3 questions to smart minds

Initial Coin Offerings versus VC Financing

For this 3 questions to Christoph Gerlinger

German Start­ups Group
Photo: Chris­toph Gerlinger
6. March 2018

Curr­ently, the trend towards Initial Coin Offe­rings (ICOs) is parti­cu­larly noti­ceable, which is why many are alre­ady predic­ting an immi­nent extinc­tion of venture capi­ta­lists. Do start­ups still prefer VC funding because it is smart money, i.e. the respec­tive inves­tors addi­tio­nally contri­bute their exper­tise, their network and partly also their repu­ta­tion, or will the run on Initial Coin Offe­rings intensify? 

For this 3 ques­ti­ons to Chris­toph Gerlin­ger, CEO of the German Start­ups Group

1. Are the curr­ently much talked about ICOs (Initial Coin Offe­rings), with which start­ups want to finance them­sel­ves via crypto curren­cies, a real compe­ti­tion to VC finan­cing for startups?

Previously, venture capi­tal (VC) was conside­red “smart money,” while ICOs seemed to attract more “silly money.” But that could soon change as the crypto commu­nity is rapidly catching up in terms of know­ledge, judgment and finan­cial talent. If startup shares were to be “toke­ni­zed” more often in the future, i.e., issued with parti­ci­pa­tion rights as crypto coins, VCs may cease to repre­sent anything more than simply slightly better-infor­med or more judgmen­tal inves­tors in the coin space.

2. What advan­ta­ges can a VC firm offer a startup?

Mainly “smart money”, i.e. know­ledge, expe­ri­ence and network in addi­tion to capi­tal. In addi­tion, venture capi­tal can have a signal effect for other inves­tors, for exam­ple, if the indi­vi­dual VC is conside­red to have special judgment power in the busi­ness area in ques­tion. Of course, this is diffe­rent for ICOs with many thou­sands of subscri­bers — howe­ver, there are also alre­ady the first crypto funds, which presu­ma­bly have a simi­lar signal­ing effect. Howe­ver, there are also VC rounds just before or after an ICO, with start­ups looking to take advan­tage of both (fast money and smart money).

3. How do you assess the future deve­lo­p­ment for ICOs?

Divi­ded into two. The utility token ICOs that have virtually descen­ded upon us as a glut in the past year (which, accor­ding to the current legal inter­pre­ta­tion, do not consti­tute a secu­rity in contrast to the so-called “Secu­rity tokens”, which are simi­lar to a secu­rity and are subject to a pros­pec­tus requi­re­ment and finan­cial market super­vi­sory measu­res), which are not even ready for use in the absence of comple­tion of the product offe­ring or even proto­ty­pes of the coin issuer, will hardly be placeable in the future and will also gene­rate many long faces with regard to past transactions.

On the other hand, coins that have a working value-added use and where block­chain tech­no­logy is used in the product, where it brings advan­ta­ges over tradi­tio­nal solu­ti­ons, will succeed. The same is likely to be true of well-made secu­rity and asset-backed tokens, which, as their name suggests, secu­ri­tize rights simi­lar to secu­ri­ties or are backed by speci­fic assets, which some market parti­ci­pants expect to see a diverse range of offe­rings in 2018.

About German Start­ups Group

The German Start­ups Group is an early-stage inves­tor and descri­bes itself as one of the most active play­ers in the German startup scene. The Berlin-based company says it has stakes in more than 25 start­ups, inclu­ding such house­hold names as online eyewear retailer Mister Spex, deli­very service Deli­very Hero, music service Sound­cloud and fintechs CRX Markets and Scalable Capital.

In terms of finan­cial strength, howe­ver, the German Start­ups Groups is compa­ra­tively small. The total of all finan­cial assets amoun­ted to just under 24 million euros at the most recent balance sheet date (June 30, 2016). Berli­ners hold only very small stakes in most of the compa­nies. — In Febru­ary 2018, German Start­ups Group issued a conver­ti­ble bond in the amount of EUR 3 million with a five-year term and a conver­sion price of EUR 2.50 per share. German Start­ups Group is repre­sen­ted in the SCALE 30 index of the Deut­sche Börse segment of the same name.

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