Innovation hubs around the world — one of the most familiar being Silicon Valley — have many characteristics in common. Innovation is the accepted currency and fuel of these habitats: You innovate, I invest or pay for your innovation and we join other innovative individuals or entities to innovate further.
In innovation hubs, the objectives are reasonably achievable, the basics are well-provided and resources are readily accessible. Only very distinctive species can sustain themselves in this ecosystem — those who know one competitor: themselves. They freely share, collaborate and create value without being afraid of oversharing. Making things better, faster and cheaper continues until the ecosystem is skewed and ready for self-correction or disruption.
Initial Coin Offerings (ICOs) are maybe the best example of such disruption. According to Investopedia, ICOs are “used by startups to bypass the rigorous and regulated capital-raising process required by venture capitalists or banks. In an ICO campaign, a percentage of the cryptocurrency is sold to early backers of the project in exchange for legal tender or other cryptocurrencies.”
As such, I believe ICOs are going to be crucial to innovation hubs. Let’s look at three reasons why:
1. ICOs can help fund innovation.
In the last couple of decades, there’s been debate as to whether the U.S. venture capital industry has failed to fund innovation. An estimated $21 billion of capital was raised in 2009 compared to $188.4 billion in 2000. Since then VC spending in the U.S. has slowly risen, but the number of deals continues to decline.
When I was seeking VCs to invest in my consumer-centric commerce vision in 2011 to 2017, I was asked to create a killer team, a prototype or proof of concept and a detailed user-acquisition plan to get to 10 million users in a year. I was also asked to show revenue, solid user retention and pivot to a B2B. I did all of the above. I was told to come back when I had a solid pipeline. Why would a startup need VCs after check-marking everything on this list?
Looking back at the golden age of Silicon Valley and the VCs who funded home runs like Google, Microsoft, Apple and Amazon, one can clearly sense that VCs had more appreciation for innovation and disruptive technologies, and were more willing to take risks and tolerate failure. These companies had the luxury of supportive investors whose large investments encouraged autonomy, entrepreneurship and the flow of creative ideas for many years.
The VC industry started small but over time accumulated larger funds. More money allowed VCs to wait to partner in the upside, closer to fruition without too much risk. In that case, what happens to small or medium deals that are risky but more likely to break down barriers?
Remember how I established, above, that in innovation hubs, the skewed ecosystem somehow self-corrects or disrupts if it needs to? This recently happened when hundreds of great startups with capable teams and innovative products suffered from lack of funding and subsequently folded miserably. But thanks to ICOs, innovation found a way to fund itself.
As CNN reports, the 200-plus ICOs in 2017 alone have raised a combined $3 billion. This money mostly came from small contributors who don’t have much to lose for dreaming big.
2. ICOs can neutralize the playing field.
According to research, women-led startups made up 4.94% of all venture deals in 2016, with an average deal size of $4.5 million. Compare this to $10.9 million per deal for the 95% of remaining male founders. Old ways of understanding technologies, interpersonal dynamics and business models can’t work if we only want to optimize the model on the variables we know well.
Bonnie Crater, CEO of Full Circle CRM, attributes this gender gap to a deeper-rooted issue within the subconscious: Because venture capitalists invest not only in ideas but in people, it makes sense that they’d choose to invest in someone similar to them. “It’s human nature,” Crater told CIO. “The guys who graduated from Stanford are funding young guys graduating from Stanford.”
There aren’t many women to invest in like-minded women who look, act, manage or think like them, or who invent products they care about. Only 7% of partners at the top 100 VC firms are women.
One of the newest trends for female entrepreneurs is to raise capital via ICO, which can change the fundraising game. Women have already tapped into this opportunity. (Full disclosure: My team and I are preparing for an ICO after six years of painful interaction with multiple VCs who don’t seem to fully grasp the nuances of our product.)
It’s been an exciting and overwhelming experience. The industry, regulations and standards are shaping up before our eyes. Nimble, agile, real-time, conservativism, due diligence and many other notions that you had defined in your entrepreneurship handbook over the years will not do the justice in dealing with this paradigm shift.
ICO contributors don’t share the same professional or educational background, gender, ethnicity, skin color, language and personal traits with entrepreneurs with which they share the ride. And that’s exactly what innovation used to enjoy before things became more systematic, structured and modeled based on historical data by the venture capital industry.
3. Cryptocurrencies can remove the bottlenecks of centralized systems.
As blockchain and cryptocurrency have enabled applications to shape up and proliferate, the fear of invisible hands will be replaced by a light at the end of the tunnel. The centralized entities that see their very existence threatened by these technologies will gradually see the benefits of this technology.
Imagine a world where Alibaba and Amazon couldn’t threaten U.S. brick-and-mortars because of a tokenized tariff system and no need for credit cards. Brick-and-mortar retailers would more easily be able to sell products to billions of international consumers.
Imagine a world where a fashion blogger could promote an American product to an Australian fan and instantly get paid for their influence with 5% of the transaction value in cryptocurrency. Imagine a world where our paper money could be transformed into a smart, traceable cryptocurrency in a ledger that’s as open to the IRS as it is to your family.
Transparency brings democracy, holds constituencies accountable and establishes a real value system of which multiple parties can be the beneficiaries.