Initial coin offerings took the summer by storm, with more than $1.5 billion raised from April through August. Reactions have been extreme and varied: Some digital-currency enthusiasts have declared that ICOs will replace venture funding altogether, even as China banned all token sales.
For venture investors, digital-token offerings present opportunities and challenges. They open the door to new liquidity for startups and investors, while presenting a host of regulatory issues.
Kik, the anonymous social-media app founded in 2009 by University of Waterloo students, is raising $125 million by selling digital tokens called Kin.
Of that total, $50 million has already been raised from such institutions as Pantera Capital, Polychain Capital and Blockchain Capital. The rest is being raised through a token-distribution event, which launched Sept. 12. Within a few days after, more than 9,800 participants from 117 countries had registered for the sale.
What’s unusual about the ICO is the relative maturity of the company and the fact that it’s already raised funding from traditional venture investors, such as Tencent Holdings, Spark Capital, Union Square Ventures, RRE Ventures, SV Angel, Valiant Capital and Foundation Capital. The Waterloo, Ontario-based company says it had previously raised more than $120 million in funding from its investors.
As Kik’s ICO was under way, Paul Holland, a general partner at Foundation Capital who serves on Kik’s board, spoke with VCJ about how his firm is navigating the token offering and how he sees ICOs affecting the startup world. This interview has been edited for length and clarity.
Q: What is your involvement with Kik and how has the company decided to hold an ICO?
A: We got involved with Kik about five years ago, and at that time they were one of the only cross-platform messaging companies and had carved out a significant niche with teens. This was pre-Snapchat, and they managed to stay as one of the top messaging apps within that community despite significant competition.
But like all messaging apps, including some of the ones that are now public, they all eventually have to figure out a business model. So the company’s management team started working on the concept of marrying a digital currency with a messaging platform a couple of years ago, and we think Kik is the first company to do so. Kik’s management team is [made up of] Millennials, and they’re more conversant about the notion of digital currencies than most folks are.
Fred Wilson from Union Square Ventures is also on the board, and he has a strong interest in digital currencies and a very successful fintech practice, as does Foundation Capital. So it was the confluence of different reasons that led to us realize that holding an ICO might be the most promising of paths for Kik.
Work on the ICO had been under way for many months before actually launching the ICO itself. I’m aware of other smaller players in the space who pivoted fairly quickly and recently to the strategy of being involved in digital currencies, but for us, this was a fairly long and thought-out process.
Q: How does the ICO affect Foundation Capital’s previous investment, and how do you avoid diluting your own stake?
A: That’s the thing that’s kind of magical about this. There are a lot of articles and chatter about whether ICOs are going to replace the venture market, and the answer is no. It’s like comparing apples to basketballs.
For some companies, it’s a very viable path to funding; for others it’s not. For companies like Kik, you go through the ICO process and the proceeds end up in the company treasury, and you operate on the strategy you told your investors you would follow.
It’s not dilutive of previous investments, and we’re all now betting on this strategy to bring in funding. It’s augmenting the money that’s already in the company.
Q: How much of the terms of the ICO did you help to shape? (Kik’s ICO bans Canadian investors due to regulatory uncertainty and caps the amount that individuals are allowed to invest.)
A: There was the usual board-level observation and oversight as we went through the process, but the management team and specialty consultants that work on these digital-token auctions worked on the terms of the ICO. In the case of Kik, we were trying to be extra careful in terms of regulatory compliance, and ran a more conservative process.
Q: Does Foundation Capital get a share of the tokens?
A: We’re in the middle of the process right now. But we’re not going the route of, ‘Let’s raise X million and take half of that and send it off to the investors.’
As an investor, I have no expectation that this process is going to turn into some yield for me. The primary value is for me as a board member, and voting for the right thing to do for stakeholders. So the ICO funds will go into the company’s treasury and it will use them to operate on its strategy.
Q: How is the company navigating the changing compliance landscape?
A: We’ve spent a ton of time on the issue of compliance, and we have a chief financial officer and a group working on it. As you’re seeing, it’s a very dynamic environment, and as those changes happen we’re adjusting and staying within the guardrails.
Q: More broadly, what long-term impact could ICOs have on venture funding and the startup ecosystem?
A: Over time, if these companies that hold ICOs are successful — if they build a community and build value — then the value may be inherent in the company itself and what it does to enhance its currency. Of course, that brings up more questions than answers.
But for decades there’s been this one well-beaten path for startups, where they have three options: go public, get acquired or go bust. Perhaps what’s going to happen over time is that these new currencies and the liquidity they provide will open up a fourth path. That fourth path has been around forever in the business world, that you have a successful entity. But there’s still a lot of the book left to be written.
Photo of U.S. dollar bill and binary code courtesy of Jason Reed/iStock/Getty Images