Serial entrepreneur John Fearon, a partner at venture builder Sugar Ventures and the co-founder of smart vending machine business Dropfoods, believes that initial coin offers (ICOs) – also known as digital token sales – are an additional tool in the entrepreneurial finance toolkit but says their impact on orthodox startup financing remains uncertain.
In September, Dropfoods launched what was potentially the first digital token sale by a non-blockchain firm, with the aim of integrating digital tokens named Dropcoins into their business of operating smart vending machines.
Asked what led to the decision to utilise a digital token offering, despite Dropfoods being a non-blockchain business, Fearon explains: “Dropfoods already had a mobile wallet in development and had been discussing adding blockchain to this even before we looked into ICOs. Once we understood the token market and the ICO potential we decided that this was a good fit for the business.”
Questioned about the decision to pursue a token offering at a time when the ICO markets’ momentum is faltering due to Chinese and South Korean regulators cracking down on ICOs, Fearon says, “The ICO market is obviously not as frothy as before when it comes to broker activity. However, we believe that there is still strong demand from the community to support token sales.”
According to a blog post by digital asset exchange GDAX, a “properly designed token sale doesn’t promise ‘investment returns’, ‘dividends’ or ‘profits’. Instead, it focuses on selling a digital asset that will have a clear use case in a decentralized application, as a means of both incentivizing development and solving the chicken-and-egg problem for the network.”
Asked about the benefits that the digital tokens issued in the Dropfoods ICO will confer, given their reliance on network effects of the token holders to boost the value of the company and tokens by association, Fearon explains, “We believe there will be network effects as seen by traditional banks with their ATM and branch networks, when it comes to digital wallet adoption. With more Dropfoods digital wallet users, there will be more usage of Dropcoins.”
“By adding blockchain and smart contracts to our digital wallet ecosystem, we believe this will open up a number of opportunities. For example, we could have partnerships with fintech and other financial services that could use our Dropcoins to record and enforce the transactions in the future.”
In effect, token holders are prepaying for a product or service using the bitcoin or Ethereum cryptocurrencies. Fundamentally, it is a financing mechanism native to the blockchain sector.
Fearon notes that entrepreneurs should approach digital token sales with caution, noting: “Not all businesses need tokens and there is likely to be little or no demand for the tokens in the long term if the tokens are not going to be used by real users or the system to record and facilitate transactions.”
“Another thing to keep in mind is to be very aware of securities law and make sure your tokens do not constitute a security, otherwise the tokens cannot be traded. Tokens present another option for businesses to create value. Historically you had 3 options – revenue, equity and debt – in order to fund the business. The ICO and token sale feel like an additional option for business owners.”
As for the future of ICOs and how he sees the digital token space evolving, given his roots as an entrepreneur? Fearon reckons that current regulations issued by the Monetary Authority of Singapore (MAS) regarding digital token offerings are “primarily concerned with AML, retail investors and clients data protection”, and predicts that MAS will evolve its solutions around these specific priorities.
As for ICOs remaining a specialist tool of entrepreneurial finance or becoming integrated into mainstream financing as the market matures?
Fearon argues: “If you look at the successful ICOs, many of them have been dealing with fundamental building block issues in the ecosystem such as currencies, tokens, payments, and the friction between the digital and traditional economies. It seems to me this will remain like this in the short to near term and I am not sure how quickly it will disrupt orthodox startup investing.”