Since the 2017 rise of the cryptospace, public recognition has brought several discussions to the limelight. Discussions about regulation, fundraising, and digital asset use cases ensued.
Our team of experts provided insights into the fundraising issues, how “liquidity raising” strategies have evolved, and what to expect next.
Here’s what they had to say.
Stefan Rust, CEO of Truflation
“It is amazing how governments continuously try to slow the art of innovation and disruption through standardization and regulation. Across all routes, they have tried to control innovation by selecting parties as limited partners in funds managed by selected individuals to specialize in deploying capital into startups in favorable geographies.
Crypto, on the other hand, has, through the Initial Coin Offering process, allowed participants to create huge platforms such as Ethereum, which is now at a $500 billion market cap, as well as ChainLink, Solana, and Polygon. All of these groundbreaking projects came out of the ICO process, which has been effectively shut down. And this is a shame. While ICOs attract bad actors, ultimately all processes in a free market economy will result in volatility – it is part of filtering out the bad from the good.
But in essence, the good that is created generates significant opportunity – “the 10 baggers” as venture capitalists call it. Whether it is a start-up business venture, equity funding, crypto funding, or any other high-risk investment, the risk should generate the reward associated with it.
Launching a start-up is hard. It requires tenacity, conviction, persistence, and tireless effort on behalf of the founders and the founding teams. Not only are they trying to change the game of a specific industry, they now have to overcome the regulatory burden, jurisdictional compliance, and political standardization of a disruptive process that is meant to be non-compliant, non-standardized, and out of the box.
Just imagine if Amazon would’ve asked Barnes & Noble if they could launch in advance. “What category of books would I be allowed to disrupt? Can I share the market with you and apply for approval to disrupt this segment; and would you give me the green light to be able to do this?” Do you think Barnes & Noble would’ve allowed them to do this and, more importantly, who would’ve invested in that business should they have done that process?
You could say the same thing about Netflix and Blockbuster. Disruption is about changing the game. Entrepreneurs should be focusing their time on disrupting a business, an industry, a vertical, or creating new market opportunities. Instead, they often have to spend all their time talking to investors to try and comply on how they can raise money as they focus on executing and delivering on a business with minimal resources as they are all bootstrapped and investors are notoriously skeptical of any new blue ocean opportunity.
And if friends want to invest in a start-up, they should be able to; if communities want to invest in a start-up and risk their own capital, they should be able to. Why should the venture capital business be limited to institutions and not individuals? In a decentralized world, everybody wants to participate in growth opportunities, in the opportunity of striking a home run by being that one investor that seeded Bitcoin, Ethereum, or Polygon. This opportunity should not be limited to institutions that sit on a high pedestal and become kingmakers for entire industries.
By default, as a start-up moves and shifts into a scale-up phase to raise funding, it immediately hits a fundraising need that requires the team to talk to institutions and venture capitalists. They will then begin to go through the filtration process that forces companies to adapt their reporting and documentation to meet the requirements of those in the venture capital industry.
If the companies are making revenue and are cash flow positive, they can run their business according to the guidelines that are stipulated under US or other accounting practices, based on the jurisdiction in which they are located. There’s no need to add more regulation than we already live with today. Just educate the population on how to invest, how to do research, what tools they can use to identify how to do research, and how to apply critical thinking. Governments and regulators should be focussing on this, rather than more draconian rules that lock average people out of wealth creation opportunities.”
Akbar Thobhani, CEO at SFOX
With ICOs in decline, alternative capital sources in crypto are just getting started
The rhetoric of the day in crypto markets is that the decline of ICOs is creating a vacuum of capital in the sector, but the issue extends beyond that. In reality, capital is scarce across the spectrum, which is driving purchasers/traders to get more creative in sourcing financing. The good news is that this isn’t an impossible task, provided you know where to look.
These are the market conditions in which prime brokers shine, and the crypto market is increasingly taking advantage of the infrastructure and networks that come with these providers. Companies like sFOX have been professionalizing capital management in crypto for the last decade, providing traders and fund managers with the billions of dollars’ worth of liquidity necessary to efficiently manage their portfolios through turbulent markets. Equally key in current conditions is the ability of providers like sFOX to open doors for asset managers, introducing them to trusted options for everything from banking relationships to capital allocators. Especially post-ICO, connecting with the like-minded, sophisticated players in the crypto sector can make the difference between maintaining a strategy and closing your doors.
Modern fund administration platforms like DwellFi offer another competitive foothold amidst current uncertainty. DwellFi’s CEO, Kumar Ujjwal, reports a >$1B in potential private financing in late stage startups and a variety of private equity opportunities. The current market dynamics make private valuations attractive for DwellFi’s investors. DwellFi projects a pool of over 1,000 investors on its platform by year end, marking the next step in a platform that marries fund management with the right kind of network from which to source capital for your specific strategy.
In addition to service providers, another effective strategy for emerging fund managers to navigate these challenging times is to remain flexible and open to structures that are more appealing to capital allocators. Emerging fund managers and traders are facing increasing hurdles when trying to secure capital for commingled fund structures. Conversely, there appears to be a larger pool of capital allocators, including Valmar Capital, willing to provide funding through separately managed account structures. This alternative allows traders to gain access to risk-managed exposure to the crypto market without compromising liquidity or control over their funds. Simultaneously, portfolio managers can initiate the process of building their track record and generating revenue streams similar to those of traditional funds.
Lean times have always been the catalyst for innovation of new instruments, strategies, and capital sources in financial markets, and in a sector as nimble and progressive as crypto, no one should be surprised to see that same spirit played out with a vengeance. Don’t get too caught up in the “crypto winter” narrative: you might miss the innovations, connections, and opportunities that already have others springing ahead.
Related: The Science Behind ICO Presales…
Ryan Shea, Crypto Economist at Trakx
“I disagree with the view that the arrival of new crypto regulations means that the days of ICO, IEO or other “liquidity generation events” are over. What the new regulations, most recently introduced by the UK and France, are seeking to do is professionalize crypto offerings and promotions. For example, in both countries entities seeking to offer digital asset services, including issuing crypto assets, are required to register with the regulators to ensure that the business model is sound (a white paper is typically required) and that any promotions are fair and not misleading and made by people authorised to do so. By these actions, what governments are seeking to do is bring crypto into line with the regulations that already exist in traditional finance. Crypto firms that do not have meet these requirements will therefore no longer able to offer their services within these countries, which is way several leading crypto companies have withdraw them recently.
While many in crypto are vehemently against increased official oversight, if the asset class is to go mainstream – which everyone operating in the space wishes to see happen – then, in my view, regulation is a necessary condition because it brings with it a perception of legitimacy(*) that has been repeatedly undermined by the narrative that “crypto is nothing but a money laundering tool”. Moreover, I would argue it is not in the industry’s best interests long-term if the first – and quite possibly only – experience a new crypto users has is losing all of their investment after apeing into a ICO Ponzi-scheme in the expectation of making quick and easy money. Yes, the new regulations will make tokenized capital raising more difficult than was previously the case, but if it gives crypto users a better experience then it stands to help foster crypto adoption.
I do agree though that these additional regulatory requirements are particularly challenging for Defi projects, because crypto assets are increasingly subject to so-called travel rules which requires digital asset servicing companies to collect, verify and share information about crypto-asset transfers as part of the KYC/AML requirements. In many instances, the people operating in Defi prefer to operate with anonymity (and not necessarily for nefarious reasons, privacy is after all a human right according to the UN), which means these projects will be difficult to get off the ground via tokenized capital raising. In this case, the alternative is probably to return to the more standard VC/high net worth seed investment to raise funds, even if this introduces unwanted centralizing forces into the protocol.”