuff around the iPhone in 2008 and 2009, they are all building stuff around blockchains and crypto” now, said Nick Chirls, general partner at Notation Capital, a New York pre-seed venture firm. “Our view is that we have to find a way to participate in that.”

Union Square Ventures, Bessemer Venture Partners and Sequoia Capital all have reacted—using investor funds—by buying digital tokens directly or by putting money into hedge funds that buy tokens. Some venture investors, such as Nick Tomaino of Runa Capital, left their firms to set up crypto hedge funds.
“If you are in the business of investing in the future you probably have to change the style of investment to accommodate novel ideas and opportunities,” said Brad Burnham, managing partner at Union Square Ventures. His firm bought tokens in the landmark offering of Filecoin, taken stakes in several blockchain startups and invested in the crypto-focused hedge funds Polychain Capital and Metastable Capital.
“If you are rigid,” Mr. Burnham added, “you may miss some significant opportunities.” He cautioned, however, that “ICOs got out of hand.”
World-wide some 120 businesses have raised about $1.5 billion through coin offerings this year, up from about $256 million by 43 companies last year, according to CoinDesk’s ICO Tracker.
ICOs have prompted many entrepreneurs to bypass venture firms because this funding method offers cheap, non-dilutive capital with few strings attached. The offerings also amount to a new kind of crowdfunding, with buyers who double as a base of potential users of software products developed by the startups.
Protocol Labs Inc.’s Filecoin file-storage software network raised some $250 million without so much as a prototype. Other cryptotoken-based concepts have been proposed or are in the works on a wide range of digital alternatives for blogging, mobile messaging, identity verification, internet browsing and even clinical-trial management.
“In a traditional venture world, venture investors are used to being the gatekeepers to capital,” said Olaf Carlson-Wee, founder of Polychain Capital, a hedge fund that invests in cryptotokens. “Now it’s very easy for these decentralized networked projects to raise capital through a crowdsale through the internet.”
Still, U.S. early-stage venture funding in seed and first rounds continues growing and totaled $6.61 billion in the first half of the year, up from $5.76 billion in the same period last year, according to Dow Jones VentureSource.
Some venture investors watching from the sidelines say that, for now, ICOs haven’t had an impact on their business.
David Wu, general partner at the consumer-focused early-stage firm Maveron, said the entrepreneurs his firm is speaking to haven’t contemplated ICOs.
“There’s enough value-add that the VC community brings to consumer startups in shaping their brand that it’s not a good route for them to do tokens,” Mr. Wu said.
VCs who have sat out the current boom said it was in part to avoid the regulatory or legal risks that accompany coin offerings, some of which have fetched stratospheric offerings for back-of-the-napkin-stage crypto startups.
“It’s highly unlikely we’ll invest in an ICO...I think they are crazy,” said Kathleen Utecht, managing partner at fintech-focused Core Innovation Capital. “There’s a reason that there’s milestone financing in venture capital,” Ms. Utecht said, adding, “It’s super distracting [for founders] when there’s so much money.”
Some VCs lack a mandate from their limited partners to invest in these startups. And even if they could, many venture investors say they are put off because the risk is too high, there are no governance rights, and often there isn’t even a finished product, just a white paper.
The main reason to do an ICO is to use the token as a means of exchange for a real blockchain technology for some tradable digital asset, but many startups are using ICOs just to raise capital, said Ethan Kurzweil, a partner at Bessemer.
“There’s certain types of companies where there’s a network effect with a lot of developers on platforms, and you want that network effect,” Mr. Kurzweil said. “We think it’s very transformative. It’s just an overreaction today.”
Although ICOs work well for founders that don’t want extra services from venture firms, some still see an important role for them.
“We feel more traditional VCs actually bring a lot of value,” said Muneeb Ali, co-founder of Blockstack, which has a platform for blockchain startups and has raised venture funding. “They look for a lot of signals and do due diligence before giving their money. They help build companies that are sustainable for the long run.”