Blockchain technology has revolutionised the financial industry more than any other place. Other than creating a new decentralised means of exchange in the form of cryptos, it is also impacting how companies raise their initial capital.
Before, raising money for a startup involved looking for a group of venture capitalists willing to fund your project in return for a stake in the company. However, blockchain is currently making it possible to raise money from anyone who is willing to buy a token as an Initial Coin Offering (ICO).
Having been around for the longest time, venture capital (VC) remains a trusted way to raise funds for a company. ICO on the other hand seems to be a formidable threat, however, it’s still in the infancy stages.
Here are some of the notable differences between the two fundraising options:
VC is a way for raising more than just money for the business. Instead, it comes with additional resources like industry expertise, scalability, business guidelines, influencers and industry connections.
ICO on the other hand is all about looking for a strong community. You believe in the power of the people for growth rather than influence.
When going the VC way, you are targeting the industry experts who have the resources and business experience. To convince this team to invest in your project you have to sell them into it. You have to set up a demo, whitepaper, smooth pitch and a clear roadmap. You also need a strong VC to show your capability of handling the given project. However, once sold to the idea, the VC investors are quite reliable. They offer all the necessary support for the project success and are patient on return on investments.
ICO, on the other hand, has no particular target. You can sell your idea to anyone at any place on the globe. You don’t need any previous experience or track record to convince the investors. You only need an idea with a strong buzz to get funds.
To secure VC funding, you have to share part of the company with the funder, usually 20-30% of the company. You also need a strong and capable staff, a working product and proper documentation.
ICO investment, however, has no formal requirements. You decide the distributions of tokens and when investors receive their tokens. It also has no legal requirements.
Press and public perception
VC comes with a positive press to the start-up due to associated reputable investors. These investors only take up projects that are likely to succeed as they do due diligence before putting money anywhere. They also come with a valuable network in the industry.
ICO on the other hand has acquired negative connotations with limited PR. Several ICOs have failed before, hence giving the funding method a negative perception.
Both ICO and VC are ideal ways to raise funds. ICO comes with freedom, no geographic limitations, rapidity and no need for a working product. VC funding however comes with investors’ loyalty, business guidelines, valuable connections and PR credit.
Still, having been successful over the years, VC might lose ground to ICO in the long run as blockchain becomes more mainstream.