Why Ethereum Startups Don’t Need San Francisco or Silicon Valley

This guest article was written by Jack du Rose, co-founder of Colony.

This year a new funding model took hold in the startup community: the token sale. Token sales on Ethereum have raised hundreds of millions of dollars for startups, in some cases, in mere seconds. The funding comes not from Silicon Valley VCs, but from crowds of people around the world with interest and a little bit of technical know-how.

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Token sales are sometimes referred to as ‘Initial Coin Offerings’ (ICOs), likening them to a stock market IPO. They have also been called Ethereum’s ‘killer app’, implying that startup fundraising is Ethereum’s ultimate use-case. Neither of these characterizations are true of a well-formed token sale. To get why, it’s important to understand this new paradigm.

Jack du Rose

Rather than being equity in a company, tokens are a necessary component of some kinds of software that developers build on Ethereum. Metaphorically speaking, a token sale would be something like a board game company raising funds by selling trading cards in advance, then using the proceeds to develop the game board, box, and rules.

Sometimes the tokens are a sort of internal currency that must be used to pay for services on the platform. In other cases, the token may enable holders to interact with and influence parameters of the platform or service. The property of being integrated within the dApp or platform is essential for a healthy and well-formed token sale, and the key element that can distinguish a token sale from something like a stock or a securities offering.

Latest developments

The SEC has recently weighed in on this very issue by publishing an investigative report on the infamous token sale of ‘the DAO’ — declaring that DAO tokens were, in fact, securities, but that no prosecution would be sought. The report has generated fervent discussion in the blockchain community over the reasoning of the SEC, and its regulatory implications.

One notably positive outcome of the report is the acknowledgement that not all token offerings are securities — meaning that whether or not a particular token is a security needs to be judged case-by-case. At the very least, we can be optimistic about this result, whatever misgivings might exist regarding the nuances of the DAO’s specific circumstances.

In the midst of the regulatory debate, one often overlooked role of token sales is the ability to galvanize a community of early adopters, who become the first users and advocates of the project. These first users are enthusiastic about the team and project based on its own merits, but reaching them has proven difficult.

Fungible tokens that start trading on exchanges have in the past seen wildly inflated valuations. This, in turn, has rapidly created an unfortunate atmosphere of FOMO and speculation surrounding token sales, with investor transactions congesting the entire Ethereum network and preventing many early adopters from contributing.

The way forward

Token sales will mature and continue to play a central role in the innovation happening on top of Ethereum today, and governments all around the world will have to adapt to this new paradigm if they hope to benefit from the new companies and projects emerging every day. Despite the potential pitfalls in implementation, the token sale has changed the game for startup funding within the Ethereum ecosystem, and beyond.

Contrary to what some may say about any killer app, the token sale funding model is merely the enabler of a rich and diverse suite of ‘killer dApps’ yet to be created, built by companies that decided to opt out of courting angel investors, and instead rely on the genuine interest of a grassroots community network of early adopters and enthusiasts.

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