Readers know that I have been and continue to be excited about the emerging blockchain/crypto/token opportunity and I believe it represents the next big wave of innovation in the tech sector, upon which many important companies, products, and technologies will be built. I've been saying that since I started blogging about Bitcoin here on AVC in 2011.
I have also written a lot about our portfolio companies that are working in this sector and have even mentioned the tokens that they are issuing. But I have never and will never promote a token offering here at AVC. I believe that these are very risky investments that require a lot of diligence and patience. These are very similar to the kind of seed investments we make at USV. We know that that vast majority of them will not work out and we build a portfolio based on that understanding.
I have also written a lot about the need for diversification and that I expect this sector will come unglued at some point, like the Internet sector did in 2000-2001. If you read Carlota Perez, you will understand that most important technological revolutions have been fueled by rampant speculation that almost always comes undone right as the sector is moving from the installation phase to the deployment phase. That framework is almost certainly playing out again in crypto.
So this ugly speculative phase comes with the territory and always has. But that doesn't mean I have to like it. I hate it. Most ICOs, like the ones mentioned in Nathaniel's piece, are scams. And the celebrities and others who promote them on their social media channels in an effort to enrich themselves are behaving badly and possibly violating securities laws.
The worst of it, as Peter VanValkenburgh, the director of research at Coin Center, told Nathaniel is:
It's undeniable that a celebrity endorsement brings a new audience into the world of crypto currencies. But I'm not certain that celebrity endorsements are doing a good job of bringing attention to the legitimate projects.
I am certain that celebrities are not doing a good job of bringing attention to the legitimate projects. A legitimate project has these characteristics:
- A relationship between the amount of money being raised and the complexity of the project.
- A very clear use case that requires the decentralization approach brought by blockchain technology.
- A reasonable valuation based on the size of the opportunity being pursued.
- A credible team.
- The technology has been built, at least to a point where it is demonstrable.
We have looked at hundreds of token offerings at USV and have only participated in one token offering to date. We do have five portfolio companies that either have done or will do token offerings so you can add them to the list of tokens we have exposure to. And USV is an investor in a number of token funds like Polychain which I blogged about yesterday. But the point I am trying to make is we have passed on most everything that is going on in this sector. We will keep looking for legitimate projects and we will certainly buy into token offerings. But we are being very careful and I would hope and expect that all of you are too.
When it comes to ICOs, understand that most are scams and that you must be careful to avoid them. As I said in that post I linked to above, the operative term when it comes to ICOs is "Buyer Beware."