For the first time ever, ICOs have surpassed traditional venture capital for early-stage companies. In April 2017, ICOs raised just under $100 million. In May 2017, that number jumped to $250 million. In June 2017, it jumped again to $550 million. By comparison, traditional early-stage venture capital funding in June 2017 was just under $300 million. And, considering the popularity and tremendous growth of ICOs, this gap will likely continue to widen. In total, over 228 ICOs have raised $3 billion so far in 2017 (through November 30). (Data from www.Coinschedule.com.)

What does this mean for traditional venture capital? Is venture capital finished as an investment vehicle for early and mid-stage startups? Hardly. Even if ICO’s eventually become commonplace, they are a long ways off from being the de-facto investment vehicle for startup companies.

Reasons for Venture Capital Sticking Around As a Investment Vehicle:

• Expertise/Experience/Connections – There will always be a need for professional expertise in the evaluation process of investment opportunities, particularly with early-stage startups. Unfortunately, ICOs do not provide investors with objective expert advice on the company or their investment potential. Typically, ICOs are issued with an accompanying white paper from the company explaining the investment opportunity. Obviously, this would not be considered objective expert advice for investors. In addition, most venture capital companies assist startups with important networking connections and their experience in building and scaling companies. Without the help and guidance of venture capital, some currently successful companies may not have made it.
• Due Diligence – Part of the appeal of ICOs is that startups can raise large sums of money bypassing traditional venture capital markets. However, in doing so, these startups also escape a necessary level of scrutiny that is typically performed by venture capital, and is essential for the due diligence of the investment.
• Oversight – Another benefit of traditional venture capital is company oversight. This oversight often comes in the form of a board of directors, who have a fiduciary responsibility to the shareholders, and are also entrusted with the direction of the company as their custodial duty. With ICOs, board of director seats that would normally be allocated to venture capital investors would now be occupied by the founder’s allies or be left vacant entirely. The founders may feel compelled to spend money simply because it’s there. And without oversight, that spending can quickly spiral out of control. In addition, the founders may feel less motivated to work hard since the money was so easy to come by. In a way, the more difficult process of acquiring traditional venture capital forces entrepreneurs to hustle and work harder to find product-market fit in order to obtain funding.
• Overheated speculation – So far, most of the early investors in ICOs have been early adopters and venture capitalists in the blockchain technology space. However, institutional investors such as hedge funds and mutual funds, are now showing a lot of interest in ICOs as well, and eventually will enter this market. As more investors jump in the pool and start investing in ICOs, the speculative nature of ICOs increases exponentially. When that happens, more non-professional investors will “follow the smart money” and begin to see ICOs as a path to quick riches. I see the ICO’s as rocket fuel for the current crowdfunding craze, almost similar to Kickstarter on steroids. However, when the rocket fuel burns out, the potential for a major crash is also very likely.
• Government regulation – As has typically happened throughout history,  when markets crash due to over-speculation, governments step in and increase regulation of those markets (see 1987 Black Monday crash, 2000 dot-com bubble, 2008 financial crisis, etc.). Eventually, governments will move to regulate ICOs. It has already happened in China. In Sept 2017, Chinese authorities banned ICOs. However, a subsequent announcement stated that the ban was only temporary, until licensing regulations could be put into place. Let’s just hope that the regulation comes sooner than later, and before a major financial catastrophe occurs. On the other hand, traditional venture capital is currently regulated and subject to national and international laws.
• Illegal activity – Since ICOs are not currently government regulated, they are prime vehicles for money laundering. The Monetary Authority of Singapore (MAS), stated that ICOs are “vulnerable to money laundering and terrorist financing risks due to the anonymous nature of the transactions, and the ease with which large sums of monies may be raised in a short period of time.” And anytime there is the ripe potential for criminal activities, governments will actively get involved in regulating those activities.
• Instability – In a way, it’s still the Wild, Wild West out there when it comes to ICOs. Anyone with a laptop can create a company and offer ICOs to the average Joe to invest in. This democratization and ease of investing in companies via their ICOs make them highly volatile and susceptible to speculation and boom/bust cycles.
• ICO hacks and scams – Currently, it is very easy to hack an ICO, either by staging an ICO for a fake company, gaining access to the cryptocurrency wallet where the funds are stored, or simply altering the destination address of the incoming funds. In July 2017, Coindash lost $7 million during its ICO when a hacker altered the digital address the funds were sent to. There have also been cases where the entire ICO was a scam, and the founders merely disappeared with investors money. With traditional venture capital, a proper amount of due diligence is required on the part of the investor. Since the startups that typically issue ICOs are relatively new (and typically have very little information on them), the absolute minimum due diligence an investor should conduct is verifying if the company is actually a legal operating entity, and that it has skilled developers on the team.
• Operational risk – If the issuing company makes an operational error in the coding or processing of the funds, the monies could all disappear. This obviously would not be a concern with traditional venture capital.

Now this doesn’t mean that ICOs will disappear completely. I believe that ICOs are here to stay. I just think that eventually more regulation and stability of ICOs are necessary, and will eventually happen. Regulation typically begets stability. However, excessive regulation can also kill a promising idea. Therefore, governments must be conscious of that possibility as well.