19. Primary Markets, ICOs & Venture Capital, Part 1

What this lecture covers

This lecture turns from secondary markets (crypto exchanges) to primary markets: how initial coin offerings (ICOs) raise money for new blockchain projects. It builds on the course's discussion of tokens and blockchain economics, asking what an ICO actually is, why investors buy into projects that often have no working product yet, and how these offerings compare to more familiar models like Kickstarter or venture capital.

After watching, you can define an ICO, list the main criteria used to evaluate one, and explain why the market has struggled to value tokens whose future utility is uncertain.

Key ideas

• Initial coin offering (ICO): a startup sells its own crypto token to raise money, historically often before its network is functional.
• Pre-functional fundraising: in the quarter studied, roughly 95-99% of token offerings were sold before the network was usable, and about 75% were sold based on just an idea, not even open-source code.
• SAFT (simple agreement for future token): a legal structure, created by a Boston law firm, meant to sell a right to a future token today while trying to avoid securities registration; the lecture is skeptical it achieves that.
• Monetary policy embedded in tokens: many ICOs, following Bitcoin's example, hard-code a supply schedule (like Bitcoin's block-reward halving), though not all do.
• Deferred versus current revenue: companies vary in whether they book ICO proceeds as revenue now or later, partly to manage tax exposure, since booking it like equity risks it being classified as a security.
• Token distribution: how much of the token supply the founders keep versus sell to the public, and over what period (from a typical 15-60 days up to EOS's unusual 350-day sale).
• Valuation problem: because token utility (like future storage value) is uncertain, tokens should in theory trade at a discount to their eventual use value, yet the market has often priced them at a premium.

Walkthrough

What is an ICO and its history (1:00)

The lecture defines an ICO as a startup selling its own crypto token to raise money, crediting J.R. Willett's 2010 idea of building an application layer on top of Bitcoin as its conceptual origin. A short timeline shows ICO fundraising growing from Ethereum's $18 million raise in 2014 through the DAO's failed $168 million offering in 2016, to roughly $25 billion raised in the 12 months from June 2017 to June 2018, a figure comparable to 20-30% of global venture capital in that period.

Core characteristics of ICOs (6:05)

The lecture lists defining traits: proceeds are meant to help build a network; offerings usually happen before the network is functional (95-99% in the period studied); development is often centralized despite being nominally open source, and in a recent quarter over half of ICOs weren't even open source at the time of sale; promoters keep some tokens for themselves, similar to founder equity in venture rounds; and tokens are fungible and transferable, sometimes tradable even before the underlying network launches.

SAFTs and monetary policy (15:12)

The lecture explains the SAFT structure, used to sell rights to a future token, and argues it doesn't really escape the underlying economic reality of selling something for future delivery. It then covers how tokens often embed a monetary policy, referencing Bitcoin's halving schedule and noting Ethereum has changed its block reward multiple times through consensus without a hard fork.

Comparing ICOs to Kickstarter and venture capital (23:21)

A class discussion draws out key differences from Kickstarter: Kickstarter fixes price and lets the market set quantity, while ICOs often fix quantity and let the market set price, and ICO buyers are typically anticipating financial appreciation rather than a single product. The lecture also discusses how venture capitalists have adapted, often now taking a hybrid of equity and tokens rather than tokens alone.

How to evaluate an ICO (26:23)

The lecture presents a checklist: assess whether the token use case is viable and whether a native token is actually needed; read the white paper and, if available, the source code; evaluate the team; check venture capital involvement; and gauge community size on channels like Reddit, while cautioning this last signal can reflect a "greater fool" dynamic rather than genuine value.

Accounting and valuation problems (35:32)

A discussion on how ICO proceeds get booked (deferred versus current revenue) leads into a harder question: what determines a token's fundamental value when white papers rarely specify what one token unit is actually worth in service terms. The lecture argues that, in theory, a token's price should be a discount to its future utility value given execution risk, yet market prices have often run at a premium instead, which is why entrepreneurs have found ICOs to be a source of cheap financing.

Statistics and closing (50:45)

The lecture closes with figures on ICO activity by industry and volume, showing monthly ICO issuance peaking around 500 in early 2018 before declining, and revisits the question of whether tokens can carry equity-like rights, noting this is rare and mostly limited to utility or service tokens.

Before you watch

• Review the Howey test and securities classification concepts covered earlier in the course, since they underpin the ICO valuation discussion.
• Recall the course's earlier discussion of native tokens and why a project might or might not need one.

Check your understanding

1. What percentage of ICOs in the quarter studied were sold before the network was functional, and what does that imply about investor risk?
2. How does a SAFT differ economically from simply selling a token outright, according to the lecture?
3. What is the difference between how Kickstarter and a typical ICO set price and quantity?
4. Why might a company choose to book ICO proceeds as deferred revenue rather than current revenue?
5. Why does the lecture argue that ICO tokens should theoretically trade at a discount to their future utility value?