Blockchain and crypto-currency investing is hot again, and one of the most active firms in the space is the Digital Currency Group.
To date, the New York-based firm has invested in 105 companies in 27 countries. So far this year it has backed at least 12 new deals and completed six or seven follow-ons.
The firm, founded by Barry Silbert, who previously started SecondMarket, continues to believe bitcoin and blockchain are agents of global economic and social change.
VCJ recently had the opportunity to speak with Associate Travis Scher, who supports Digital Currency Group’s investment efforts.
Scher questions whether innovations, such as initial coin offerings, will fundamentally change venture capital. But he is bullish on the potential for crypto tokens to revolutionize the financial system and parts of the economy.
What follows is an edited transcript of VCJ’s conversation with Scher.
Q: You’ve expressed some skepticism with ICOs. What are your reservations?
A: First off, I am excited about the potential of crypto tokens, or crypto assets, to revolutionize (a) our financial system, (b) the internet itself, (c) many parts of the real economy.
A lot of people who are much smarter than I am, much more experienced than I am, guys like Chris Dixon, Naval Ravikant and Fred Wilson, have been super bullish on this trend for years before the current mania…So on the longer term, and on the real underlying potential, super bullish, super excited. I’m less excited about the quality of the projects that are being released today, at least relative to the amount of money they are raising. And also some of the things about how these things are being structured.
Q: What are the structural issues you have with ICOs?
A: What I mean by structure is, how are you setting up the allocations in the ICO, who has access to tokens (and) when?
Here is one of the things I’m very concerned about. I’m a little concerned about uncapped offerings, by which I mean sales of tokens that don’t have a maximum amount. A lot of folks are going out there and saying, ‘We’re going to raise a maximum of 25 or 20, or $30 million.’ That is an extraordinary amount.
There are ways that good entrepreneurs can allocate funds like that even if they are getting them a little ahead of where their progress is. But there are other sales being done where they are not putting a total cap on the amount (and) a tremendous amount of hype is being generated. There was Bancor Foundation that raised (more than) $150 million. There was EOS that has already raised over $200 million…I just think it is too much money.
Some of these $20 to $30 million sales are too much. But I think some of those really massive ones are problematic for a lot of reasons.
Q: Where do you hope to participate in ICOs as an investor?
A: Where we would love to get involved is where you have a really credible mission driven team that is very early (and) prior to their having launched their token or planned exactly what their ICO is. And back them early.
So we can invest in the company, and it’s possible that the company at a token sale can maintain a portion of the tokens and we as investors can have indirect exposure. Or (with) this new type of contract, or investment agreement, that has come into vogue recently called the SAFT. It’s the simple agreement for future tokens. You agree to buy the tokens and therefore fund the development of the protocol before they are released.
So you get the token sometime in the future, if there is a crowd sale, (and) at a discount to what the crowd is paying or at a fixed price at the time that you purchase them.
Q: How do you think securities regulators will respond to the ICOs?
A: I’m not sure. I think they are definitely paying attention at this point as the sums of money have gone up and up and up.
Some of these IPOs, some of these tokens, will likely, or would likely, if the SEC decides to move forward, be deemed unregistered offerings of securities in violation of the securities laws, which will, first off, give the buyers the right of rescission and, second off, the guys behind it can get in a lot of trouble.
Some of these things look and smell like investment contracts. They are being marketed as pure investment contracts. There’s no real utility for these tokens at the time they are created.
Q: Do you advocate regulations?
A: Regulators should be prudent. There are other parts of the world where regulators are much more open to allowing a certain degree of innovation, even if it entails some risk to investors.
Places like Switzerland and Singapore are taking a little bit of a leadership role. A lot of the teams are considering moving out of the U.S. or structuring them so U.S. buyers are not supposed to participate.
Q: Venture firms, such as Blockchain Capital, have begun to use tokens. Is disruption coming to the venture capital model?
A: There are a few things going on. One is you have one example of a normal, centralized venture capital fund rather than raising money in a traditional way issued a token to raise funds to make investments.
That was Blockchain Capital. They have to comply with U.S. regulations, so I don’t think there were tremendous advantages from a U.S. perspective to doing this.
But being abroad, they have this sort of tradable LP interest, which is interesting. But I don’t think most venture capital firms, the big ones, the successful ones, have trouble raising money right now. And so I don’t really see blockchain disrupting that side of the business any time soon.
Q: How about the other side of the business?
A: The other thing you have is you have crypto hedge funds emerging and venture capital funds considering, or doing, investments in tokens rather than investing in tradition equity.
We’ve done a little bit of that. Now there are more funds looking at doing that and so I think that is great to the extent you have great entrepreneurs looking at creating businesses that have a business model based on crypto tokens or crypto assets.
Q: Doesn’t that open up the venture business to a new class of investors, with companies turning to the crowd and issuing tokens rather than seeking venture capital?
A: I don’t see this generally disrupting VC. If it doesn’t make sense for your business model to exist on a blockchain and to have a crypto token, you probably shouldn’t be doing an IPO to begin with.
There’s going to be limited universe of businesses that make sense to put on a blockchain. So I don’t think you are going to disintermediate VCs like that. Most opportunities are still going to exist in the form of traditional equity.
Q: Where is Digital Currency Group looking for new opportunities in the realm of bitcoin, blockchain and crypto currencies?
A: We backed a ton of exchanges, and they’re all doing super well because of the volatility and the increase in trading volumes. A lot of them are going to be doing follow-on rounds that we’ll be excited to participate in.
We backed a number of enterprise blockchain startups. One thing I’m excited about over the next few years is a lot of early blockchain startups were applying distributed ledger technology to financial services…now I think we’re starting to see some good entrepreneurs work on use cases in different industries.
Stuff like healthcare and energy and ad tech. There are going to be tremendous challenges and hurdles to adoption of blockchain in some of these industries, but I’m definitely excited by the long term potential of distributed ledger in some of those specifically.
Q: Crypto currencies have risen sharply in value. Is this a speculative bubble?
A: From my vantage point, there’s not much of a question that we’re in the midst of a speculative mania, or bubble, in the crypto currency space. The rate at which all crypto currencies have gone up is really extraordinary.
It has a few components. One, people are starting to see the tremendous potential of the underlying technology. The other thing is when people see extraordinary increases in price, they look at that and they say, ‘I can make that kind of money.’
Then they start piling their money into something and that just increases the total demand.
Photo of Travis Scher courtesy of Digital Currency Group