While terms like ICOs, IEOs, and STOs relate to cryptocurrency fundraising, they differ significantly in their methods while sharing one key trait – they vary from traditional vencture capital (VC) approaches. As these new models continue gaining popularity among startups, some analysts question what implications they may have on shaping the future of VCs. With innovative alternatives emerging, venture capitalists must adapt to stay competitive in fundraising landscapes that could be redefined in the years ahead.
In many ways, despite differences, they solve VC problems spanning decades. Investors aren’t limited to wealthy funds – all can back ventures. This expands fundraising paths, especially for blockchain startups. Token gains can be huge and fast too – ICOs average 179% first day gains in weeks. This begs one question, though…
Which one is the best model for the future and what does the emergence of these new players mean for VCs?
Understanding ICO, IEO and STO Better
Initial Coin Offering (ICO) is not very different from Initial Public Offering (IPO) that traditional method entails, except that the business issues Cryptocurrency tokens to investors that want access to its product or service. IPOs raised over $25 Billion dollars in the last few years and saw enormous success.
Although ICO may have been the stepping stone for other innovative models to follow, the development of IEO and STO aimed at fixing the issues that ICO posed. Lack of vetting let any promise services for tokens, flooding the market with iffy projects and scams that hurt crypto’s reputation. In effect, the governments of many nations including China and the USA imposed legal restrictions that limited its scope. This led to the rise of IEO.
Rather than dubious startups self-hosting tokens with just roadmaps, crypto platforms reliably list vetted tokens for a fee. Initial Exchange Offering (IEO) therefore eliminates the trust issues, the legal restrictions and the lack of background checks that its predecessor ICO has. Platforms like Binance and Bittrex vet projects, building trust. This attracts investment while startups save on marketing via platform listing fees.
IEO still has issues to address. It offers utility tokens without an underlying asset, like ICO. The value of a startup’s tokens relies on the exchange’s token. For example, Binance projects use BNB tokens. In short, all depends on the exchange platform. You cannot control what happens there. Exchanges may favor some tokens through brokered deals. We know exchanges can be influenced by certain parties.
A Security Token Offering (STO) changes the game. STO differs by being asset-backed, reducing risks from empty ICO/IEO promises. Its tokens represent ownership stakes, not just utility, through financial assets. This is not unlike ‘stock’ or security in traditional sense–only it is stored in a smart contract on Blockchain.
Which one is Better and What Does it Mean for VCs?
ICO has definitely seen better times, but other two are still strong competitors to each other. To simply name one the winner in the race will be to do disservice to the complexity of the nature of various businesses themselves. The answer depends on the business itself. It’s up to the business to understand the pros and cons of each of these models before setting a direction. But in general, a project backed by STO raises more funds than any other model. In the last year, an average STO backed project raised $85 million compared to only $17 million for IEO based projects.
Both sums, however remain larger than what a VC-backed project would typically raise. It’s not all blues for VCs, though. VCs can partner with startups, advising in exchange for token deals. Hoping to profit, some broker ICOs – a budding trend.
Andriotio Financial Services can be your gateway to raising funds with STO and VCs with the expert advice from the best in business.
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