Flippening 2.0: Private funding to take over ICO sales?

In retrospect, flippenning has always been associated with an altcoin like Ethereum, dethroning Bitcoin in terms of total market cap. Bitcoin was the first cryptocurrency and has been dominating the market ever since its inception, but some individuals in the crypto community believe that in the future Bitcoin will lose its current market dominance to an alternate cryptocurrency.

What could be Flippenning 2.0?

Flippening 2.0 is likely a market trend that could witness Initial Coin Offerings-ICOs becoming less accessible to the public and more exclusive towards high-net-worth individuals and institutions. Ironically, ICOs were created to avoid wall street middlemen but the market seems to rebound to traditional investors for raising capital.

Funds raised ($MM) through private funding and ICO sales

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Capital raised by blockchain and crypto enterprises through accredited investors and private institutions in the past few months alone were considerably higher, at a whopping $1.54 bln (source). ICO/STOs sales, on the other hand, raised ~64% less capital in comparison at $989 mln.

Regulatory authorities fueling Flippenning 2.0?

Increasing regulatory scrutiny over ICO sales, especially in countries like the USA, is forcing entrepreneurs to look towards institutional investors. In retrospect, entrepreneurs with audacious ideas could easily raise capital for their project, simply by building a website and uploading a whitepaper pertaining to the details of the project. All this changed when numerous ICO scams started to pop up, according to a study by Statis group almost 80% of all ICOs conducted in 2017 were scams, this forced regulators to become more vigilant. Now entrepreneurs essentially find it easier to raise funds from accredited investors instead of navigating through the regulatory minefield of conducting a public sale.

To digress, Canadian messaging platform Kik managed to raise $100 mln through its public ICO and got into a stint with the U.S. Securities and Exchange Commission (SEC) as a consequence of its native Kin tokens being considered as an ‘unregulated security’. Kik may even be served a ‘cease and desist’ order as punishment.

Benefits of raising private capital

On top of being essentially easier, raising private capital has a host of other benefits like creating a conducive environment for company management to focus on long term goals, most often retail investors are motivated by short term goals and earning quick returns. Retail investors most often have very little to offer other than their capital but onboarding private investors, on the other hand, opens up the option to leverage their network of professional connections. This could help a company scale faster and achieve their long-term goals.

Why the crypto market need institutional investors

Technologies like blockchain are already making waves in dozens of industries, in the short time since its inception. In spite of this, for blockchain to achieve its utmost potential, it needs to scale to reach a global platform. Bulge bracket banks and other private institutions with deep pockets can propel blockchain to a global platform by providing a financial backbone to its audacious use cases. Institutional investment could also help fuel wide-scale adoption by boosting the trust of the public in digital assets.

In November of last year KPMG, one of the ‘big four’ auditing firms in the world, published a report which strongly advocated the potential for growth in the crypto market and why institutional investors should dip their toes into the market instead staying on the sidelines. “Institutionalization is the necessary next step for crypto and is required to build trust, facilitate scale, increase accessibility, and drive growth.” KPMG was quoted saying in their report.

For now, only a small percentage of the world directly interact with crypto and blockchain and they are largely retail investors, entrepreneurs, and crypto enthusiasts. In light of this, the majority stay away due to a lack of credibility in the tech among the public, which could be turned on its head if high-profile companies invest in the technology. In retrospect, the growing number of VCs and VC funds solely specializing in blockchain and akin technologies could be indications of institutional investors inching towards the still-nascent market.

Marquee private funding deals of 2018

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With Blockchain and crypto companies seemingly swaying towards private funding instead of going for public ICO sale, some companies have managed to raise incredible amounts despite the lingering crypto winter. Here are some of the noteworthy deals.

Bitmain
Bitmain is a privately owned Chinese company and is the operator of one of the largest Bitcoin mining pools, Antpool. Bitmain is renowned in the crypto space as the manufacturer of high-tech crypto mining hardware but the company also invests in mining software development. Bitmain raised a total of $822 mln dollars in two separate rounds, backed by well-known VC firms such as Sequoia Capital.

OneConnect is a Chinese financial services and FinTech company that provides technology solutions to financial institutions such as banks. OneConnect managed to raise $650 mln as part of a series A private funding round. OneConnect has previously been involved in high-profile deals such as partnering with the Hong Kong Monetary Authority to launch a blockchain-powered financial system for trading.

Robinhood
Robinhood is a popular stock trading app and is considered to be one of the top Fintech startups from the US, according to a report by Fortune the app was valued at a whopping $5.6 bln. Although the company started out as a trading platform for stocks, it later launched a platform for trading crypto assets. The trading app raised $363 mln as part of a series D funding round from well known VC’s such as Sequoia Capital and Kleiner Perkins among others. 

Coinbase
Coinbase is a San Francisco based digital currency exchange that distinguished itself by allowing its users to directly buy crypto using fiat currency. The exchange allows trading of some of the major cryptocurrencies such as Bitcoin, Ethereum etc. The exchange managed to raise a whopping $300 mln as part of a series E funding round from renowned VC’s in the crypto space such as Andreessen Horowitz among others.

Tzero
Tzero’s alternative trading platform was among the most awaited in the crypto community, the company aims on creating an alternative trading platform for trading digital assets. Tzero managed to raise $270 mln as part of a venture capital round from GSR capital. The venture capital firm also plans on investing $100 mln into Overstock, tZero’s parent company.

Does this herald the end of retail investments?

Not exactly. An ICO is not solely for raising funds, it also doubles as a mechanism to distribute tokens among retail investors, developers, and crypto-enthusiasts.

Token distribution is important because, without a strong community to support the blockchain startup, the chances of failure are high even with a great business model and a solid product-market fit.

Consider a messaging platform or a payments platform powered by blockchain, an ICO can give the platform the initial nudge of users it requires to get off the ground and proliferate. In light of this, even though startups seem to be swaying towards professional investors to raise funds, the probability that retail investors will be utterly cut off are slim.