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There is Hope for Blockchain Regulation, Thanks to General Georges Doriot
Fred Wilson posted the other day on his blog about General Georges Doriot, reminding us that Doriot was credited to be the “father of modern venture capital”.
Georges Doriot’s story is told in the book Creative Capital: Georges Doriot and the Birth of Venture Capital, published in 2008 and written by Spencer Ante.
I was struck by the similarities between what happened in the 1940’s and what is happening now with cryptocurrency, relating to breaking the regulatory mold in order to allow something new to flourish.
Following World War II, Doriot founded the world’s first public venture capital firm, American Research and Development Corporation (ARDC).
Consider this:
“The idea of venture capital was so new that the founders of ARDC were forced to reengineer aspects of various financial regulatory structures in order to make it viable. Before ARDC could offer its stock, for instance, it had to obtain a number of exemptions under the Investment Company Act of 1940 from the Securities and Exchange Commission.” [source]
This is almost exactly where we are with cryptocurrency tokens and funds. The industry is begging for a re-write and a reengineering of the financial regulatory structures of yesteryears.
This gives hope to the current array of activities that have spurred around cryptocurrencies, and the tectonic shifts that ICOs and cryptocurrency-based token models are begging for.
Back in the day, stocks were considered a new asset class, just as cryptocurrencies are today, as we are calling them “new asset classes”.
The current asset classes include stocks, bonds, and cash as “traditional assets”. Alternative assets include commodities, REITs, collectibles, insurance products, derivatives, foreign currency, venture capital, private equity and distressed securities.
It is worthy to note that the alternative classes have varying degrees of compliance requirements: from being regulated to non-regulated.
Maybe, regulators could stop scratching their heads and treat cryptocurrencies simply as a new alternative asset class, and we’ll be done with the debate. There is a precedent to that evolution, citing Doriot’s work.
Most regulators have been waiting and doing no harm to the current environment (except the rare ones who have issued bearish warnings). Their wait has been useful, and will be vindicated because we are starting to see the circle come to its fullness:
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Crowdsourced funding via cryptocurrencies is a viable practice. A lot of good ideas and innovative companies are coming out of it. This segment is creating thousands of jobs and companies all over the world.
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Cryptocurrency fund management is going to become a thing. Today it looks like a fringe activity or strange beast that has characteristics so unique, that they can’t be described in the current legal lexicon. Its reality lies somewhere between traditional fund management and venture capital, and it is already practiced or envied by professional managers and seasoned investors.
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Cryptocurrencies are not evil and are not for money launderers and scammers. They are for entrepreneurs, technologists, change-the-world dreamers, and anyone who believes they can (and will) enable new business models, new types of organizations, and new ways to service consumers and businesses alike.
Georges Doriot
“ARDC may have been launched in 1946, but it took close to 20 years before the investment community bought into the whole the “venture capital” thing. It really took one big success for investors to take the venture capital business model seriously, which for ARD came in the form of its investment in Digital Equipment Corporation. In 1957, ARD invested $70,000 into Digital Equipment Corp for a 70% ownership stake. By 1967 the position was worth $200 million or 2800x its original investment.” [source]
Hopefully, crypto will not take 20 years before the investment community buys into that concept wholeheartedly. It already has big successes, like Bitcoin, Ethereum and many others who have generated financial returns for their early investors, while creating a new economy of its own-, the blockchain economy.
Just as Georges Doriot was credited for seeing that capital needed to get “creative” to birth venture capital, we need to be creative today, in order to birth “crypto capital”.
Endnote: This topic will be discussed in greater depth and with a variety of experts we have assembled from around the world, at the upcoming Token Summit in New York, on May 25th. This topic straddles two streams: 1) the regulatory aspect, and 2) how crypto-assets are valued and they are really worth.
Chris Burniske, Blockchain Products Lead at ARK Invest will lead the crypto-assets valuation panel, exploring how to concretely analyze this new asset class, including definitions of speculative vs. utility value, and how their characteristics and roles play in markets.
Peter Van Valkenburgh, Director of Research at the Coin Center will lead the legal and compliance panel, where they will explore and contrast the latest regulatory practices in Europe, Africa, Asia and North America.
@wmoug:disqus great article and segue to introduce your token summit event. 😉
As a Canadian entrepreneur in tech, I feel that Canada, like many other protectionist states, is in for a world of hurt until we learn to force our wealthy individuals to reinvest in future generations of entrepreneurs. One of the ways for entrepreneurs to leap frog over this oligarchy is through crowdsourced cryptocurrencies. I’ve seen great entrepreneurs who have not obtained their funding from forward thinking venture capital institutions and have ended up getting burned or worse, beaten down to the point where they have given up on creating what could be tomorrow’s job building companies. Crowdsourced cryptocurrencies give power back to the entrepreneur to build tomorrow’s jobs.
However, I definitely feel that these new funding models need to be tested and monitored by regulators in the not so distant future.
One thing that bothered me a bit about the article was that there was no mention of the evils/perils of crowdsourced funding via cryptocurrencies. Maybe this is because you, like myself, are Canadian and we come from a country with the highest education[1] so there it will take much more trickery for a fraudster to walk away with our hard-earned money. But for the majority of those in the rest of the world, there are serious implications of fraudsters being able to whip up a pitch deck and shiny website to maliciously steal people life savings. There needs to be protection and regulation for those who cannot protect themselves.
Again, great article I look forward to seeing what comes of this new asset class
Reference:
1. Best Countries for Education ~ https://www.usnews.com/news/best-countries/best-education
yes, it’s great that regulators standby as investors in token offerings like Matchpool and DeOS get fleeced. It’s great to see all funding opportunities being enabled by ERC-20 tokens on Ethereum, increasingly the value dependent on this as if yet truly tested, scaled and secured platform, where even one of its lead developers (Vlad) calls for some mellowing of the irrational exhuberance. And of many of the ICOs being enabled by ERC-20 tokens, it’s great to see how few would be fundable businesses given their lack of biz fundamentals, biz models or credible teams to undertake the problem area being explored. Just great stuff. We should also cheer outfits like Polychain Capital for getting in on pre-ordering tokens (pre-ICO) to benefit fm the ICO pump. I love their business and am perhaps jealous that I don’t have the connections to get those pre-pump tokens :(. Anyway, much to cheer here and I can’t wait to see what the future brings us, but I suspect will include ICOs like this one: https://coinidol.com/first-crypto-token-backed-by-food-factory-russia/.
Thanks. I’ve written about the risks of ICOs before, eg:
http://startupmanagement.org/2017/01/23/watch-out-the-icos-are-coming/
I can sense the sarcasm in your tone, and I value parts of it.
This isn’t focused on just ICOs, although ICOs, just like the startup/VC model, are going to include the proverbial good, bad and ugly. It’s just that we almost never hear about it, because it’s all done in private.
Regarding the pre-sales advantages you referenced; honestly getting a 35% token discount and being locked from trading for a year is not as good a deal as trading the token when it goes public by making 100-500%+ within weeks if not months. Anyone can do that.
ahhh.. would have been a nice reference to this post.
The startup/VC model is actually not very private and we hear of the successes and flame outs quite regularly thanks to various industry publications who focus on such things. Techcrunch, VentureBeat and many others do not hesitate to discuss the failures, though the successes often get the lion’s share of the attention. What’s important to understand however, is that in this world, a fair amount of diligence is done and a business objective is expected. You don’t see startups getting $1m to $15m on an idea with no developed software to speak of and a team with no background in the customer problem they claim to be addressing. It just doesn’t happen.
This is far from the case with the rise of the ICO. The founders put out a White Paper with little inkling of a true customer problem and talk up the technology, frequently even the economics of their token offering, but zero business fundamentals. The most recent example I can give is a project that is fixing all that is wrong with Wikipedia and adding an advertising model on top. One problem, no one on the team has ever worked or developed anything with or for Wikipedia, none have ever been publishers and none have any depth of understanding of the advertising ecosystem…oh yeah, other than it’s complicated and shouldn’t have so many middlemen.
I’m happy to be wrong, but so far this all feels like a train wreck, and to even pretend that it’s the sort of risk that VCs have been taking in new innovations, is a misunderstanding of the VC business.
There is a lot that goes on inside startups that is not reported by publishers.
At the gross level, this is similar to the VC business from a risk / reward perspective. Yes, the numbers are different and diligence is lowered, but it’s a good experiment. The cream will rise to the top.
Yes, I used the publisher comment to illustrate that there does exist some level of transparency, it’s not nothing. Let’s pretend for a second that I have been an advisor to over 30 companies over the past 20 yrs, and continue to advise 5 companies now, and interact regularly with over 20 VCs, just to qualify that our differing opinions don’t come from insight into startups that I’m not experiencing on a daily basis. Let’s also agree that if a startup these days came into any investor’s office and said:
Startup: “Hi, we’ve got this revolutionary new idea and have written a white paper about it, that will change everything. All we need from you is $1m to $10m and we will go off and build this very important thing.”
Investor: “Well, have you asked the people whom you believe could use this, if they want it and what value it will bring them?”
Startup: “Not exactly, we just know that this is very important and will change everything.”
Investor: “Were any of you working in that industry and suffered from the inability to do the things you hope will be solved by your new technology?”
Startup: “Not exactly, but we’ve done a lot of thinking about it and believe we’ve come up with a better way. As well, the world is tired of middlemen, and this will disintermediate them.”
Investor: “Huh? Do you know what Uber does?”
Startup: “Yes, but they just collect fees and they will be disintermediated as soon as people can connect to each other directly.”
Investor: “So how do you plan to make money from this?”
Startup: “We will open source our technology and everyone will be using it, but we will know the most about it.”
Investor: “Yes…and where’s the money, how will you make money?”
Startup: “We’re still trying to figure that out.”
Investor: “Let me get this straight, you can’t articulate the business problem and the specific person (consumer or member of an organization) who will benefit from this and in what way. You have never worked in the industry for which you are developing for. You don’t have business model. You believe that all middlemen just collect fees for doing nothing. You haven’t built a working prototype or any meaningful software which is why you are seeking funding. Did I get that right?”
Startup: “Yes.”
Investor: “What exactly have you done here?”
Startup: “A lot of thinking about how to better solve this thing we believe is broken.”
Investor: “Don’t let the door hit you on the way out.”
Sounds like a Dilbert cartoon, and having now met or spoken with at least 20 companies doing or planning on doing ICOs, I’d have to say, this all looks like a bubble that will burst as soon as regulators get around to it. This Dilbertian interaction is a good summary for how most of my discussions have gone. More and more people are getting their funds ripped off and the din is getting louder for curbing much of this behavior. Wait ’til Bancor Network rolls out and let’s even the most non-technical people issue their own ERC-20 token. If you think questionable practices can be addressed now, wait ’til that thing goes live and the tsunami of non-technical folks jumps in. Don’t forget, just because one doesn’t think they’re scamming doesn’t mean they aren’t or that others aren’t being scammed 😉
Nice to be able to moderate out an on-topic comment your blog to have the last word 🙂 Well done Monsieur. Sure works better than blocks on Twitter.