ICO Investments Pass VC Funding in Blockchain Market First

This article highlights findings from CoinDesk Research‘s new Q1 2017 State of Blockchain report, expanding on ICO and VC investment in Q2. 

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For the first time in the technology’s short history, blockchain entrepreneurs are now raising more money through initial coin offerings (ICOs) than traditional venture capital investments.

So far in 2017, blockchain entrepreneurs have raised $327m through ICO offerings, a figure that now exceeds the $295m raised through VC funding, according to CoinDesk data.

Analysis shows the development was spurred by big gains in Q2, as entrepreneurs raised $291m through ICOs, compared to just $187m in traditional funding over the same period.

Overall, the totals are a far cry from 2016, when the nascent funding mechanism accounted for less than half of the nearly $500m of venture capital invested into startups. In the first quarter of 2017, for example, ICOs raised to just under a third of entities seeking VC funding.

In the months since, however, this trend has reversed with ICO investment totals growing over 800% and soaring past venture capital funding.

The second quarter has seen less than 10 venture capital deals thus far.

More than 80% of that funding was contributed by two deals: bitcoin mining chip maker Canaan ($43.6m) and distributed ledger consortium R3 ($107m).

By comparison, more than 20 ICOs have closed thus far in the second quarter, with over 10 exceeding $10m (and numerous selling out in just seconds or with massive valuations.)

ICO investment into early-stage blockchain projects has now totaled more than venture capital, the primary funding source for the industry in every year prior.

The takeaway

Making sense of the data and its impact, though, might be more challenging.

While they’re often compared, it may not be the case that sales of blockchain-based tokens – which in a sense monetize a startups network effort (and distribute ownership and influence to the widest audience possible) – will replace traditional venture capital, designed to enable investors to buy a share of a company’s equity (with no real downside to a limited group of holders).

Already emerging are a number of startups (Brave, Civic, Kik) that have both traditional VC investment and have issued a form of token, though its not clear that this hybrid model will prove ultimately impactful.

Whether it be by token sales and projects supported largely by the retail public from the start, institutional investors who begin to dominate ICO rounds or some hybrid structure, the space is wide open for innovation and evolution.

Further, the proliferation of new decentralization application platforms and independent blockchains has added additional difficulty to surveying the universe of tokens, as investors must not only analyze the application or system (like augur or golem), but also the base protocol or infrastructure layer (like ethereum, waves or lisk) in numerous cases.

Still, with proven demand and interest from both entrepreneurial and investor audiences and limited regulatory guidance, ICOs could continue to gain steam as a fundraising mechanism.

How the structures, valuations and legalities evolve is a much larger question, but undoubtedly the continued and growing wave of token sales will focus the spotlight on each of these questions and more.

View CoinDesk Research for the full Q1 2017 State of Blockchain and ICO Spotlight Study.

Disclosure: CoinDesk is a subsidiary of DCG, which has an ownership stake in Civic and Brave.

Horse race image via Shutterstock

InvestmentVenture CapitalFundingICOs

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