Initial Coin Offerings | Jack Saba

All right, so initial coin offerings. There are 3 types of initial coin offerings. So when Bitcoin was created, from the very beginning, from the very first block— Bitcoins are created only when blocks are added— everyone was really excited about Bitcoin, but it was very rigid and hard to work with. So Ethereum came along. They said, we love this idea of a blockchain, but we want it to do more. And in order to jumpstart their network, they pre-mined a bunch of tokens. So they created a bunch of tokens, and they sold that out to future developers, users, and operators of their network. And they raised $9 million. So this idea of pre-mining tokens provided them capital to operate and develop their protocol, and it also incentivized early adoption. So protocol tokens are things that operate the network, like the Bitcoin token, the Ethereum token, Tezos, and EOS. And then you have application-specific tokens. And so that would be something like if Uber created a token to pay— so you pay drivers in these Uber tokens instead of US dollars, it is an application-specific token. And then there are securities. And these are basically just investment vehicles that are represented digitally, which in and of itself is a really great thing. So those are—

yeah? Sorry, I didn't want to interrupt.

No, please.

So do you think in the way you described it, ICOs may be susceptible to fraud? For example, the company comes and then does ICO and then disappears.

Yeah, incredibly susceptible. And right now we're in the wild, wild west, and that's a lot about what my company's working on, is formalizing the best practices of these initial coin offerings to de-risk the investment. Because with seed stage companies, if you raise seed stage capital, only 4.3% of those companies ever reach an exit. 96% of companies are failing, 95.7% of companies are failing from the jump. So the risk of participating at that early stage is incredibly high. The initial coin offerings don't change that, they just open up more people to that risk. So we're working on kind of formalizing the best practices to de-risk the participation, as well as make sure that there are no scams and fraud, yeah.

Will there be caps on the amount of money Say you've got $10,000 a year or so, $100,000 a year.

No, anyone can do one. It's just another form of fundraising for capital, yeah.

The ones without their names on it, is the one under Protocol called Treasure?

Treasure, yeah.

And then the other one, what's it called, Litecoin?

This one right here?

Yeah.

No, this is BitBounce. So this is a DU alumni, raised $20 million through it, and it's a spam filter. And so if marketers want to get through to my inbox, they've got to attach some value to it. So I get paid to read their spam.

What's the name of that?

Bitbounce.

Could you just repeat the definition of protocols being security?

So protocol tokens operate the network. So you need them. So like right now if you had a website, you would host it at Amazon, right? And you would pay Amazon monthly. But since this isn't a company and just random people are operating it, you have to pay them in the Ethereum token, so it operates the protocol. These are application-specific, and then this security is just an investment vehicle. It's a way to invest in a company.

I think that the protocol token and app token, they have some attributes of security, right? It's a hybrid—

It's a nuanced thing, and we could definitely discuss more further offline, but I don't want to confuse people right now. But you're right.

Guys, let's write down your questions and when we do Q&A ask your questions anytime.

So have any of you guys tried to raise money before? Yeah, yeah, yeah. I can kind of tell because you guys have this thousand-yard stare in your eyes from like the misery of trying to raise capital. It is so brutal. You send out 1,000 emails, you get 100 responses, you get 99 nos and maybe you find an investor. Not only is that just daunting, but when you have a startup there's no separation between who you are and the company. So when investors are saying no to your company, they're saying no to you.

Wow.

It is a hard thing to do. So these initial coin offerings are very appealing because not only are you getting buy-in from your future users, it's a very effective way to raise capital. Golem raised $9 million in 30 minutes. Gnosis raised $12 million in 15 minutes. Filecoin raised $200 million in an hour. That's nuts. This takes companies 10 years to get to that kind of capital.

What?

It's nuts. So what happened with Golem, right? So Golem's this really interesting company. If I tried to do machine learning or CGI rendering on my laptop, it can't handle a task like that. So I would send the network out to you guys, the task out to you guys. You would each run 1/50th of the program, send me back a full rendering, and then I would pay you guys in the Golem token. So when they told people about that, everyone's like, I want to put my computer on the network, I want to put my computer on the network, I want to put my computer on the network. So they all bought into the token. So they raised from their future users. So capital fast, network effect, and then also provides a barrier to entry because if another company comes along, they have to do it so much better to get me to leave my tokens that I already placed with Golem to go into their company. So an incredibly effective way to raise capital, buy-in from the community, ease of fundraising. And then this is the coolest one, I think. So if we go back to the use case of Uber, if they built their MVP in Chicago, they validated their market in New York, they hit Boston, D.C., and Philadelphia, and they said, all right, now we got to go West Coast. We have to hit San Francisco, LA, Sacramento, Houston, Austin, Dallas, and all these other cities. If they do an initial coin offering to fund that, not only are they bringing in money fast, they know where their demand's going to be.

Right.

And not only are they going out there then to say we need to place money on advertising to get future users, people just paid them to participate in their network. You've changed user acquisition costs into user acquisition revenue. I think that's fascinating. Recipe for success. So you've got to get a captivating use case. So the technology has been around for a long time and people have constantly talked about interesting uses for the technology, financial inclusion, or medical records or data protection and privacy. So you pick something that people are really interested in. You establish your team, and then this is really very different than the traditional startup methodology. Traditionally, you would run in stealth. You wouldn't say a word about what you're doing to anyone. You'd build your product, you'd stay heads down, slowly you get people on, and then when you're ready to burst onto the scene, you let everyone know. Oftentimes before even a line of code is written, people are writing a detailed research paper about what they're doing, how they're doing it, what their roadmap is, and where they're going. What this allows for is people to truly understand if they want to participate with you. So it's very different, you're very open about what you're doing. And then what you would do is you try to get a whale. This kind of whale, not this kind of whale. So a whale is an investor in the space that's probably been around for a very long time. So they either got into Bitcoin really early on and accrued all this value, hundreds of millions of dollars, and now they need to place it into new opportunities. Or you have someone of notable figure like Tim, who if Tim places his stamp of approval on your project, the rest of the community is going to say, that's something I want to participate in. Tim's seeing something I want to follow. So you get someone that can kind of create that momentum for your fundraising. Interesting use case, strong team, white paper, a whale. What's ahead? Right now we're operating in a very gray area. So if Uber wanted to do their Uber token at the stage that they were just really small and people couldn't actually pay with this token, The Securities and Exchange Commission would say that's a security and not an application token. But right now jurisdictions haven't really defined that stuff yet, so there's a little bit of regulatory uncertainty. Regulations are going to come. Failures. The 2 biggest mistakes people investing in this technology are making is that they're saying because a company's using the blockchain they're going to be successful, and because they're raising $200 million they're going to be successful. It's not true. Companies fail for so many reasons. It's going to take them a little longer because they're sitting on more money, but the majority of companies that are out there right now are failing. So we haven't seen that yet, but we're going to watch it happen. And then I think that this technology is going to move back to growth stage— sorry, this fundraising mechanism, the initial coin offerings, are going to move back to growth stage fundraising. So right now they're happening at the seed stage. I've got an idea, let's put it out there. But what's going to happen is if all 50 of you guys are doing an initial coin offering, It's really hard to tell the difference in quality between your concepts. So if you build a product, bring it to market, get initial users, you've gotten above and beyond what everyone else has been able to do. You've proven that you can execute, and now you've de-risked the investment for everyone else that are going to participate. So I think that they're happening at the seed stage right now. That's a fact. I think they're going to move back to Series B and Series C.