ICOs Deliver Average Returns of 1,320%

In its new report ‘Tokenisation: Implications for the venture capital industry’, Mangrove Capital Partners (http://www.mangrove.vc/ico-report2017) highlighted that the performance of ICOs ‘has been nothing short of outstanding’ with blind investment in each ICO, including those that failed, generating an average return of 1,320%. The research also found the majority of large-scale ICOs (i.e. those over $10m) is focused on either the blockchain economy or financial services industry.

The report explains how ICOs could dramatically change capital raising for startups by allowing founders to “raise significant capital (perhaps even all the capital they could ever need) in one early round of fundraising without giving away any equity in the business”. It also explains the benefits for investors, with the disruptive new funding mechanism bringing liquidity, accountability and transparency to investing in private companies.

While the report acknowledges that the performance of ICOs is linked it the rapidly ascending value of ether – which has risen from around $8 at the start of the year to a high of $390 in September – it attributes ether’s rising value to the growth in ICO fundraisings and increasing demand for tokens. Furthermore, it predicts “the value of ether will continue to rise as more businesses opt to issue tokens and the ICO market matures”.

The report also suggests that a growing market for ICOs will lead to a decreasing requirement for venture capital and that ‘the balance of power would likely tip from the investors to the entrepreneurs’, with mid to late stage financing hit hardest. It explains how ICOs could have significant implications for the VC operating model with venture firms losing their various rights, which cover everything from board and governance issues through to economic rights in certain situations. It suggests they may also need to adopt a more active trading strategy more akin to hedge funds as investment in private companies becomes more liquid.

“ICOs do not put VCs out of the game. They are free to take capital and invest in startups of any kind, and, subject to authorisation from their own investors, could just as easily invest through Crypto into ICO as with FIAT into equity or convertible debt,” comments Skype’s former chief operating officer Michael Jackson, partner at Mangrove Capital Partners. “However, the rhythm of a weekly partners meeting and a monthly investment committee won’t work in an active environment responding to real world events.”

Mangrove’s report also suggests that regulated exchanges could be established to protect investors from fraud:

“Interestingly, many projects today fit into existing regulatory frameworks and, with small changes to implementation rules, could easily be accommodated without anything other than a better understanding…In the mid term, it would be logical that a parallel structure to existing stock exchanges will be created – likely geographically and then vertically..” continues Michael Jackson, partner at Mangrove Capital Partners.