Orange Silicon Valley will host an ICOnomics event on February 21, and in preparation we’re exploring some of the issues that matter most for cryptocurrency and the companies that have decided to hold initial coin offerings (ICOs).
Regulation will play a significant role in shaping the future for ICOs, and it dominated the second half of our interview with 500 Startups Venture Partner Rob Neivert. In the first part of the interview, Neivert described the opportunities and challenges that ICOs have brought to the tech community. For startups and investors alike, there are still many questions that will need to be answered.
As our interview concluded, we discussed what ICOs could like going forward, where regulatory oversight could emerge, and why cryptocurrency enthusiasm is different from the dotcom bubble of the late ‘90s.
Orange Silicon Valley: When you bring up a regulator like the U.S. Securities and Exchange Commission (SEC), do you think it’s possible that a similar entity for ICOs emerges from the private sector instead of from a government?
Rob Neivert: Sure. There has got to be — I don’t know how many companies — trying to do it now. Smith + Crown [for example]. All these guys are all trying to become the authority. The big ones are the exchanges that are trying to say, “We’re going to vet it before we list it on the exchange.”
The exchanges are in a mad rush to capture market share, and they don’t have a lot of incentive for quality just yet. I do think there’s going to emerge the equivalent of the New York Stock Exchange. Somebody is going to emerge as guys that say, “We won’t [allow a company] on here until you have spent literally a quarter million or a half a million dollars validating everything: your code exists, your team exists, it’s running. And then, maybe.”
But here’s the thing, with most ICOs, there is no product. There’s no financials. There’s nothing. So what is there to validate, except for those four guys who do exist and didn’t lie in their white paper?
There’s so little to validate, it doesn’t even matter if that entity exists; they still can’t do much. And the New York Stock Exchange is solid because there’s that long history of profitability, of checks and balances — of financial control. You don’t have that, because it doesn’t exist. Even if they wanted to regulate it, they can’t, because those companies don’t exist. And that’s one of the things that the SEC is going to run into is you cannot try to regulate them the same way.
It’s going to be a new entity, and it’s going to work by different rules. The only thing that’s coming in there with reputation is the founders.
OSV: As you watch companies launching ICOs right now, what are the terms for success in your head? And what do you see as open questions about how ICOs will be used in the future?
RN: One of the things we’re finding is that the ICOs themselves, especially the large ones, are not performing very well at all. For people like me, this is actually expected.
If you hand $200 million, $500 million, or $1 billion now as a few of these hit the billion dollar mark, very few people know how to actually manage and achieve results with that. It’s really, really hard for small teams that are generally inexperienced. Many of them are all about pomp and presentation, and very few of them have actual expertise and experience. Even though their white papers make it seem like they know exactly what they’re doing, the fact is that it is really, really, hard.
So my statement is you’re going to have a massive failure rate because you’re gonna have fighting among people, and a lot of it is going to be about fighting for control and ownership and all that other stuff. There’s too much money on the table, and they’re not paying attention to the product. They’re paying attention to their money and their wallets and their Lamborghinis.
For some of the older ones that raised tens of millions, I think they’re going to be OK because — tens of millions is still a good chunk of money, but they’re not suddenly billionaires — they still have to build something. I think it’s really hard to imagine they’re going to be successful, because it’s so hard to break the human nature of “I’m already rich.”
OSV: But is this new? We’ve seen this in tech before, haven’t we? During the dotcom bubble, for instance.
RN: This is literally almost an order of magnitude worse. This is way worse. In the dotcom days you built it up, maybe took some VC money, but the VCs at least had some control. Yeah a couple of guys bought Ferraris, but there were banking controls and lawsuits. There is no check and balance here. Tezos has a billion dollars. You know what their check and balance is? It’s zero. Yeah they produce nothing, yet they still keep their money.
There is so much less checks and balances. There’s no SEC. You can’t sue them, you can’t take them to court. You don’t know what country they’re in. You have no rights. You’re not buying equity; you’re buying a token that allows usage. You have no rights. So the human nature side is much worse here.
OSV: In your head, what attributes will the most successful ICO companies have in the long term?
RN: I think the forecasting nature of that is too complicated. But I will offer this: I think the really big ones will get there, but they’re going to waste a lot of money getting there. But I do think they will actually get there — most of them. They’re going to spend ten times the amount of money to accomplish the same thing, but I think the smallerish ones, the couple-of-million or ten-million dollar ones, are actually more likely, because those are much more manageable. They’re not trying to solve the world’s hunger problem, they’re trying to solve something specific, and I think they will. Whether or not they get a great return, maybe/maybe not, but I think they’re going to be more likely to deliver the more reasonable project.
I just don’t think you can deliver those big projects they’re citing in their white papers. It’s just too damn hard. It’s a 20-year journey.
(Editor’s note: Read the first part of our interview with Rob Neivert to see a deeper background of his experience with ICOs in the investor and startup communities.)
Orange Silicon Valley and the National Venture Capital Association will explore the topic of policy and regulation, as well as the future of ICOs and cryptocurrency at a February 21 event in San Francisco. Speakers include regulators, lawyers, entrepreneurs and investors who are actively involved in the ecosystem. The special guest speaker is Joseph Borg, Director of the Alabama Securities Commission and President of the National American Securities Administrators Association. Smart Money magazine listed Borg in its listing of “The Power 30- The Top Financial Players” citing his 98% conviction rate and calling him “one of the toughest ‘stock cops’ in America.” Please join us for this discussion by registering for the ICOnomics event here.